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SCHEDULE 14A
(RULE 14A-101)
INFORMATION REQUIRED IN PROXY STATEMENT
SCHEDULE 14A INFORMATION
Proxy Statement Pursuant to Section 14(a) of
the Securities Exchange Act of 1934
Filed by the Registrant [X]
Filed by a Party other than the Registrant [_]
Check the appropriate box:
[X] Preliminary Proxy Statement
[_] Confidential, For Use of the Commission Only
(as permitted by Rule 14a-6(e)(2))
[_] Definitive Proxy Statement
[_] Definitive Additional Materials
[_] Soliciting Material Pursuant to Rule 14a-11(c) or Rule 14a-12
PINNACLE ENTERTAINMENT, INC.
(Name of Registrant as Specified In Its Charter)
(Name of Person(s) Filing Proxy Statement, if Other Than the Registrant)
Payment of Filing Fee (Check the appropriate box):
[_] No fee required.
[X] Fee computed on table below per Exchange Act Rules 14a-6(i)(1) and 0-11.
(1) Title of each class of securities to which transaction applies: Common
Stock, $0.10 par value
(2) Aggregate number of securities to which transaction applies: 26,304,929
(3) Per unit price or other underlying value of transaction computed
pursuant to Exchange Act Rule 0-11 (set forth the amount on which the
filing fee is calculated and state how it was determined):
The filing fee was determined based upon (1) the product of (a) the
26,304,929 shares of common stock, par value $0.10 per share, proposed
to be acquired by the acquiror, and (b) merger consideration of $25.00
per share of common stock (which assumes a contingent payment of $1.00
per share), plus (2) $34,861,075 payable to holders of options and
warrants to purchase shares of common stock in exchange for the
cancellation of such options and warrants (the "Total Consideration").
The payment of the filing fee, calculated in accordance with Regulation
240.0-11 under the Securities Exchange Act of 1934, as amended, equals
one-fiftieth of one percent of the Total Consideration.
(4) Proposed maximum aggregate value of transaction: $692,484,294
(5) Total fee paid: $138,496.86
[_] Fee paid previously with preliminary materials.
[X] Check box if any part of the fee is offset as provided by Exchange Act Rule
0-11(a)(2) and identify the filing for which the offsetting fee was paid
previously. Identify the previous filing by registration statement number,
or the form or schedule and the date of its filing.
(1) Amount Previously Paid: $138,496.86
(2) Form, Schedule or Registration Statement No.: Schedule 13E-3
(3)Filing Party:
Pinnacle Entertainment, Inc. Bruce C. Hinckley
R.D. Hubbard Pinnacle Acquisition Corporation
G. Michael Finnigan PH Casino Resorts, Inc.
Paul R. Alanis Harveys Casino Resorts
J. Michael Allen Colony HCR Voteco, LLC
(4) Date Filed: May 30, 2000
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PINNACLE ENTERTAINMENT, INC.
330 NORTH BRAND BOULEVARD, SUITE 1100
GLENDALE, CALIFORNIA 91203
, 2000
Dear Fellow Stockholder:
You are cordially invited to attend the Annual Meeting of Stockholders of
Pinnacle Entertainment, Inc. (formerly Hollywood Park, Inc.) ("Pinnacle" or
the "Company"), to be held at on August , 2000 at .m. local time.
At the annual meeting, you will be asked to consider and vote upon a
proposal to approve and adopt a merger agreement which provides for the merger
of Pinnacle Acquisition Corporation, a wholly-owned subsidiary of PH Casino
Resorts, Inc., with and into the Company, with the Company as the surviving
corporation. Following the merger, the Company would be wholly-owned by PH
Casino Resorts and would no longer have securities listed on the New York
Stock Exchange. PH Casino Resorts and Pinnacle Acquisition Corporation are
newly formed direct and indirect subsidiaries of Harveys Casino Resorts formed
for the purpose of completing the merger. Harveys Casino Resorts is an
affiliate of Colony Capital, Inc., a private investment firm.
Upon closing of the merger, holders of the outstanding shares of the
Company's common stock (other than shares of the Company's common stock owned
by the Company or its subsidiaries, Pinnacle Acquisition Corporation and
stockholders who have perfected their appraisal rights in accordance with
Delaware law and certain shares of the Company's common stock to be
contributed to PH Casino Resorts by certain members of senior management of
the Company, as discussed below) will be entitled to receive $24.00 in cash,
without interest, for each share of the Company's common stock held by them.
Such stockholders may also be entitled to receive up to an additional $1.00 in
cash for each share of the Company's common stock contingent on the sale by
the Company of the Company's 97 acres of surplus land in Inglewood, California
under certain circumstances, as described in the accompanying Proxy Statement.
However, there is no assurance that such a sale will occur or, if such a sale
occurs, that such circumstances will be satisfied.
Upon the closing of the merger, holders of options to purchase shares of
the Company's common stock (other than certain options to be exchanged for PH
Casino Resorts options by certain members of senior management of the Company
as discussed below) also may be entitled to receive cash in exchange for their
options, depending on the per share exercise price of such options, as
described in the accompanying Proxy Statement, regardless of whether their
options are fully vested.
In connection with the merger, certain members of the Company's senior
management, including myself, have agreed to contribute certain of their
shares of the Company's common stock to PH Casino Resorts in exchange for
shares of PH Casino Resorts common stock, and to exchange certain of their
Pinnacle stock options for fully vested options to purchase shares of PH
Casino Resorts common stock, with the new PH Casino Resorts shares and options
having an aggregate value equal to that of the shares contributed and options
exchanged.
In addition, certain members of the Company's senior management, including
myself, are or will be parties to other arrangements concerning their
positions as directors, executive officers and stockholders of PH Casino
Resorts or its subsidiaries following the merger. These arrangements are
described in more detail in the Proxy Statement. Following the merger, it is
currently expected that members of the Company's senior management will
beneficially own approximately 15.6% of the voting power of PH Casino Resorts
common stock.
Accompanying this letter is the formal Notice of Annual Meeting, Proxy
Statement and Proxy Card relating to the meeting. The Proxy Statement provides
detailed information about the proposed merger. We encourage you to read the
entire Proxy Statement, including the annexes, completely and carefully.
Because certain members of the Company's senior management will obtain an
ownership interest in PH Casino Resorts following the merger, the Board of
Directors appointed a special committee of the Board of Directors comprised of
seven independent members of the Board of Directors to negotiate and evaluate
the merger agreement on behalf of the Company and to recommend to the full
Board of Directors whether to proceed with the proposed merger. The Board of
Directors, acting on the unanimous recommendation of the special committee,
unanimously approved the merger agreement and the transactions contemplated by
the merger agreement. Paul Alanis and I, each of whom will own shares of PH
Casino Resorts common stock upon consummation of the merger, abstained from
the vote.
The Board of Directors have determined that the terms and conditions of the
merger agreement, the proposed merger and the transactions contemplated by the
merger agreement are advisable, fair to and in the best interests of the
Company's stockholders. THEREFORE, THE BOARD OF DIRECTORS, BASED ON THE
RECOMMENDATION OF THE SPECIAL COMMITTEE, UNANIMOUSLY, WITH THE DIRECTORS WHO
ARE MANAGEMENT MEMBERS ABSTAINING, RECOMMENDS THAT STOCKHOLDERS VOTE "FOR" THE
APPROVAL AND ADOPTION OF THE MERGER AGREEMENT. The recommendation of the
special committee and the approval and recommendation of the Board of
Directors are based on a number of factors described in the Proxy Statement,
including the written opinion of Jefferies & Company, Inc., the special
committee's financial advisor, to the effect that, as of the date of the
opinion, the merger consideration to be received by the stockholders in the
merger is fair to such stockholders from a financial point of view. The price
of $24.00 per share (not taking into account any additional contingent
payment) represents a 39.1% premium to the closing price of the Company's
common stock on March 6, 2000 (the second to last trading day prior to the
public announcement that the Company had received a proposal regarding the
proposed transaction) and a 21.5% premium to the closing price for the common
stock on April 14, 2000 (the last trading day before the signing of the
definitive Merger Agreement was announced). The merger is subject to certain
conditions to closing in addition to approval by the Company's stockholders,
including regulatory approvals in the various jurisdictions in which the
Company and Harveys Casino Resorts conduct gaming operations, the completion
by the Company of certain pending asset sales and completion of PH Casino
Resorts's financing for the transaction (with respect to which bank commitment
and "highly confident" letters have been received).
Approval and adoption of the merger agreement requires the affirmative vote
of the holders of a majority of the outstanding shares of the Company's common
stock in accordance with applicable Delaware law. The members of the Company's
senior management, including myself, who will have a continuing ownership
interest in PH Casino Resorts have agreed to vote their shares (representing a
total of approximately 11.4% of the Company's outstanding common stock) in
favor of the approval and adoption of the merger agreement.
At the annual meeting, you will also be asked to consider and vote on the
election of nine directors to serve for the coming year on the Company's Board
of Directors until the earlier of the Company's next annual meeting of
stockholders (and until such director's successor shall have been duly elected
and qualified) or the effective time of the merger. The accompanying Proxy
Statement contains important information concerning the directors to be
elected at the annual meeting. We hope you will take the time to study it
carefully.
Your vote is very important, regardless of how many shares you own. We hope
you can attend the annual meeting in person. However, whether or not you plan
to attend the annual meeting, please complete, sign, date and return the Proxy
Card in the enclosed envelope. If you attend the annual meeting, you may vote
in person if you wish, even though you have previously returned your Proxy
Card.
Sincerely,
R.D. Hubbard
Chairman of the Board of Directors
and Chief Executive Officer
2
PINNACLE ENTERTAINMENT, INC.
330 NORTH BRAND BOULEVARD, SUITE 1100
GLENDALE, CALIFORNIA 91203
NOTICE OF ANNUAL MEETING OF STOCKHOLDERS
TO BE HELD ON AUGUST , 2000
TO THE STOCKHOLDERS OF PINNACLE ENTERTAINMENT, INC.:
NOTICE IS HEREBY GIVEN that an Annual Meeting of Stockholders of Pinnacle
Entertainment, Inc. (formerly Hollywood Park, Inc.), a Delaware corporation
("Pinnacle" or the "Company"), will be held on August , 2000, at .m. local
time, at and at any adjournment or postponement thereof (the "Annual
Meeting"). At the Annual Meeting, the Company's stockholders will be asked to
consider and vote upon:
1. A proposal to approve and adopt the Agreement and Plan of Merger,
dated as of April 17, 2000 (the "Merger Agreement"), by and among the
Company, PH Casino Resorts, Inc., a Delaware corporation ("PHCR"), and
Pinnacle Acquisition Corporation, a Delaware corporation and wholly-owned
subsidiary of PHCR ("Pinnacle Acq Corp"), pursuant to which (i) Pinnacle
Acq Corp will merge with and into the Company, with the Company as the
surviving corporation, (ii) holders of the then outstanding shares of the
Company's common stock (other than shares owned by the Company or any of
its subsidiaries, Pinnacle Acq Corp and stockholders who have perfected
their appraisal rights in accordance with Delaware law and certain shares
to be contributed to PHCR by certain members of the Company's senior
management) will be entitled to receive $24.00 in cash, without interest,
for each share of the Company's common stock held by them and up to an
additional $1.00 in cash for each such share of the Company's common stock,
contingent on the sale by the Company of the Company's 97 acres of surplus
land in Inglewood, California under certain circumstances, and (iii)
holders of options to purchase shares of the Company's common stock (other
than certain options to be exchanged for PHCR options by certain members of
senior management of the Company as discussed below) also may be entitled
to receive cash in exchange for their options, depending on the per share
exercise price of such optons, as described in the accompanying Proxy
Statement, regardless of whether their options are fully vested;
2. The election of nine directors to serve on the Company's Board of
Directors for the coming year, each to hold office until the earlier of the
next annual meeting of stockholders (and until such director's successor
shall have been duly elected and qualified) or the effective time of the
merger; and
3. Such other business as may properly come before the Annual Meeting or
before any adjournments or postponements thereof.
The Merger Agreement is described in the accompanying Proxy Statement,
which you are urged to read carefully. A copy of the Merger Agreement is
attached as Annex A to such Proxy Statement.
Only stockholders of record of the Company's common stock at the close of
business on [ ], 2000 are entitled to notice of and to vote at the Annual
Meeting or any adjournments or postponements thereof. A list of such
stockholders will be available for inspection at the Annual Meeting by any
stockholder and, for 10 days prior to the Annual Meeting, at [ ].
Stockholders of the Company who do not vote in favor of the Merger
Agreement will have the right to seek appraisal of the fair value of their
shares if the merger is completed, but only if they submit a written demand
for such an appraisal prior to the taking of the vote on the Merger Agreement
and they comply with the other Delaware law procedures for exercising
appraisal rights explained in the accompanying Proxy Statement.
Your vote is very important. The proposed merger cannot occur unless, among
other things, the Merger Agreement is approved and adopted by the affirmative
vote of the holders of a majority of all outstanding shares of the Company's
common stock. Your failure to vote will have the same effect as if you voted
against approval and adoption of the Merger Agreement. TO ENSURE THAT YOUR
SHARES ARE REPRESENTED AT THE ANNUAL MEETING, YOU ARE URGED TO COMPLETE, DATE,
AND SIGN THE ENCLOSED PROXY CARD AND MAIL IT PROMPTLY IN THE POSTAGE PAID
ENVELOPE PROVIDED, WHETHER OR NOT YOU PLAN TO ATTEND THE ANNUAL MEETING IN
PERSON. YOUR PROXY CAN BE WITHDRAWN BY YOU AT ANY TIME BEFORE IT IS VOTED.
BY ORDER OF THE BOARD OF DIRECTORS
Loren S. Ostrow
Secretary
Glendale, California
, 2000
THE INFORMATION IN THIS PRELIMINARY PROXY STATEMENT DATED MAY 30, 2000 WILL BE
AMENDED OR COMPLETED.
PINNACLE ENTERTAINMENT, INC.
(FORMERLY HOLLYWOOD PARK, INC.)
330 NORTH BRAND BOULEVARD, SUITE 1100
GLENDALE, CALIFORNIA 91203
PROXY STATEMENT RELATING TO
ANNUAL MEETING OF STOCKHOLDERS
To Be Held August , 2000
This Proxy Statement is being furnished to the stockholders of Pinnacle
Entertainment, Inc., a Delaware corporation ("Pinnacle" or the "Company"), in
connection with the solicitation of proxies by the Company's Board of
Directors for use at the Annual Meeting of the Company's Stockholders (the
"Annual Meeting") to be held on August , 2000, at .m. local time, at
, and at any adjournments or postponements thereof.
At the Annual Meeting, holders of the Company's common stock, $0.10 par
value per share ("Pinnacle Common Stock"), will consider a proposal to approve
and adopt the Agreement and Plan of Merger, dated as of April 17, 2000 (the
"Merger Agreement"), by and among the Company, PH Casino Resorts, Inc., a
Delaware corporation ("PHCR"), and Pinnacle Acquisition Corporation, a
Delaware corporation and wholly-owned subsidiary of PHCR ("Pinnacle Acq
Corp"), which provides for the merger of Pinnacle Acq Corp, a newly formed
wholly-owned subsidiary of PHCR, with and into the Company, with the Company
surviving as a wholly-owned subsidiary of PHCR (the "Pinnacle Merger"). A copy
of the Merger Agreement is attached to this Proxy Statement as Annex A.
Upon closing of the Pinnacle Merger, holders of then outstanding shares of
Pinnacle Common Stock (other than shares of Pinnacle Common Stock owned by the
Company or any of its subsidiaries, Pinnacle Acq Corp and stockholders who
have perfected their appraisal rights in accordance with Delaware law and
certain shares of Pinnacle Common Stock to be contributed to PHCR by certain
members of the Company's senior management as described below) will be
entitled to receive $24.00 in cash, without interest, for each share of
Pinnacle Common Stock held by them. Such stockholders may also be entitled to
receive up to an additional $1.00 in cash for each share of Pinnacle Common
Stock held by them, contingent on the sale by the Company of the Company's 97
acres of surplus land in Inglewood, California under certain circumstances, as
described in this Proxy Statement. See "Merger Agreement--Conversion of
Pinnacle Shares and Stock Options; Contingent Payment." Upon the closing of
the Pinnacle Merger, holders of options to purchase shares of Pinnacle Common
Stock (other than options to be exchanged for PHCR options by certain members
of the Company's senior management as described below) with a per share
exercise price of less than $24.00 will be entitled to receive an amount in
cash equal to the difference between $24.00 and the exercise price per share,
without interest, for each share underlying such option, regardless of whether
the option is fully vested. Each such option holder also will be entitled to
receive the contingent payment described above to the extent that the cash
merger consideration (taking into account any contingent payment to be paid in
cash at the effective time) exceeds the per share exercise price of such
options.
In connection with the Pinnacle Merger, certain members of the Company's
senior management (the "Management Stockholders") have agreed to contribute
certain of their shares of Pinnacle Common Stock to PHCR in exchange for
shares of PHCR common stock and to exchange certain of their Pinnacle stock
options for fully vested options to purchase shares of PHCR common stock, with
the new PCHR shares and options having an aggregate value equal to that of the
shares contributed and options exchanged.
In addition, certain members of the Company's senior management (the
"Management Stockholders") are or will be parties to other arrangements
concerning their positions as directors, executive officers and stockholders
of PHCR or its subsidiaries following the merger. These arrangements are
described in more detail in the Proxy Statement. Following the merger, it is
currently expected that members of the Company's senior management will
beneficially own approximately 15.6% of the voting power of PHCR's common
stock.
THE BOARD OF DIRECTORS, AFTER RECEIVING THE UNANIMOUS RECOMMENDATION OF A
SPECIAL COMMITTEE OF INDEPENDENT DIRECTORS, HAS APPROVED THE MERGER AGREEMENT,
THE PINNACLE MERGER AND THE TRANSACTIONS CONTEMPLATED BY THE MERGER AGREEMENT,
AND HAS DETERMINED THAT THE TERMS AND CONDITIONS OF THE MERGER AGREEMENT, THE
PINNACLE MERGER AND THE TRANSACTIONS CONTEMPLATED BY THE MERGER AGREEMENT ARE
ADVISABLE, FAIR TO AND IN THE BEST INTERESTS OF THE COMPANY'S STOCKHOLDERS.
THE BOARD OF DIRECTORS, BASED UPON THE RECOMMENDATION OF THE SPECIAL
COMMITTEE, UNANIMOUSLY, WITH THE MANAGEMENT STOCKHOLDERS ABSTAINING,
RECOMMENDS THAT STOCKHOLDERS VOTE "FOR" THE APPROVAL AND ADOPTION OF THE
MERGER AGREEMENT.
Approval and adoption of the Merger Agreement requires the affirmative vote
of the holders of a majority of the outstanding shares of Pinnacle Common
Stock. The Management Stockholders have agreed to vote their shares
(representing a total of approximately 11.4% of the outstanding Pinnacle
Common Stock) in favor of the approval and adoption of the Merger Agreement.
At the Annual Meeting, holders of Pinnacle Common Stock will also vote to
elect nine directors to serve on the Company's Board of Directors until the
earlier of the Company's next annual meeting of stockholders (and until such
director's successor shall have been duly elected and qualified) or the
effective time of the Pinnacle Merger. If the Pinnacle Merger is approved and
completed, at the effective time of the Pinnacle Merger, the directors of the
Company will be replaced with the directors of Pinnacle Acq Corp.
This Proxy Statement and the accompanying Proxy Card are first being mailed
to the Company's stockholders on or about , 2000. The address of the
principal executive offices of the Company is 330 North Brand Boulevard, Suite
1100, Glendale, California 91203.
NEITHER THE SECURITIES AND EXCHANGE COMMISSION (THE "SEC") NOR ANY STATE
SECURITIES COMMISSION HAS APPROVED OR DISAPPROVED THE TRANSACTIONS DESCRIBED
IN THIS PROXY STATEMENT OR PASSED UPON THE FAIRNESS OR MERITS OF SUCH
TRANSACTION NOR UPON THE ACCURACY OR ADEQUACY OF THE INFORMATION CONTAINED
HEREIN. ANY REPRESENTATION TO THE CONTRARY IS UNLAWFUL.
2
TABLE OF CONTENTS
SUMMARY TERM SHEET......................................................... 5
SELECTED CONSOLIDATED FINANCIAL DATA....................................... 19
UNAUDITED PRO FORMA CONSOLIDATED FINANCIAL STATEMENTS REFLECTING CERTAIN
DISPOSITIONS.............................................................. 21
ANNUAL MEETING............................................................. 28
Purpose.................................................................. 28
Record Date; Outstanding Shares; Quorum.................................. 28
Voting of Proxies; Votes Required........................................ 28
Abstentions; Broker Non-Votes............................................ 29
Solicitation of Proxies and Expenses..................................... 29
CAUTIONARY STATEMENTS REGARDING FORWARD-LOOKING STATEMENTS................. 30
PROPOSAL 1: MERGER OF THE COMPANY AND PINNACLE ACQUISITION CORPORATION..... 31
PARTIES TO THE PINNACLE MERGER............................................. 31
The Company.............................................................. 31
Pinnacle Acq Corp, PHCR, Harveys Casino Resorts and Voteco............... 34
SPECIAL FACTORS............................................................ 40
Background of the Pinnacle Merger........................................ 40
Purposes and Reasons for the Pinnacle Merger............................. 46
Certain Effects of the Pinnacle Merger................................... 46
Recommendation of the Special Committee and Board of Directors; Fairness
of the Pinnacle Merger.................................................. 49
Opinion of Financial Advisor to the Special Committee.................... 51
Position of Pinnacle Acq Corp, PHCR, Harveys Casino Resorts and Voteco... 57
Certain Federal Income Tax Consequences of the Pinnacle Merger........... 58
THE PINNACLE MERGER........................................................ 60
Interests of Certain Persons in the Pinnacle Merger; Certain
Relationships........................................................... 60
Conduct of the Business of the Company if the Pinnacle Merger is Not
Consummated............................................................. 61
Plans for the Company After the Pinnacle Merger.......................... 61
Financing of the Pinnacle Merger and the Harveys Merger.................. 64
Regulatory Requirements.................................................. 66
Legal Proceedings........................................................ 68
Fees and Expenses........................................................ 69
Accounting Treatment..................................................... 69
APPRAISAL RIGHTS........................................................... 69
MERGER AGREEMENT........................................................... 72
General.................................................................. 72
Effective Time........................................................... 72
Conversion of Pinnacle Shares and Stock Options; Contingent Payment...... 73
Surrender of Shares and Payment.......................................... 74
Contribution of Stock by the Management Stockholders..................... 75
The Harveys Merger....................................................... 75
Representations and Warranties........................................... 75
Conduct of Business Pending the Pinnacle Merger.......................... 76
Conditions to the Pinnacle Merger........................................ 77
Expenses of the Pinnacle Merger.......................................... 79
Financing of the Pinnacle Merger and the Harveys Merger.................. 79
3
Indemnification and Insurance............................................. 80
No Solicitation........................................................... 80
Termination............................................................... 83
Termination Fee........................................................... 84
Amendment................................................................. 84
Limited Joint and Several Liability of Harveys Casino Resorts............. 84
VOTING AND CONTRIBUTION AGREEMENT; MEMORANDUM OF UNDERSTANDING.............. 85
Voting and Contribution Agreement......................................... 85
Memorandum of Understanding............................................... 86
STOCKHOLDERS AGREEMENT...................................................... 88
COMMON STOCK MARKET PRICE AND DIVIDEND INFORMATION.......................... 93
Market Price Information.................................................. 93
Dividend Information...................................................... 93
COMMON STOCK PURCHASE INFORMATION........................................... 93
Purchases by the Company.................................................. 93
Purchases by Management Stockholders...................................... 94
PROPOSAL 2: ELECTION OF DIRECTORS........................................... 95
General................................................................... 95
Information Regarding the Directors of the Company........................ 95
Board Meetings, Board Committees and Director Compensation................ 97
Amended and Restated Directors Deferred Compensation Plan................. 98
Compensation Committee Interlocks and Insider Participation............... 100
Executive Officers........................................................ 100
Executive Compensation.................................................... 101
Compensation Committee Report on Executive Compensation................... 105
Performance Graph......................................................... 106
Certain Relationships and Related Transactions............................ 107
Section 16(a) Beneficial Ownership Reporting Compliance................... 107
Security Ownership of Certain Beneficial Owners and Management............ 108
INDEPENDENT PUBLIC ACCOUNTANTS.............................................. 110
STOCKHOLDER PROPOSALS FOR THE NEXT ANNUAL MEETING........................... 110
ANNUAL REPORT TO STOCKHOLDERS AND FORM 10-K................................. 110
WHERE TO FIND ADDITIONAL INFORMATION........................................ 111
AVAILABLE INFORMATION....................................................... 112
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS.................................. F-1
ANNEX A AGREEMENT AND PLAN OF MERGER....................................... A-1
ANNEX B OPINION OF JEFFERIES & COMPANY, INC................................ B-1
ANNEX C SECTION 262 OF THE DELAWARE GENERAL CORPORATION LAW................ C-1
4
SUMMARY TERM SHEET
The following is a summary of some of the terms of the Pinnacle Merger and
other information relating to the Annual Meeting. It is not meant to be
comprehensive and does not contain all the information that is important to
you. We have included page references to direct you to more complete
information in the Proxy Statement. You should carefully read the entire Proxy
Statement, including the Annexes, and the other documents to which this Proxy
Statement refers to fully understand the Pinnacle Merger and its consequences.
The Pinnacle Merger (see . PH Casino Resorts, Inc. will acquire the Company
page 31) through a merger of its newly formed wholly-
owned subsidiary, Pinnacle Acquisition
Corporation, into the Company. PH Casino
Resorts, Inc. is referred to as "PHCR" and
Pinnacle Acquisition Corporation is referred to
as "Pinnacle Acq Corp" throughout this Proxy
Statement. PHCR is a newly formed wholly-owned
subsidiary of Harveys Casino Resorts, a gaming
company with gaming establishments in Nevada,
Iowa, and Colorado. Harveys Casino Resorts is an
affiliate of Colony Capital, Inc. ("Colony
Capital"). The Company will be the surviving
corporation in the Pinnacle Merger and following
the Pinnacle Merger, will be a wholly-owned
subsidiary of PHCR.
. Concurrently with the Pinnacle Merger, another
newly formed wholly-owned subsidiary of PHCR,
Harveys Acquisition Corporation ("Harveys Acq
Corp"), will merge into Harveys Casino Resorts
(the "Harveys Merger"), with Harveys Casino
Resorts surviving as a wholly-owned subsidiary
of PHCR.
. Immediately following the Pinnacle Merger and
the Harveys Merger, it is currently expected
that Colony HCR Voteco, LLC ("Voteco"), an
affiliate of Colony Capital, will own
approximately 82.7% of the voting power of
PHCR's common stock, and some members of the
Company's senior management team (to whom we
collectively refer throughout the Proxy
Statement as the "Management Stockholders"),
including R.D. Hubbard, who is the Chairman of
the Board and Chief Executive Officer of the
Company, will own in the aggregate approximately
15.6% of the voting power of PHCR's common
stock. See "--Interest of Management
Stockholders" below. It is currently expected
that the remaining 1.7% of the voting power of
PHCR's common stock will be owned by members of
current management of Harveys Casino Resorts.
The respective percentage ownership interests of
Voteco, the Management Stockholders and current
management of Harveys Casino Resorts with
respect to PHCR common stock following the
Pinnacle Merger and the Harveys Merger that are
set forth in this paragraph and throughout this
Proxy Statement are subject to adjustment in the
event that affiliates of PHCR determine to make
any equity investment in PHCR or any of its
subsidiaries. Affiliates of PHCR are under no
obligation to make any such equity investment,
and if affiliates of PHCR elect, in their sole
discretion to make an equity investment
5
in PHCR or its subsidiaries prior to the closing
of the Pinnacle Merger, such equity investment
will be subject to the reasonable approval of
Mr. Hubbard.
What You Will Receive in . Upon the closing of the Pinnacle Merger, holders
the Pinnacle Merger (see of then outstanding shares of Pinnacle Common
pages 1 and 73 ) Stock (other than shares of Pinnacle Common
Stock owned by the Company or any of its
subsidiaries, Pinnacle Acq Corp and stockholders
who perfect their appraisal rights in accordance
with Delaware law and shares to be contributed
to PHCR by the Management Stockholders) will be
entitled to receive $24.00 in cash, without
interest, for each share of Pinnacle Common
Stock held by them, plus up to an additional
$1.00 per share in cash contingent upon the sale
by the Company before December 31, 2001 of the
Company's 97 acres of surplus land in Inglewood,
California.
. If the Inglewood land sale closes before
December 31, 2001 and the net after tax proceeds
of such sale are at least $40,750,000, you will
receive a contingent payment of $1.00 in cash
for each share. If the Inglewood land sale
closes before December 31, 2001 and the net
after tax proceeds of such sale are more than
$13,054,000 but less than $40,750,000, the $1.00
per share contingent payment will be reduced
proportionately, as described in more detail in
this Proxy Statement. See "Merger Agreement--
Conversion of Pinnacle Shares and Stock Options;
Contingent Payment--Calculation of Prorated
Contingent Payment." If the Inglewood land sale
does not close before December 31, 2001 or if
the net after tax proceeds of such sale are less
than or equal to $13,054,000, then you would not
be entitled to any contingent payment.
. If the Inglewood land sale closes on or before
the fifth business day prior to the closing of
the Pinnacle Merger, any contingent payment
which you are entitled to receive will be paid
to you, together with the merger consideration
of $24.00 per share.
. If the Inglewood land sale does not close on or
before the fifth business day prior to closing
of the Pinnacle Merger, then in addition to
being entitled to receive merger consideration
of $24.00 per share in cash at the closing, you
will become entitled to the appropriate
contingent payment amount, if any, in cash
following the closing of the Inglewood land sale
provided that such sale closes before December
31, 2001, as described above. This right to
receive a contingent payment based on the
Inglewood land sale is referred to in the Proxy
Statement as a "Contingent Payment." The
obligation of the Pinnacle surviving corporation
to pay the applicable contingent payment, if
any, will be secured by an irrevocable letter of
credit in an amount equal to $27,696,000. Any
right to receive the applicable contingent
payment, if any, will not represent an equity or
other ownership interest in PHCR
6
or the Pinnacle surviving corporation, will not
be transferable except by operation of law or
will, will not be represented by any form of
certificate or instrument, and will not bear
interest. Any right to receive the applicable
contingent payment, if any, also will not
entitle you to any voting or other rights as a
stockholder of PHCR or the Pinnacle surviving
corporation.
. The Company has entered into an agreement to
sell the Inglewood land at a price which the
Company estimates would result in net after tax
proceeds in excess of $40,750,000. That
agreement is subject to contingencies, so that
there can be no assurance that the sale of the
Inglewood land will be completed on such terms
or at all.
. Upon the closing of the Pinnacle Merger, holders
of options to purchase shares of Pinnacle Common
Stock (other than options to be exchanged for
PHCR options by the Management Stockholders) may
be entitled to receive cash in exchange for
their options, depending on the per share
exercise price of such options, as described
under "--Treatment of Stock Options in the
Pinnacle Merger" below.
The Special Committee . Because two members of the Company's Board of
and Its Recommendation Directors, R.D. Hubbard, Chairman of the Board,
to the Board (See pages and Paul Alanis, along with other Management
40 and 49) Stockholders, will obtain an ownership interest
in PHCR following the Pinnacle Merger, the Board
of Directors formed a special committee
consisting of seven disinterested directors to
evaluate and negotiate the terms of the Merger
Agreement with PHCR and to recommend to the full
Board whether to proceed with the proposed
Pinnacle Merger. The special committee
independently selected and retained legal and
financial advisors to assist it in the
negotiation. The special committee and the Board
of Directors received an opinion from the
special committee's financial advisor, on which
the special committee and the entire Board of
Directors relied, that as of the date of the
opinion, the merger consideration was fair to
you from a financial point of view. See "Special
Factors--Opinion of Financial Advisor to the
Special Committee." The special committee
determined that the terms and conditions of the
Merger Agreement are advisable, fair to and in
the best interests of the Company's stockholders
and recommended to the full Board that it
approve the Merger Agreement.
. The Board of Directors recommends you vote in
Why the Board of favor of the approval and adoption of the Merger
Directors Recommends Agreement. The Board of Directors, based upon
That You Vote for the the unanimous recommendation of the special
Merger Agreement (see committee, has determined that the terms and
page 49) conditions of the Merger Agreement, the Pinnacle
Merger and the transactions contemplated by the
Merger Agreement are advisable, fair to and in
the best interests of the Company's
stockholders.
7
ACCORDINGLY, THE BOARD OF DIRECTORS UNANIMOUSLY,
WITH THE MANAGEMENT STOCKHOLDERS ABSTAINING,
RECOMMENDS THAT STOCKHOLDERS VOTE "FOR" THE
APPROVAL AND ADOPTION OF THE MERGER AGREEMENT.
Vote Required to Approve . The holders of a majority of the outstanding
the Merger Agreement shares of Pinnacle Common Stock must vote to
(see page 28) approve and adopt the Merger Agreement. The
Management Stockholders currently beneficially
own a total of approximately 11.4% of the
Pinnacle Common Stock and have agreed to vote
their shares in favor of the approval and
adoption of the Merger Agreement. IF YOU DO NOT
VOTE YOUR SHARES, THE EFFECT WILL BE A VOTE
AGAINST THE APPROVAL AND ADOPTION OF THE MERGER
AGREEMENT.
Colony HCR Voteco, LLC
(see page 34)
. Voteco is the beneficial owner of approximately
97.5% of the outstanding voting common stock of
Harveys Casino Resorts. Voteco is owned and
managed by Thomas J. Barrack, Jr. and Kelvin L.
Davis. Mr. Barrack is the Chairman of Colony
Capital and Colony Advisors, Inc. and the
Chairman of the Board of Harveys Casino Resorts.
Mr. Davis is a Director of Harveys Casino
Resorts. Immediately following the Pinnacle
Merger and the Harveys Merger, it is currently
expected that Voteco will own approximately
82.7% of the voting power of PHCR's common
stock.
PHCR and Pinnacle Acq . PHCR and Pinnacle Acq Corp are newly formed
Corp (see page 34) direct and indirect wholly-owned subsidiaries of
Harveys Casino Resorts formed for the purpose of
completing the Pinnacle Merger. At the present
time, they have no assets and conduct no
operations. Pinnacle Acq Corp will merge into
Pinnacle in the Pinnacle Merger. Following the
Pinnacle Merger, Pinnacle will continue as the
surviving corporation and Pinnacle Acq Corp will
cease to exist.
Limited Joint and . Harveys Casino Resorts has agreed to be jointly
Several Liability of and severally liable with PHCR and Pinnacle Acq
Harveys Casino Resorts Corp for any claims brought against PHCR or
Pinnacle Acq Corp under the Merger Agreement as
to which PHCR and Pinnacle Acq Corp are liable.
However, in no event shall the aggregate
liability of Harveys Casino Resorts relating to
any such claim or arising under such agreement,
or otherwise pertaining to the Merger Agreement,
exceed $15,000,000. In addition, Harveys Casino
Resorts will have the benefit of and the right
to assert any and all defenses to such claims
and any and all setoffs that are available to
PHCR or Pinnacle Acq Corp or both as primary
obligors under the Merger Agreement.
8
Treatment of Stock . Holders of options to purchase shares of
Options in the Pinnacle Pinnacle Common Stock (other than options being
Merger exchanged for PHCR options by the Management
Stockholders) with a per share exercise price of
less than $24.00 will be entitled to receive an
amount in cash equal to the difference between
$24.00 and the per share exercise price of such
stock option, without interest, for each share
underlying each such option held by them,
regardless of whether the option is fully
vested. All stock options will become fully
vested upon consummation of the Pinnacle Merger.
Such option holders would also receive any
applicable Contingent Payment for each share
covered by an option to the extent that the cash
merger consideration (taking into account any
Contingent Payment to be paid in cash at the
effective time of the Pinnacle Merger) exceeds
the per share exercise price of such option.
Opinion of Financial . The special committee of the Company's Board of
Advisor (see page 50) Directors received a written fairness opinion
from Jefferies & Company, Inc. with respect to
the merger consideration in the Pinnacle Merger.
The written fairness opinion states that as of
the date of the opinion the merger consideration
was fair from a financial point of view to the
holders of Pinnacle Common Stock.
Location, Date and Time . The annual meeting will be on August , 2000 at
of Annual Meeting (see :m. local time at .
page 28)
Purpose and Effects of . The purpose of the Pinnacle Merger is to allow
the Pinnacle Merger (see PHCR to acquire the Company. If the Pinnacle
page 46) Merger is completed, PHCR will acquire all of
the outstanding shares of capital stock of the
Company, Pinnacle Common Stock will cease to be
traded on the New York Stock Exchange and the
Company will cease to be a reporting company.
Interest of Management . The Management Stockholders have interests in
Stockholders (see page the Pinnacle Merger that are different from your
60) interests as a stockholder. Collectively, the
Management Stockholders now beneficially own
3,000,285 shares of Pinnacle Common Stock
representing approximately 11.4% of the
outstanding Pinnacle Common Stock. As a
condition to the Pinnacle Merger, the Management
Stockholders will, immediately prior to the
Pinnacle Merger, contribute to PHCR some of the
shares of Pinnacle Common Stock held by them in
exchange for shares of PHCR common stock and
will exchange some of their Pinnacle stock
options for fully vested options to purchase
shares of PHCR common stock, with an aggregate
value equal to that of the shares contributed
and options exchanged. Based on the merger
consideration, the aggregate value of the shares
of Pinnacle Common Stock being contributed to
PHCR and Pinnacle stock options being exchanged
by the Management Stockholders is $50,000,000.
9
. Following the contributions and exchanges
described in the preceding paragraph, all
remaining shares of Pinnacle Common Stock and
stock options held by the Management
Stockholders (other than shares owned by Mr.
Hubbard) will be converted into cash, and if
applicable, the right to receive any Contingent
Payment, in the Pinnacle Merger on the same
basis as shares of Pinnacle Common Stock and
stock options held by non-Management
Stockholders. With respect to remaining shares
owned by Mr. Hubbard, in order to mitigate a tax
disadvantage of this transaction structure which
affects Mr. Hubbard but does not affect the
other Management Stockholders or the public
stockholders, immediately prior to the Pinnacle
Merger, the Company will purchase from Mr.
Hubbard the shares of Pinnacle Common Stock
owned by Mr. Hubbard which are not being
contributed to PHCR for a purchase price equal
to the merger consideration (including any right
to receive the applicable Contingent Payment, if
any, on terms substantively identical to that
being received by the Company's stockholders).
. The Management Stockholders will continue to
serve as executive officers of PHCR or its
subsidiaries after the Pinnacle Merger.
. The Management Stockholders will also be
entitled to receive restricted stock grants for
shares of PHCR stock and be eligible to receive
additional PHCR stock options.
. The Management Stockholders have agreed to vote
their shares of Pinnacle Common Stock in favor
of the approval and adoption of the Merger
Agreement.
Financing and Sources of . One of the conditions to Pinnacle Acq Corp's
Funds for the Pinnacle obligation to consummate the Pinnacle Merger is
Merger (see page 64) the receipt by Pinnacle Acq Corp and Harveys Acq
Corp of cash proceeds of the "Financing." See
"--Conditions to the Pinnacle Merger." The
"Financing" means debt financing satisfying the
terms specified in the Merger Agreement. See
"Merger Agreement--Financing of the Pinnacle
Merger and the Harveys Merger."
. PHCR has received a commitment letter with
respect to a $900,000,000 aggregate principal
amount senior secured credit facility, and PHCR
and certain of its affiliates have received
"highly confident" letters with respect to
$550,000,000 aggregate principal amount of
senior subordinated debt. These amounts,
together with substantially all of the Company's
available cash balance on hand at the closing,
are material components of the collective
sources of funds expected to be used by PHCR to
complete the acquisition of the Company. In
addition to the need to obtain the Financing, to
the extent that the Company's available cash
balance on hand at the closing is less than the
aggregate
10
amount necessary, together with such Financing,
to consummate the Pinnacle Merger and the other
transactions contemplated by the Merger
Agreement, then PHCR's ability to consummate the
Financing and the Pinnacle Merger would likely
be materially impaired. While the amount cannot
be known with certainty, it is expected that an
aggregate of at least $1,600,000,000 would be
necessary to enable the payment in full of all
amounts to be paid by PHCR in connection with
the Pinnacle Merger and the other transactions
contemplated by the Merger Agreement in the case
where no Pinnacle indebtedness is assumed by the
acquiror.
. Pinnacle Acq Corp has agreed in the Merger
Agreement to use commercially reasonable efforts
to obtain and effectuate the Financing, however,
PHCR and its affiliates are under no obligation
to obtain any additional financing or make any
equity investment in PHCR or its subsidiaries.
In addition, the Voting Agreement provides that
if affiliates of PHCR elect, in their sole
discretion, to make an equity investment in PHCR
or its subsidiaries prior to the closing of the
Pinnacle Merger, such equity investment will be
subject to the reasonable approval of
Mr. Hubbard. See "Voting and Contribution
Agreement; Memorandum of Understanding."
Conditions to the . A number of conditions must be satisfied or
Pinnacle Merger (see waived before any of the parties is obligated to
page 77) complete the Pinnacle Merger, including:
. The Pinnacle Merger must be approved by the
holders of a majority of the outstanding
shares of Pinnacle Common Stock;
. There must be no legal or judicial restraints
or prohibitions preventing completion of the
Pinnacle Merger; and
. Any waiting period under the Hart-Scott-
Rodino Act shall have expired or shall have
been terminated.
. Additional conditions must be satisfied or
waived before Pinnacle Acq Corp, but not the
Company, is obligated to complete the Pinnacle
Merger, including:
. All required licenses, permits, consents,
findings of suitability and other approvals
from the applicable gaming authorities, other
governmental entities and specified third
parties shall have been obtained;
. Pinnacle Acq Corp and Harveys Acq Corp shall
have received the cash proceeds of the
Financing;
. Since April 17, 2000, no event shall have
occurred which would reasonably be expected
to have a material adverse effect on the
Company or the transactions contemplated by
the Merger Agreement;
11
. To the extent required, Pinnacle Acq Corp
shall have received valid consents and
related tenders under the outstanding
principal amount of debt of the Company and
Harveys Casino Resorts pursuant to tender
offers for such debt;
. The Company shall have completed the pending
sales of Boomtown Biloxi, Casino Magic Bay
St. Louis and Turf Paradise on substantially
the terms and conditions contained in the
applicable definitive agreements for such
transactions and for at least a minimum
amount of net proceeds;
. All material phases of the Belterra Resort
and Casino, other than the golf course and
performance theater, shall have been
substantially completed and open to the
public by not later than September 15, 2000,
and the costs associated with such project
shall not be, in the aggregate, more than
$207,000,000, and such project (other than
the golf course and performance theater)
shall have been completed in substantial
conformity with the written budgets, plans
and policies relating to such project
provided to Pinnacle Acq Corp;
. The transactions contemplated by the Voting
Agreement shall have been consummated
immediately prior to the effective time of
the Pinnacle Merger;
. The representations and warranties made by
the Company in the Merger Agreement must be
true and accurate in all material respects,
or if qualified as to materiality, true and
accurate in all respects;
. The Company must have performed and
complied, in all material respects, with all
of its obligations and covenants set forth
in the Merger Agreement; and
. The shares held by stockholders who exercise
appraisal rights under Delaware law must not
exceed 5% of the outstanding shares of
Pinnacle Common Stock.
. Additional conditions must be satisfied or
waived before the Company, but not Pinnacle Acq
Corp is obligated to complete the Pinnacle
Merger, including:
. All required licenses, permits, consents
findings of suitability and other approvals
from the applicable gaming authorities must
have been obtained;
. The representations and warranties made by
Pinnacle Acq Corp in the Merger Agreement
must be true and accurate in all material
respects, or if qualified as to materiality,
true and accurate in all respects; and
. Pinnacle Acq Corp must have performed and
complied, in all material respects, with all
of its obligations and covenants set forth
in the Merger Agreement.
12
Termination of the Merger . All parties may mutually agree in writing at any
Agreement (see page 83) time (including any time after the Annual
Meeting) to terminate the Merger Agreement.
. In addition, either Pinnacle Acq Corp or the
Company may terminate the Merger Agreement if:
. the Pinnacle Merger has not been completed
by January 15, 2001; provided that at
Pinnacle Acq Corp's option, such outside
closing date may be extended for
(1) up to two months if the parties have
received from each gaming authority
whose required approval is outstanding
as of such date reasonable assurance
that a hearing is scheduled or can
reasonably be expected to be scheduled
prior to March 15, 2001, or
(2) up to six months if Pinnacle Acq Corp
can demonstrate that there is a
reasonable likelihood that it will
receive the gaming approvals by the
extended outside closing date, and
Pinnacle Acq Corp has delivered to the
Company one or more commitment letters
and "highly confident" letters
reflecting amounts that are at least
sufficient to cover the Financing with
expiration dates that are coextensive
with the extended outside closing date;
. either party receives a final and
nonappealable written statement from a
gaming authority stating that such gaming
authority has disapproved or will not give
approval to the Merger Agreement and such
disapproval would cause Pinnacle Acq Corp to
be unable to consummate the Pinnacle Merger,
or if Pinnacle Acq Corp has finally
withdrawn (with no intent to resubmit) its
gaming application with such gaming
authority;
. a final, nonappealable court order or other
governmental action prohibits the Pinnacle
Merger;
. at a duly held stockholders meeting, the
stockholder approval required to complete
the Pinnacle Merger is not obtained; or
. the commitment and "highly confident"
letters which have been received by PHCR
with respect to the Financing have been
withdrawn or terminated by the issuing
lenders and are not replaced with commitment
and/or "highly confident" letters reflecting
amounts sufficient to cover the Financing
within 20 business days following such
withdrawal or termination.
. Pinnacle Acq Corp may also terminate the Merger
Agreement if:
. the Board of Directors of the Company
amends, modifies or withdraws, or publicly
proposes to amend, modify in a manner
adverse to Pinnacle Acq Corp or withdraw,
its
13
recommendation of the Merger Agreement; or
. following the submission of a "takeover
proposal," the Company fails to comply with
the covenant in the Merger Agreement
prohibiting solicitation of other
acquisition proposals (see "Acquisition
Proposals" below) or the covenant in the
Merger Agreement requiring Pinnacle to use
all reasonable efforts to consummate and
make effective the Pinnacle Merger, the
Financing and the other transactions
contemplated by the Merger Agreement,
subject to specified exceptions; or
. the Merger Agreement has not been approved
by the Company's stockholders on or prior to
[August 15, 2000] [as it may be extended
pursuant to the Merger Agreement].
A "takeover proposal" is one of certain types
of acquisition proposals, including proposals
to acquire 10% or more of the Company's
consolidated assets or equity securities,
tender offers that would result in the bidder
beneficially owning 10% or more of the
Company's equity securities and mergers and
other similar transactions. See "Merger
Agreement--No Solicitation."
. The Company also may terminate the Merger
Agreement if all of the following conditions are
met:
. prior to approval of the Merger Agreement or
the Pinnacle Merger by the Company's
stockholders, to the extent required by the
fiduciary duties to the Company's
stockholders, after consultation with
outside legal counsel, the Pinnacle Board of
Directors or the special committee approves
a "competitive proposal,"
. prior to such approval, the Company's Board
of Directors complied with the provisions of
the Merger Agreement requiring the Company
to give notice to Pinnacle Acq Corp and to
give Pinnacle Acq Corp the opportunity to
make an alternative proposal,
. concurrently with the termination of the
Merger Agreement, the Company enters into a
definitive agreement with respect to the
competitive proposal, and
. concurrently with the termination of the
Merger Agreement, the Company pays to
Pinnacle Acq Corp the $25,000,000
termination fee. See "--Termination Fee."
A "competitive proposal" is one of certain
types of acquisition proposals, including
proposals to acquire 50% or more of the
Company's consolidated assets or equity
securities, tender offers that would result in
the bidder beneficially owning 50% or more of
the Company's equity securities and mergers and
other similar transactions, with respect to
which the Company's Board of Directors has
determined in its good faith judgment that (1)
the
14
value of the consideration (based on the
opinion of an independent financial advisor)
exceeds the value of the merger consideration
in the Pinnacle Merger and any alternative
proposal presented by Pinnacle Acq Corp or any
of its affiliates and (2) such proposal is more
favorable to the Company's stockholders than
the Pinnacle Merger and any alternative
proposal presented by Pinnacle Acq Corp or any
of its affiliates. See "Merger Agreement--No
Solicitation."
Acquisition Proposals . In general, the Merger Agreement prohibits the
(see page 80) Company and its officers, directors, employees
and other representatives from soliciting,
initiating, encouraging or participating in
inquiries, discussions or negotiations or
furnishing non-public information regarding
takeover proposals. However, the Merger
Agreement permits the Company to provide
information to and participate in negotiations
with third parties who make unsolicited, written
competitive proposals if:
(1) in the opinion of the Company's Board of
Directors after consultation with outside
legal counsel, the failure to act would be
inconsistent with the fiduciary duties of
the Company's Board of Directors to the
Company's stockholders, and
(2) other conditions are met.
Termination Fee (See page . Under some circumstances, the Company will be
84) obligated to pay Pinnacle Acq Corp a termination
fee equal to $25,000,000. This termination fee
is payable if, among other things, the Merger
Agreement:
. is terminated by Pinnacle Acq Corp because
the Company's Board of Directors amends,
modifies or withdraws, or publicly proposes
to amend, modify in a manner adverse to
Pinnacle Acq Corp or withdraw, its
recommendation of the Merger Agreement,
. is terminated by Pinnacle Acq Corp because
following a takeover proposal Pinnacle
failed to comply with the covenant in the
Merger Agreement prohibiting solicitation of
other acquisition proposals (see "--
Acquisition Proposals" above) or the
covenant in the Merger Agreement requiring
Pinnacle to use all reasonable efforts to
consummate and make effective the Pinnacle
Merger, the Financing and the other
transactions contemplated by the Merger
Agreement, subject to specified exceptions,
. is terminated by the Company in compliance
with the Merger Agreement upon entering into
a definitive agreement with respect to a
competitive proposal, as summarized above
and as set out in detail in the Merger
Agreement (see "--Termination of the Merger
Agreement"),
15
. is terminated, because the Merger Agreement
has not been approved by the Company's
stockholders prior to [August 15, 2000] [as
it may be extended as described above], or
the Pinnacle Merger has not been completed
by the outside closing date and, in either
case, prior to such termination a
"competitive proposal" or a "significant
takeover proposal" was made and within 12
months of such termination the Company
consummates a significant takeover proposal,
or enters into an agreement with respect to,
or approves or recommends or publicly
proposes to approve or recommend, a
significant takeover proposal which is
thereafter consummated (subject to some
exceptions), or
. is terminated because the Company's
stockholders do not approve the Pinnacle
Merger and prior to the termination of the
Merger Agreement a significant takeover
proposal was made.
A "significant takeover proposal" is a certain
type of takeover proposal, including a proposal
to acquire 20% or more of the Company's
consolidated assets or equity securities,
tender offers that would result in the bidder
beneficially owning 20% or more of the
Company's equity securities and mergers and
other similar transactions. See "Merger
Agreement--No Solicitation."
. R.D. Hubbard and Paul Alanis, two of the nine
Conflicts of Interest members of the Company's Board of Directors,
(See page 60) have a conflict of interest in recommending
approval and adoption of the Merger Agreement.
. If the Pinnacle Merger occurs, Mr. Hubbard and
Mr. Alanis will own shares of and options to
purchase shares of PHCR's common stock following
the Pinnacle Merger and as a result will receive
the benefit of any future earnings, growth and
increased value of the Company (and Harveys
Casino Resorts) while all other stockholders of
the Company (other than the other Management
Stockholders) will no longer receive any such
benefit with respect to the Company.
. Mr. Hubbard and Mr. Alanis will also serve as
directors, officers or both of PHCR or its
subsidiaries after the Pinnacle Merger.
. Because of this conflict, Mr. Hubbard and Mr.
Alanis abstained from the vote of the Company's
Board of Directors on the Pinnacle Merger.
Consequently, the Board of Directors' approval
and recommendations were made by the seven
disinterested directors and the Board of
Directors' recommendation is based on the
unanimous recommendation of the special
committee of such disinterested directors, which
did not have a conflict of interest in making
the approval and recommendation. See "--The
Special Committee and its Recommendation to the
Board."
16
Advantages of the . In the Pinnacle Merger, you will receive for
Pinnacle Merger to You your shares of Pinnacle Common Stock a cash
(See page 46) premium over the market price when the Pinnacle
Merger was announced. The merger consideration
of $24.00 per share (not taking into account any
additional contingent payment) represents a
premium of 39.1% over the closing price of
Pinnacle Common Stock on March 6, 2000 (the
second to last trading day prior to the public
announcement that the Company had received a
proposal regarding the proposed transaction) and
a 21.5% premium over the closing price for
Pinnacle Common Stock on April 14, 2000 (the
last trading day before the signing of the
definitive Merger Agreement was announced).
Following the Pinnacle Merger, you also will not
bear the risk of any decrease in the value of
the Company.
Disadvantages of the . Following the proposed Pinnacle Merger, you will
Pinnacle Merger to You no longer own stock of the Company and will no
(See page 46) longer benefit from any earnings or growth of
the Company. Also, you may recognize a taxable
gain as a result of the Pinnacle Merger. See "--
U.S. Federal Income Tax Consequences of the
Pinnacle Merger."
What to do Now . Please mark your vote on, sign, date and mail
your Proxy Card in the enclosed return envelope
as soon as possible, so that your shares may be
represented and voted at the Annual Meeting.
Rights You Have if You . Stockholders who do not vote in favor of the
Oppose the Pinnacle Pinnacle Merger may dissent and obtain the fair
Merger (See page 69) value of their shares as determined by the
Delaware Court of Chancery, but only if they
strictly comply with all of the Delaware law
procedures explained on pages [69] to [72] and
in Annex C to this Proxy Statement.
Who May Vote on the . All stockholders of record as of the close of
Pinnacle Merger (See page business on [ ], 2000 will be entitled to
28) notice of, and to vote at, the Annual Meeting.
Don't Send Your Stock . Do not send in your stock certificates now. If
Certificates Now the Pinnacle Merger is completed, we will send
you a transmittal form and written instructions
for exchanging your share certificates for the
merger consideration. Once you have submitted
your certificates following the completion of
the Pinnacle Merger, there will be no need to
resubmit anything further in order for you to
receive the Contingent Payment, if any.
Shares Held in "Street . If your shares of Pinnacle Common Stock are held
Name" in "street name" by your broker, your broker
will ONLY vote your shares if you provide
instructions on how to vote. You should follow
the directions provided by your broker regarding
how to instruct your broker to vote your shares.
17
Changing Your Vote (See . If you have signed and mailed back your Proxy
page 28) Card and want to change your vote, you may
either send a written revocation or another
signed Proxy Card with a later date to the
Company's transfer agent before the Annual
Meeting, or simply attend the Annual Meeting and
vote in person.
Completion of the . We are working toward completing the Pinnacle
Pinnacle Merger (See page Merger as quickly as possible. If the Merger
77) Agreement is approved and the other conditions
to the Pinnacle Merger are satisfied, we expect
to complete the Pinnacle Merger in the fourth
quarter of 2000, although as described above,
under some circumstances the Merger Agreement
permits the closing date to be extended into the
spring or summer of 2001 in order to obtain the
approvals of gaming authorities.
U.S. Federal Income Tax . The receipt of cash for your shares of Pinnacle
Consequences of the Common Stock pursuant to the Pinnacle Merger
Pinnacle Merger (See page generally will be taxable for U.S. federal
58) income tax purposes. To review the U.S. federal
income tax consequences to stockholders in
greater detail, see "Special Factors--Certain
Federal Income Tax Consequences of the Pinnacle
Merger."
Other Matters to be Voted . At the Annual Meeting you will also vote on the
on at the Annual Meeting election of nine directors to the Company's
(See page 95) Board of Directors. Such directors will hold
office until the earlier of the next annual
meeting of stockholders (and until such
director's successor shall have been duly
elected and qualified) or the effective time of
the Pinnacle Merger. If the Pinnacle Merger is
completed, all of such directors will be
replaced by the members of Board of Directors of
Pinnacle Acq Corp.
Who Can Help Answer Other . If you have more questions about the Pinnacle
Questions Merger or would like additional copies of this
Proxy Statement, you should contact the
Corporate Secretary of the Company at Pinnacle
Entertainment, Inc. 330 North Brand Boulevard,
Suite 1100, Glendale, California 91203.
18
SELECTED CONSOLIDATED FINANCIAL DATA
The following table sets forth selected consolidated financial data for the
Company and its subsidiaries as of and for each of the five years in the
period ended December 31, 1999, and as of and for the three months ended March
31, 2000 and the three months ended March 31, 1999. The historical financial
data for Company as of and for each of the five fiscal years in the period
ended December 31, 1999, and as of and for the three months ended March 31,
2000 and the three months ended March 31, 1999 has been derived from the
audited and unaudited Consolidated Financial Statements of the Company and
should be read in conjunction with the Consolidated Financial Statements of
the Company and the notes thereto included in the Company's Annual Report on
Form 10-K for the fiscal year ended December 31, 1999, as filed with the SEC
on March 29, 2000, and in the Company's Quarterly Report on Form 10-Q for the
fiscal quarter ended March 31, 2000, as filed with the SEC on May 15, 2000,
respectively, and included in this Proxy Statement beginning on page F-1.
The Hollywood Park Race Track ("HPRT") and Hollywood Park-Casino ("HPC")
were disposed of in September 1999. The Company leased HPC back from the
purchaser and immediately subleased the facility to an unaffiliated third
party (see Note 3 to the Notes to Consolidated Financial Statements). Casino
Magic Corp. was acquired on October 15, 1998 and Boomtown, Inc. 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, results of operations of Sunflower Racing, Inc. (a horse and greyhound
racing facility in Kansas) were no longer consolidated with the Company's due
to Sunflower Racing's May 17, 1996, filing for reorganization under Chapter 11
of the Bankruptcy Code.
19
PINNACLE ENTERTAINMENT, INC.
SELECTED CONSOLIDATED FINANCIAL DATA
Three Months
ended
Years ended December 31, March 31,
--------------------------------------------------- --------------------
1999 1998 1997 1996 1995 2000 1999
---------- --------- -------- -------- -------- ---------- --------
(in thousands, except per share data and ratios)
Statement of Operations
Data:
Revenues:
Gaming................. $ 557,526 $ 293,057 $137,659 $ 50,717 $ 26,656 $ 133,153 $140,391
Racing................. 55,209 66,871 68,844 71,308 79,862 6,143 9,779
Food and beverage...... 39,817 30,510 19,894 13,947 19,783 8,251 9,671
Other.................. 54,305 36,529 21,731 7,253 4,271 15,050 12,157
---------- --------- -------- -------- -------- ---------- --------
706,857 426,967 248,128 143,225 130,572 162,597 171,998
---------- --------- -------- -------- -------- ---------- --------
Expenses:
Gaming................. 309,508 161,549 74,733 27,249 5,291 74,245 77,378
Racing................. 22,694 29,316 30,304 30,167 30,960 2,658 5,355
Food and beverage...... 46,558 38,860 25,745 19,573 24,749 9,177 11,655
General, administrative
and other............. 174,030 118,397 77,370 43,962 54,735 40,749 42,405
Depreciation and
amortization.......... 51,924 32,121 18,157 10,695 11,384 12,591 13,367
(Gain) loss on
disposition of
assets................ (42,061) 2,221 0 11,412 0 (23,854) 0
---------- --------- -------- -------- -------- ---------- --------
562,653 382,464 226,309 143,058 127,119 115,566 150,160
---------- --------- -------- -------- -------- ---------- --------
Operating income........ 144,204 44,503 21,819 167 3,453 47,031 21,838
Interest expense, net.. 57,544 22,518 7,302 942 3,922 12,880 14,491
---------- --------- -------- -------- -------- ---------- --------
Income (loss) before
income taxes and
minority interests..... 86,660 21,985 14,517 (775) (469) 34,151 7,347
Minority interests..... 1,687 374 (3) 15 0 0 458
Income tax expense..... 40,926 8,442 5,850 3,459 693 12,239 2,756
---------- --------- -------- -------- -------- ---------- --------
Net income (loss)...... $ 44,047 $ 13,169 $ 8,670 $ (4,249) $ (1,162) $ 21,912 $ 4,133
========== ========= ======== ======== ======== ========== ========
Dividends on convertible
preferred stock........ $ 0 $ 0 $ 1,520 $ 1,925 $ 1,925 $ 0 $ 0
---------- --------- -------- -------- -------- ---------- --------
Net income (loss)
available to (allocated
to) common
stockholders........... $ 44,047 $ 13,169 $ 7,150 $ (6,174) $ (3,087) $ 21,912 $ 4,133
========== ========= ======== ======== ======== ========== ========
Net income (loss) per
common share:
Basic.................. $ 1.70 $ 0.50 $ 0.33 $ (0.33) $ (0.17) $ 0.83 $ 0.16
Diluted................ $ 1.67 $ 0.50 $ 0.32 $ (0.33) $ (0.17) $ 0.80 $ 0.16
Other Data:
Earnings before
interest, taxes,
depreciation,
amortization and other
non-recurring items
(EBITDA)............... $ 157,087 $ 80,085 $ 42,459 $ 22,274 $ 20,925 $ 38,136 $ 35,912
Cash flows provided by
(used in):
Operating activities... $ 75,323 $ 38,112 $ 14,365 $ 13,677 $ 20,291 $ (878) $ 8,850
Investing activities... (51,063) (136,532) (16,226) (19,895) (32,922) 105,669 (10,990)
Financing activities... 54,868 118,498 9,609 (4,268) (2,085) (338) 62,685
Capital expenditures... 59,680 56,747 32,505 23,786 25,150 42,392 11,281
Ratio of earnings to
fixed charges (1998,
1999 and 2000 only).... 2.20x 1.73x N/A N/A N/A 2.87x 1.38x
Balance Sheet Data:
Cash and cash
equivalents............ $ 123,362 $ 44,234 $ 24,156 $ 16,408 $ 25,532 $ 227,815 $104,779
Short-term investments.. 123,428 3,179 0 4,766 6,447 0 3,210
Total assets............ 1,045,408 891,339 419,029 205,886 283,303 1,058,872 962,047
Current liabilities..... 145,008 128,592 57,317 35,364 74,951 137,008 111,310
Long term notes
payable................ 618,698 527,619 132,102 282 15,629 617,549 605,885
Total liabilities....... 764,532 656,611 195,729 44,711 117,557 755,383 723,274
Minority interests...... 0 3,752 1,946 3,015 0 0 3,646
Stockholders' equity.... 280,876 230,976 221,354 158,160 165,746 303,489 235,127
20
UNAUDITED PRO FORMA CONSOLIDATED FINANCIAL STATEMENTS
REFLECTING CERTAIN DISPOSITIONS
As more fully described in Pinnacle's Annual Report on Form 10-K for the
year ended December 31, 1999 and Quarterly Report on Form 10-Q for the three
months ended March 31, 2000, Pinnacle disposed of HPRT and HPC in September
1999 (the "1999 Asset Dispositions") and sold 42 acres of excess raw land in
March 2000 (the "Land Sale"). In addition, during 1999, the Company entered
into asset sales agreements for the sale of Casino Magic Bay St. Louis ("CMAG-
BSL") and Boomtown Biloxi ("BT-Biloxi") to subsidiaries of Penn National
Gaming, Inc. (the "Penn Transaction") and, in 2000, the Company entered into
an agreement for the sale of Turf Paradise, Inc. ("Turf") to a private
investor (the "Turf Transaction"). The Penn Transaction and Turf Transaction
are expected to close in the second or third quarter of 2000, and are shown
because the closing of those transactions is a condition precedent to the
Pinnacle Merger. See "Merger Agreement--Conditions to the Pinnacle Merger."
The following unaudited pro forma consolidated balance sheet was prepared
from the unaudited consolidated balance sheet of Pinnacle as of March 31,
2000.
The following unaudited pro forma consolidated statements of operations
were prepared from the audited consolidated statement of operations of
Pinnacle for the year ended December 31, 1999 and from the unaudited
consolidated statement of operations of Pinnacle for the three months ended
March 31, 2000. The results of operations attributable to the actual and
pending asset dispositions have been eliminated through pro forma adjustments.
It was assumed that the 1999 Asset Dispositions, the Land Sale, the Penn
Transaction and the Turf Transaction occurred on January 1, 1999 for the
unaudited pro forma consolidated statements of operations and that the Penn
Transaction and Turf Transaction occurred as of March 31, 2000 for the
unaudited pro forma consolidated balance sheet. In accordance with pro forma
presentation guidelines of the SEC, the pro forma statements of operations for
the year ended December 31, 1999 and the three months ended March 31, 2000 do
not reflect estimated gains from these transactions. Therefore, the gain and
related tax expense for the 1999 Asset Dispositions were eliminated to arrive
at the unaudited pro forma consolidated statement of operations for the year
ended December 31, 1999, and the gain and related tax expense for the Land
Sale were eliminated to arrive at the unaudited pro forma consolidated
statement of operations for the three months ended March 31, 2000.
The dispositions of HPRT, CMAG-BSL, BT-Biloxi, Turf and the 42 acres of
excess raw land were accounted for as sales. The disposition of HPC was
accounted for as a financing transaction and therefore is not recognized as a
sale for accounting purposes because Pinnacle subleased HPC to a third-party
operator.
The following unaudited pro forma consolidated financial statements should
be read in conjunction with the accompanying notes and assumptions. The
unaudited pro forma consolidated financial information is presented for
illustrative purposes only and contains estimates such as transaction costs
and income taxes for the Penn Transaction and Turf Transaction. Accordingly,
the gains and related tax expenses on the Penn Transaction and Turf
Transaction for the unaudited pro forma balance sheet are estimated, and the
pro forma financial statements are not necessarily indicative of the operating
results or financial position of Pinnacle if the pending dispositions had been
completed in an earlier period, nor necessarily indicative of its future
operating results or financial position.
These pro forma financial statements are based on, and should be read in
conjunction with, the historical consolidated financial statements and the
related notes thereto of Pinnacle contained in Pinnacle's Annual Report on
Form 10-K for the year ended December 31, 1999, and Quarterly Report on Form
10-Q for the three months ended March 31, 2000, and included in this Proxy
Statement beginning on page F-1.
21
PINNACLE ENTERTAINMENT, INC.
UNAUDITED PRO FORMA CONSOLIDATED BALANCE SHEET
As of March 31, 2000
(in thousands, except per share data)
Pinnacle
Entertainment, Pro Forma Pro Forma
Inc. Adjustments Consolidated
-------------- ----------- ------------
Assets
Current Assets:
Cash and cash equivalents......... $ 227,815 $ 195,000 (a) $ 476,523
53,000 (b)
708 (c)
Receivables, net.................. 16,278 16,278
Prepaid expenses and other
assets........................... 13,912 13,912
Assets held for sale.............. 153,206 (136,374)(d) 16,832
Current portion of notes
receivable....................... 5,785 5,785
---------- --------- ----------
Total current assets............ 416,996 112,334 529,330
Notes receivable.................... 8,632 8,632
Net property, plant and equipment... 473,365 473,365
Goodwill, net of amortization....... 86,681 (13,245)(e) 73,436
Gaming license, net of
amortization....................... 40,848 40,848
Debt issuance costs, net of
amortization....................... 21,691 21,691
Other assets........................ 10,659 10,659
---------- --------- ----------
Total assets.................... $1,058,872 $ 99,089 $1,157,961
========== ========= ==========
Liabilities and Stockholders' Equity
Current Liabilities:
Accounts payable.................. $ 21,122 $ 21,122
Accrued interest.................. 9,594 9,594
Other accrued liabilities......... 35,595 2,250 (f) 37,845
Accrued compensation.............. 16,962 16,962
Liabilities to be assumed by
buyers of assets held for sale... 9,593 (9,593)(g) 0
Federal and state income taxes.... 37,615 37,375 (h) 74,990
Current portion of notes payable.. 6,527 6,527
---------- --------- ----------
Total current liabilities....... 137,008 30,032 167,040
Notes payable, less current
maturities......................... 617,549 617,549
Deferred tax liabilities............ 826 826
Stockholders' Equity:
Capital stock--
Preferred........................ 0 0
Common........................... 2,629 2,629
Capital in excess of par value.... 225,350 225,350
Retained earnings................. 75,510 69,057 (i) 144,567
---------- --------- ----------
Total stockholders' equity...... 303,489 69,057 372,546
---------- --------- ----------
Total liabilities and
stockholders' equity............. $1,058,872 $ 99,089 $1,157,961
========== ========= ==========
Other Data
Book value per share $ 11.55
Pro forma book value per share $ 14.17
22
PINNACLE ENTERTAINMENT, INC.
NOTES TO UNAUDITED PRO FORMA CONSOLIDATED BALANCE SHEET
Assumptions--During 1999, the Company entered into asset sales agreements
for the Penn Transaction and Turf Transaction. The Company anticipates these
transactions will close in the second or third quarter of 2000. However,
pursuant to pro forma presentation guidelines, the unaudited pro forma
consolidated balance sheet as of March 31, 2000 is presented as if the Penn
Transaction and Turf Transaction had occurred on March 31, 2000.
Pro Forma Adjustments--The following adjustments have been made to the
unaudited pro forma consolidated balance sheet:
(a) To record the sales proceeds of $195,000,000 for the Penn
Transaction.
(b) To record the sales proceeds of $53,000,000 for the Turf
Transaction.
(c) To record the net cash received from the buyers of CMAG-BSL, BT-
Biloxi and Turf, which amount represents the difference between assets sold
(other than net property, plant and equipment) and liabilities assumed.
(d) To record the sale of CMAG-BSL, BT-Biloxi and Turf, and related
assets, net of accumulated depreciation.
(e) To record the write off of goodwill associated with the Penn
Transaction, net of accumulated amortization.
(f) To record estimated Penn Transaction and Turf Transaction expenses
and other related costs of approximately $2,250,000.
(g) To record the liabilities assumed by the buyers in the Penn
Transaction and the Turf Transaction.
(h) To record the current and deferred federal and state income taxes
payable related to the dispositions. The Company may elect deferred like-
kind Section 1031 exchanges (the "Exchanges") for tax purposes with regard
to the Penn Transaction and the Turf Transaction. If the Company elects,
and is successful in completing, the Exchanges, the Company may not
recognize a current taxable gain on either the Penn Transaction or the Turf
Transaction, and, accordingly, may be able to defer the tax liabilities as
a result of these transactions.
(i) To record the estimated gain on the Penn Transaction and the Turf
Transaction. The following is the preliminary calculation of the estimated
impact to the statement of operations resulting from these transactions (in
thousands):
CMAG-BSL
and BT-
Biloxi Turf Cumulative
-------- ------- ----------
Cash proceeds..................................... $195,000 $53,000 $248,000
Less:Estimated transaction and other related
costs............................................ 1,500 750 2,250
Estimated net book value of property, plant and
equipment disposed............................. 115,353 10,720 126,073
Estimated goodwill, net of accumulated
amortization, related to the Penn Transaction.. 13,245 0 13,245
-------- ------- --------
Estimated gain before income taxes................ 64,902 41,530 106,432
Less: Estimated income taxes...................... 23,523 13,852 37,375
-------- ------- --------
Estimated gain.................................... $ 41,379 $27,678 $ 69,057
======== ======= ========
The above calculations are preliminary, subject to final determination of
the net book value of property, plant and equipment disposed of, income tax
consequences and transaction and other costs. Actual accounting adjustments
related to the dispositions may differ from the pro forma adjustments.
23
PINNACLE ENTERTAINMENT, INC.
UNAUDITED PRO FORMA CONSOLIDATED STATEMENT OF OPERATIONS
For the year ended December 31, 1999
(in thousands, except per share data and ratios)
Pro Forma Adjustments
-----------------------
Less: HPRT,
HPC, Pinnacle
Pinnacle CMAG-BSL, Entertainment, Inc.
Entertainment, Inc. BT-Biloxi, Pro Forma Pro Forma
Consolidated Turf(a)(1) Adjustments Consolidated
------------------- ----------- ----------- -------------------
Revenues:
Gaming................ $557,526 $172,178 $385,348
Racing................ 55,209 55,209 0
Food and beverage..... 39,817 19,962 19,855
Hotel and recreational
vehicle park......... 11,737 1,797 9,940
Truck stop and service
station.............. 17,644 0 17,644
Other income.......... 24,924 11,469 4,500 (b) 17,955
-------- -------- -------- --------
706,857 260,615 4,500 450,742
-------- -------- -------- --------
Expenses:
Gaming................ 309,508 95,053 214,455
Racing................ 22,694 22,694 0
Food and beverage..... 46,558 23,959 22,599
Hotel and recreational
vehicle park......... 5,923 894 5,029
Truck stop and service
station.............. 16,296 0 16,296
General and
administrative....... 134,870 52,114 200 (c) 82,956
Depreciation and
amortization......... 51,924 16,036 746 (d) 36,634
Pre-opening costs,
Belterra Resort &
Casino............... 3,020 0 3,020
Gain on disposition of
assets, net.......... (42,061) 0 41,076 (e) (985)
Proposed merger
costs................ 0 0 0 (f) 0
Other................. 13,921 5,921 8,000
-------- -------- -------- --------
562,653 216,671 42,022 388,004
-------- -------- -------- --------
Operating income........ 144,204 43,944 (37,522) 62,738
Interest expense,
net.................. 57,544 86 912 (g) 58,370
-------- -------- -------- --------
Income before minority
interests and income
taxes.................. 86,660 43,858 (38,434) 4,368
Minority interests.... 1,687 0 0 1,687
Income tax expense
(benefit)............ 40,926 17,306 (20,958)(h) 2,662
-------- -------- -------- --------
Net income.............. $ 44,047 $ 26,552 $(17,476) $ 19
======== ======== ======== ========
Net income per common
share:
Net income--basic..... $1.70 $0.00
Net income--diluted... $1.67 $0.00
Number of shares--
basic.................. 25,966 25,966
Number of shares--
diluted................ 26,329 26,329
Other Data:
Ratio of earnings to
fixed charges........ 2.20x
Pro forma ratio of
earnings to fixed
charges.............. 1.02x
24
PINNACLE ENTERTAINMENT, INC.
UNAUDITED PRO FORMA CONSOLIDATED STATEMENT OF OPERATIONS
For the three months ended March 31, 2000
(in thousands, except per share data and ratios)
Pro Forma Adjustments
-----------------------
Less: HPRT,
HPC, Pinnacle
Pinnacle CMAG-BSL, Entertainment, Inc.
Entertainment, Inc. BT-Biloxi, Pro Forma Pro Forma
Consolidated Turf(a)(2) Adjustments Consolidated
------------------- ----------- ----------- -------------------
Revenues:
Gaming................ $133,153 $35,743 $ 97,410
Racing................ 6,143 6,143 0
Food and beverage..... 8,251 3,277 4,974
Hotel and recreational
vehicle park......... 2,814 521 2,293
Truck stop and service
station.............. 4,076 0 4,076
Other income.......... 8,160 2,754 0 (b) 5,406
-------- ------- -------- --------
162,597 48,438 0 114,159
-------- ------- -------- --------
Expenses:
Gaming................ 74,245 19,945 54,300
Racing................ 2,658 2,658 0
Food and beverage..... 9,177 3,439 5,738
Hotel and recreational
vehicle park......... 1,540 285 1,255
Truck stop and service
station.............. 3,764 0 3,764
General and
administrative....... 30,713 8,458 0 (c) 22,255
Depreciation and
amortization......... 12,591 2,800 (88)(d) 9,703
Pre-opening costs,
Belterra Resort &
Casino............... 1,743 0 1,743
Gain on disposition of
assets, net.......... (23,854) 0 23,854 (e) 0
Proposed merger
costs................ 625 0 (625)(f) 0
Other................. 2,364 1,137 1,227
-------- ------- -------- --------
115,566 38,722 23,141 99,985
-------- ------- -------- --------
Operating income........ 47,031 9,716 (23,141) 14,174
Interest expense,
net.................. 12,880 18 (18)(g) 12,844
-------- ------- -------- --------
Income before income
taxes.................. 34,151 9,698 (23,123) 1,330
Income tax expense
(benefit)............ 12,239 3,491 (8,269)(h) 479
-------- ------- -------- --------
Net income.............. $ 21,912 $ 6,207 $(14,854) $ 851
======== ======= ======== ========
Net income per common
share:
Net income--basic..... $0.83 $0.03
Net income--diluted... $0.80 $0.03
Number of shares--
basic.................. 26,260 26,260
Number of shares--
diluted................ 27,307 27,307
Other Data:
Ratio of earnings to
fixed charges........ 2.87x
Pro forma ratio of
earnings to fixed
charges.............. 1.03x
25
PINNACLE ENTERTAINMENT, INC.
NOTES TO UNAUDITED PRO FORMA CONSOLIDATED
STATEMENTS OF OPERATIONS
Assumptions--The unaudited pro forma consolidated statements of operations
for the year ended December 31, 1999, and the three months ended March 31,
2000, are presented as if the 1999 Asset Dispositions, the Land Sale, the Penn
Transaction and the Turf Transaction had taken place on January 1, 1999. Had
these transactions occurred on January 1, 1999, the cash and cash equivalents
generated as of January 1, 1999, net of estimated transaction costs and
related estimated federal and state income taxes, would have been
approximately $331,700,000. The results of operations of HPRT, HPC, CMAG-BSL,
BT-Biloxi and Turf have been eliminated from Pinnacle's historical results of
operations, so that only the continuing Pinnacle operations are reflected.
In accordance with pro forma presentation guidelines of the SEC, the pro
forma statements of operations eliminate the gain and related income tax
expense on the 1999 Asset Dispositions and Land Sale. In addition, in
accordance with pro forma presentation guidelines, the pro forma statements of
operations do not reflect estimated gains and related tax expense on the Penn
Transaction and the Turf Transaction or any income that could have been
generated during the periods shown from the proceeds received. A reduction of
debt, investments in other assets including short-term investment securities
or an investment in other casino operations would likely have resulted and has
not been reflected in these pro forma statements of operations.
Pro Forma Adjustments--The following adjustments have been made to the
unaudited pro forma consolidated statements of operations:
(a)(1) To eliminate the historical results of operations of HPRT, HPC,
CMAG-BSL, BT-Biloxi and Turf.
(a)(2) To eliminate the historical results of operations of CMAG-BSL,
BT-Biloxi and Turf.
(b) To record HPC rental income to be received by Pinnacle. In
connection with the 1999 Asset Dispositions, Pinnacle entered into a lease
agreement with an unaffiliated third party to operate HPC. Rent is received
by Pinnacle in the amount of $500,000 per month, or $6,000,000 per annum.
Since the 1999 Asset Dispositions occurred in September 1999, the
historical results of operations for the year ended December 31, 1999
include three months of lease income and therefore the pro forma adjustment
reflects only the additional $4,500,000 of rental income for the period
January 1, 1999 to September 30, 1999.
(c) To record office rent expense to be paid by Pinnacle. In connection
with the 1999 Asset Dispositions, Pinnacle relocated its corporate offices.
Prior to the 1999 Asset Dispositions, Pinnacle maintained its corporate
offices at HPRT and did not pay any office rent. Since the 1999 Asset
Dispositions occurred in September 1999 and the Company relocated its
corporate offices prior to such transaction, the historical results of
operations for the year ended December 31, 1999 include four months of
office rent expense, and therefore the pro forma adjustment reflects only
the additional $200,000 of estimated office rent expense for the period
January 1, 1999 to August 31, 1999.
(d) To record estimated additional depreciation expense for HPC and
related assets associated with the 1999 Asset Dispositions and related
financing, as well as depreciation expense for Pinnacle assets sold which
are not reflected in the historical results of operations of HPRT and HPC;
off set by a reduction in amortization expense associated with the goodwill
written off in connection with the Penn Transaction. See note (e) to the
Unaudited Pro Forma Consolidated Balance Sheet.
(e) To eliminate the gain on disposition of assets related to the 1999
Asset Dispositions (for the year ended December 31, 1999) and the Land Sale
(for the three months ended March 31, 2000).
(f) To eliminate the costs associated with the Pinnacle Merger, which
merger discussions began in 2000.
(g) To adjust interest expense associated with the financing debt
incurred in connection with the 1999 Asset Dispositions.
26
(h) To record the U.S. federal and state income tax effect of pro forma
adjustments at Pinnacle's effective tax rate of approximately 39.5% for the
year ended December 31, 1999 and approximately 36% for the three months
ended March 31, 2000; off set by the elimination of the income tax expense
related to the 1999 Asset Dispositions for the year ended December 31,
1999, and the income tax expense related to the Land Sale for the three
months ended March 31, 2000.
The unaudited pro forma consolidated statements of operations for the year
ended December 31, 1999, and the three months ended March 31, 2000, do not
reflect the benefit the Company may have received from unaudited pro forma
consolidated cash, cash equivalents and short term investments of
approximately $447,000,000 as of January 1, 1999. Such amount represents the
estimated net transaction proceeds of approximately $399,600,000 (the 1999
Asset Dispositions, the Land Sale, the Penn Transaction and the Turf
Transaction before estimated taxes of $67,900,000, which are assumed to be
paid with the scheduled second quarter 1999 quarterly estimated payment),
combined with $47,400,000 of cash, cash equivalents and short term investments
as of December 31, 1998.
In February 1999, the Company completed the issuance of $350,000,000 of
9.25% Senior Subordinated Notes (the "9.25% Notes"). Had the above
transactions been completed on January 1, 1999 for the estimated proceeds
noted above, the Company may not have issued the 9.25% Notes in February 1999.
The net proceeds from the issuance of the 9.25% Notes were used to pay down
the Company's bank credit facility of $287,000,000 at the time and provide
funds for future operating needs. Had the Company not issued the 9.25% Notes,
the Company may not have incurred interest expense of approximately
$28,328,000 (or, if using after tax costs, of $17,139,000, a benefit of $0.65
per diluted share) for the year ended December 31, 1999, and $8,094,000 (or,
if using after tax costs, of $5,180,000, a benefit of $0.19 per diluted share)
for the three months ended March 31, 2000.
In addition, as noted in note (e) above, the unaudited pro forma
consolidated statements of operations for the year ended December 31, 1999,
and the three months ended March 31, 2000, respectively, exclude the gain of
$41,076,000 (or, if using the after tax gain, of approximately $18,136,000,
$0.69 per diluted share) related to the 1999 Asset Dispositions and the gain
of $23,854,000 (or, if using the after tax gain, of approximately $15,322,000,
$0.56 per diluted share) related to the Land Sale. In addition, the unaudited
pro forma consolidated statement of operations for the year ended December 31,
1999 does not reflect the estimated combined after tax gain on the Penn
Transaction and Turf Transaction of approximately $69,057,000, or $2.62 per
diluted share.
27
ANNUAL MEETING
Purpose
At the Annual Meeting, holders of Pinnacle Common Stock, $0.10 par value
per share, will be asked to vote upon: (i) a proposal to approve and adopt the
Merger Agreement, (ii) the election of nine directors to serve on the
Company's Board of Directors for the coming year, each to hold office until
the earlier of the next annual meeting of stockholders (and until such
director's successor shall have been duly elected and qualified) or the
effective time of the Pinnacle Merger and (iii) any other business that
properly comes before the Annual Meeting.
Record Date; Outstanding Shares; Quorum
Only holders of record of Pinnacle Common Stock at the close of business on
[ , 2000] (the "Record Date") will be entitled to notice of and to vote at
the Annual Meeting. As of the close of business on the Record Date, there were
[26,304,929] shares of Pinnacle Common Stock outstanding and entitled to vote,
held of record by stockholders. Pursuant to New York Stock Exchange
requirements, a majority, or [13,152,465] of these shares, present in person
or represented by proxy, will constitute a quorum for the transaction of
business. Each of the Company's stockholders is entitled to one vote for each
share of Pinnacle Common Stock held as of the Record Date. A list of such
stockholders entitled to vote will be available for inspection at the Annual
Meeting by any stockholder and, for 10 days prior to the Annual Meeting, at
[ ].
Voting of Proxies; Votes Required
Stockholders are requested to complete, date, sign and return the
accompanying Proxy Card in the enclosed envelope. All properly executed,
returned, and unrevoked Proxy Cards will be voted in accordance with the
instructions indicated thereon. Executed but unmarked Proxy Cards will be
voted FOR the approval and adoption of the Merger Agreement and FOR the
election of each director nominee listed on the Proxy Card. The Company's
Board of Directors does not presently intend to bring any business before the
Annual Meeting other than that referred to in this Proxy Statement and
specified in the Notice of the Annual Meeting. Since the Company did not
receive notice prior to of any other matter to come before the Annual
Meeting, as to any such other matter that may properly come before the Annual
Meeting, including any motion made for adjournment of the Annual Meeting, by
signing the Proxy Cards, stockholders confer discretionary authority on the
proxies (who are persons designated by the Board of Directors) to vote all
shares covered by the Proxy Cards on any such matter.
Any stockholder who has given a proxy may revoke it at any time before it
is exercised at the Annual Meeting by (i) filing a written revocation with, or
delivering a duly executed proxy bearing a later date to, the Secretary of the
Company, 330 North Brand Boulevard, Suite 1100, Glendale, California 91203, or
(ii) attending the Annual Meeting and voting in person (although attendance at
the Annual Meeting will not, by itself, revoke a proxy).
The proposal to approve and adopt the Merger Agreement requires approval by
the affirmative vote of a majority of the outstanding shares of Pinnacle
Common Stock. The Management Stockholders have agreed to vote their shares
(representing a total of approximately 11.4% of the outstanding Pinnacle
Common Stock) in favor of the approval and adoption of the Merger Agreement.
See "Voting and Contribution Agreement; Memorandum of Understanding."
Elections of directors are determined by a plurality of shares of Pinnacle
Common Stock represented in person or by proxy and voting at the Annual
Meeting.
PINNACLE STOCKHOLDERS SHOULD NOT SEND ANY CERTIFICATES REPRESENTING SHARES
OF PINNACLE COMMON STOCK WITH THEIR PROXY CARDS. YOU WILL RECEIVE WRITTEN
INSTRUCTIONS REGARDING THE SURRENDER OF YOUR STOCK CERTIFICATES AND RECEIPT OF
PAYMENT FOR YOUR SHARES OF PINNACLE COMMON STOCK AFTER THE PINNACLE MERGER IS
COMPLETED.
28
Abstentions; Broker Non-Votes
If an executed proxy is returned and the stockholder has specifically
abstained from voting on any matter, the shares represented by such proxy will
be considered present at the Annual Meeting for purposes of determining a
quorum and for purposes of calculating the vote, but will not be considered to
have been voted in favor of such matter. If an executed proxy is returned by a
broker holding shares in street name that indicates that the broker does not
have discretionary authority as to certain shares to vote on one or more
matters, such shares will be considered present at the meeting for purposes of
determining a quorum on all matters, but will not be considered to have cast
votes with respect to such matter or matters. Thus, for purposes of
determining approval of the proposal to approve and adopt the Merger
Agreement, abstentions and broker non-votes will have the same effect as votes
against the proposal. With respect to the election of directors, abstentions
and broker non-votes will have no effect on the outcome of the vote.
Solicitation of Proxies and Expenses
The Company will bear the cost of the solicitation of proxies from its
stockholders in the enclosed form. The directors, officers and employees of
the Company may solicit proxies by mail, telephone, telegram, letter,
facsimile or in person. Following the original mailing of the proxies and
other soliciting materials, the Company will request that brokers, custodians,
nominees and other record holders forward copies of the Proxy Statement and
other soliciting materials to persons for whom they hold shares of Pinnacle
Common Stock and request authority for the exercise of proxies. In such cases,
the Company will reimburse such record holders for their reasonable expenses.
In addition, the Company has retained to assist in the solicitation of
proxies at a cost (including brokers' expenses) of $ , plus certain out-of-
pocket expenses.
29
CAUTIONARY STATEMENTS REGARDING
FORWARD-LOOKING STATEMENTS
The statements contained in this Proxy Statement or in documents
incorporated by reference herein with respect to the Company that are not
historical facts are "forward-looking statements." Forward-looking statements
include, but are not limited to, statements containing the words "believes,"
"anticipates," "intends," "expects," "projects", "may", "estimates", "seek" or
"continue" and words of similar import. These forward-looking statements
involve known and unknown risks, uncertainties and other factors that may
cause actual results, performance or achievements of the Company or industry
to be materially different from any future results, performance or
achievements contemplated, projected, forecasted, estimated or budgeted in, or
expressed or implied by, projections and forward-looking statements. Such
factors include regulatory, legislative, judicial, competitive and
technological developments; industry trends; currency fluctuations; and
general economic and business conditions in the markets the Company serves.
Other factors and assumptions not identified above were also involved in the
derivation of these forward-looking statements, and the failure of such other
assumptions to be realized, as well as other factors, may also cause actual
results to differ materially from those projected. Readers are cautioned not
to place undue reliance on such forward-looking statements. The Company
disclaims any obligation to update any such factors or make any revisions to
any of the forward-looking statements or projections contained herein to
reflect actual results, changes in assumptions or changes in other factors
affecting such forward-looking statements or projections.
30
PROPOSAL 1:
MERGER OF THE COMPANY AND PINNACLE ACQUISITION CORPORATION
(Item No. 1 on Proxy Card)
The description of the proposed Pinnacle Merger and Merger Agreement
contained in this Proxy Statement does not purport be complete and is
qualified in its entirety by reference to the Merger Agreement, a copy of
which is attached as Annex A hereto and incorporated herein by reference.
PARTIES TO THE PINNACLE MERGER
The Company
Business
The Company is a Delaware corporation that owns and operates, through its
Boomtown, Inc. 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 "--Pending Asset
Dispositions") and Harvey, Louisiana, respectively. The Company also owns and
operates, through its Casino Magic Corp. subsidiary, dockside gaming casinos
in the cities of Bay St. Louis ("Casino Magic Bay St. Louis") (which is
subject to a pending sale transaction--see "--Pending Asset Dispositions") and
Biloxi, Mississippi; riverboat gaming in Bossier City, Louisiana; and two
land-based casinos in Argentina.
The Company also owns Turf Paradise, Inc., a horse racing facility in
Phoenix, Arizona, and approximately 97 acres of unimproved land adjacent to
the Hollywood Park Race Track in Inglewood, California, both of which are
subject to pending sale transactions (see "--Pending Asset Dispositions").
The Company 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, a wholly-
owned subsidiary of Churchill Downs Incorporated, and is subleased to an
unaffiliated third party operator. Prior to September 1999, the Hollywood
Park-Casino was owned and operated by the Company. The Crystal Park Hotel and
Casino is owned by the Company and is leased to the same card club operator
that now leases and operates the Hollywood Park-Casino.
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, Inc.
The principal office and business address of the Company is 330 North Brand
Boulevard, Suite 1100, Glendale, California 91203. The Company's telephone
number is (818) 662-5900.
For additional information regarding the Company, see "Where To Find
Additional Information" and "Available Information."
Belterra Resort and Casino in Indiana
The Company has received a certificate of suitability from the Indiana
gaming commission and 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. The project is continuing on schedule for an
opening in August 2000, subject to, among other things, receipt of a riverboat
owner's license. The Company plans to spend approximately $200,000,000
($70,322,000 of which had been spent as of March 31, 2000) in total costs
(including land, 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
31
golf course, a 1,500-seat entertainment facility, four restaurants, retail
areas and other amenities. Under the Merger Agreement, it is a condition to
the Pinnacle Merger that all material phases of the Belterra Resort and
Casino, other than the golf course and performance theater, shall have been
substantially completed and open to the public by not later than September 15,
2000, and the costs associated with the Belterra Resort and Casino shall not
be, in the aggregate, more than $207,000,000, and the Belterra Resort and
Casino (other than the golf course and performance theater) will have been
completed in substantial conformity with the written budgets, plans and
policies relating to the Belterra Resort and Casino provided to Pinnacle Acq
Corp.
Pending Asset Dispositions
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 and Boomtown Biloxi 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 (which approval Penn
National received in April 2000), Penn National completing the necessary
financing and termination of the Hart-Scott-Rodino waiting period. The Company
estimates the transactions will close in the second or third quarter of 2000.
In February 2000, the Company announced the signing of a definitive
agreement with a private investor for the sale of Turf Paradise for
$53,000,000 in cash. The agreement includes the horseracing operations and all
275 acres at the Phoenix, Arizona property. The Company anticipates closing
the transaction in the second or third quarter of 2000.
Under the Merger Agreement, the Pinnacle Merger is conditioned upon, among
other things, the Company completing the pending sales of Boomtown Biloxi,
Casino Magic Bay St. Louis and Turf Paradise on substantially the terms and
conditions contained in the applicable definitive agreements for such
transactions.
On April 18, 2000, the Company announced that it had entered into a
definitive agreement with Casden Properties Inc. for the sale of the Company's
remaining 97 acres in Inglewood, California for approximately $63,000,000 in
cash. The sale is subject to certain closing conditions, including Casden
Properties receiving the necessary entitlements to develop the property. The
Company expects the sale to close by the second quarter of 2001 and to
generate after tax net cash proceeds in excess of $41,000,000. Under the
Merger Agreement, receipt by the Company's stockholders of a contingent
payment of up to an additional $1.00 in cash per share in connection with the
Pinnacle Merger is subject to the closing of the sale of the Inglewood
property by December 31, 2001 in a transaction in which the after tax proceeds
exceed $13,054,000. Such after tax proceeds must be equal to or greater than
$40,750,000 in order for the full $1.00 to be paid.
Controlling Persons, Directors and Executive Officers of the Company
Because the Pinnacle Merger may be considered a "going private"
transaction, the Company and certain of the Management Stockholders that may
be considered affiliates of the Company (each of which affiliate Management
Stockholders is also a director and/or executive officer of the Company) have
filed a Schedule 13E-3 with the SEC with respect to the Pinnacle Merger. The
Schedule 13E-3 requires the persons filing the Schedule 13E-3 to furnish
additional information with respect to themselves and their controlling
persons, directors and executive officers. This information is set forth
below.
The name, position and current principal occupation or employment of each
director and executive officer of the Company are set forth below.
The business address of Mr. Hubbard is c/o Pinnacle Entertainment, Inc.,
4400 MacArthur Boulevard, Suite 380, Newport Beach, California 92660. The
business address of Mr. Finnigan is c/o Realty Investment Group,
32
Inc., 4400 MacArthur Boulevard, Suite 380, Newport Beach, California 92660.
The business address of Messrs. Alanis, Allen, Hinckley, Parrott and Ornest is
c/o Pinnacle Entertainment, Inc., 330 North Brand Boulevard, Suite 1100,
Glendale, California 91203. Prior to September, 1999 the business address of
all the aforementioned persons was c/o Hollywood Park, Inc., 1050 S. Prairie
Avenue, Inglewood, California 90301. The business address of Mr. Manfuso is
c/o Manfuso Brothers Investments, 2730 University Blvd. West, Suite 430,
Wheaton, Maryland 20902. The business address of Mr. Martineau is c/o Genesis
Portfolio Partners, LLC, 3889 Central Avenue N.E. #356, Columbia Heights, MN
55421. The business address of Mr. Miller is c/o Fore Star Golf, 301 Commerce,
Suite 1470, Fort Worth, Texas 76102. The business address of Mr. Reitnouer is
c/o Crowell Weedon, One Wilshire Blvd., Suite 2600, Los Angeles, California
90017. The business address of Mr. Torguson is c/o Casino Magic Corp., 711
Casino Magic Drive, Bay St. Louis, Mississippi 39520.
All directors and executive officers listed below are citizens of the
United States.
Present Principal Occupation
Name Position or Employment
---- -------- ----------------------------
R.D. Hubbard............ Chairman of the Board of Same as Position
Directors and Chief
Executive Officer
Paul R. Alanis.......... President, Chief Same as Position
Operating Officer and
Director
Robert T. Manfuso....... Director Partner, Manfuso Brothers
Investments
James L. Martineau...... Director Chairman, Genesis Portfolio
Partners, LLC
Gary G. Miller.......... Director Chairman and Chief Executive
Officer of Fore Star Golf
Michael Ornest.......... Director Private Investor
Timothy J. Parrott...... Director Consultant to Pinnacle and
Private Investor
Lynn P. Reitnouer....... Director Partner, Crowell Weedon & Co.
Marlin Torguson......... Director Chairman of the Board of Casino
Magic Corp.
J. Michael Allen........ Senior Vice President and Same as Position
Chief Operating Officer of
Gaming Operations
G. Michael Finnigan..... President and Chief Same as Position
Executive Officer of
Realty Investment Group,
Inc., a subsidiary of the
Company
Bruce C. Hinckley....... Chief Financial Officer, Same as Position
Senior Vice President and
Treasurer
The material occupations, positions, offices or employments during the past
five years of each director and executive officer of the Company are described
in "Proposal 2: Election of Directors--Information Regarding the Directors of
the Company" and "Proposal 2: Election of Directors--Executive Officers,"
respectively.
During the past five years, neither the Company nor, to the knowledge of
the Company, any of the individuals listed above as directors or executive
officers of the Company (1) has been convicted in a criminal
33
proceeding (excluding traffic violations or similar misdemeanors) or (2) has
been a party to any judicial or administrative proceeding (except for matters
that were dismissed without sanction or settlement) that resulted in a
judgment, decree or final order enjoining the person from future violations
of, or prohibiting activities subject to, federal or state securities laws, or
a finding of any violation of federal or state securities laws.
None of the information in this Proxy Statement concerning Pinnacle or any
of its subsidiaries, affiliates or associates, or any of their respective
directors, executive officers or employees, has been independently verified by
any of Pinnacle Acq Corp, Harveys Acq Corp, PHCR, Harveys Casino Resorts or
Colony HCR Voteco or any of their respective affiliates.
Pinnacle Acq Corp, PHCR, Harveys Casino Resorts and Voteco
Under a potential interpretation of the rules governing "going private"
transactions, one or more of Pinnacle Acq Corp, PHCR, Harveys Casino Resorts
and Voteco may be deemed to be an affiliate of the Company. Therefore, each of
Pinnacle Acq Corp, PHCR, Harveys Casino Resorts and Voteco has been included
as a filing person on the Schedule 13E-3 mentioned above. Therefore,
information with respect to such companies, as well as their controlling
persons, directors and executive officers, is set forth below.
Pinnacle Acq Corp
Pinnacle Acq Corp is a Delaware corporation and a direct wholly-owned
subsidiary of PHCR. Pinnacle Acq Corp was formed solely for the purposes of
engaging in the transactions contemplated by the Merger Agreement and has not
engaged in any business activities or conducted any operations other than in
connection with the transactions contemplated by the Merger Agreement.
The business address and telephone number of Pinnacle Acq Corp is c/o
Harveys Casino Resorts, Highway 50 and Stateline Avenue, P.O. Box 128, Lake
Tahoe, Nevada 89449, (775) 588-2411.
The name, position and current principal occupation or employment of each
director and executive officer of Pinnacle Acq Corp are set forth below.
The business address of each of the directors and executive officers listed
below, other than Thomas J. Barrack, Jr., is Highway 50 and Stateline Avenue,
P.O. Box 128, Lake Tahoe, Nevada 89449. The business address of Mr. Barrack is
as set forth below under "--Harveys Casino Resorts."
All directors and executive officers listed below are United States
citizens.
Present Principal Occupation
Name Position or Employment
---- -------- ----------------------------
Thomas J. Barrack, Jr. . Chief Executive Officer and Chairman and Chief Executive
Director Officer of Colony Capital, Inc.
and Colony Advisors, Inc.
Charles W. Scharer...... President President, Chief Executive
Officer and Director of Harveys
Casino Resorts
John J. McLaughlin...... Chief Financial Officer, Senior Vice President, Chief
Treasurer and Secretary Financial Officer, Treasurer
and Secretary of Harveys Casino
Resorts
The material occupations, positions, offices or employments during the past
five years of each director and executive officer of Pinnacle Acq Corp are
described below under "--Harveys Casino Resorts."
34
PHCR
PHCR is a Delaware corporation and a direct wholly-owned subsidiary of
Harveys Casino Resorts. PHCR was formed solely for the purposes of engaging in
the transactions contemplated by the Merger Agreement and has not engaged in
any business activities or conducted any operations other than in connection
with the transactions contemplated by the Merger Agreement.
The business address and telephone number of PHCR is c/o Harveys Casino
Resorts, Highway 50 and Stateline Avenue, P.O. Box 128, Lake Tahoe, Nevada
89449, (775) 588-2411.
The name, position and current principal occupation or employment of each
director and executive officer of PHCR are set forth below.
The business address of each of the directors and executive officers listed
below, other than Thomas J. Barrack, Jr., is Highway 50 and Stateline Avenue,
P.O. Box 128, Lake Tahoe, Nevada 89449. The business address of Mr. Barrack is
as set forth below under "--Harveys Casino Resorts."
All directors and executive officers listed below are United States
citizens.
Present Principal Occupation
Name Position or Employment
---- -------- ----------------------------
Thomas J. Barrack, Jr. . Chief Executive Officer and Chairman and Chief Executive
Director Officer of Colony Capital, Inc.
and Colony Advisors, Inc.
Charles W. Scharer...... President President, Chief Executive
Officer and Director of Harveys
Casino Resorts
John J. McLaughlin...... Chief Financial Officer, Senior Vice President, Chief
Treasurer and Secretary Financial Officer, Treasurer
and Secretary of Harveys Casino
Resorts
The material occupations, positions, offices or employments during the past
five years of each director and executive officer of PHCR are described below
under "--Harveys Casino Resorts."
Harveys Casino Resorts
Harveys Casino Resorts is a Nevada corporation engaged in the gaming
industry. Through its wholly-owned subsidiaries, Harveys owns and operates
gaming establishments in Nevada, Iowa and Colorado.
The business address of Harveys Casino Resorts and each of the directors
and executive officers listed below, other than Thomas J. Barrack, Jr. and
Kelvin L. Davis, is Highway 50 and Stateline Avenue, P.O. Box 128, Lake Tahoe,
Nevada 89449. The business telephone of Harveys Casino Resorts is (775) 588-
2411.
The business address of Mr. Barrack is 1999 Avenue of the Stars, Suite
1200, Los Angeles, California 90067. The business address of Mr. Davis is 345
California Street, Suite 3300, San Francisco, California 94014.
35
All directors and executive officers listed below are citizens of the
United States.
Present Principal Occupation
Name Position or Employment
---- -------- ----------------------------
Thomas J. Barrack, Jr. . Chairman of the Board of Chairman and Chief Executive
Directors Officer of Colony Capital, Inc.
and Colony Advisors, Inc.
Charles W. Scharer...... President, Chief Executive Same as Position
Officer and Director
John J. McLaughlin...... Chief Financial Officer, Same as Position
Treasurer and Secretary
Gary D. Armentrout...... Senior Vice President-- Same as Position
Business Development and
Government Relations
James J. Rafferty....... Senior Vice President-- Same as Position
Corporate Marketing
Edward B. Barraco....... Senior Vice President and Same as Position
General Manager of Harveys
Wagon Wheel
Verne H. Welch, Jr. .... Senior Vice President and Same as Position
General Manager of Harveys
Casino Hotel
John R. Bellotti........ Corporate Vice President of Same as Position
Human Resources
Kelvin L. Davis......... Director Partner of Texas Pacific Group
The material occupations, positions, offices or employments during the past
five years of each director and executive officer of Harveys Casino Resorts
are described below.
Thomas J. Barrack, Jr.
Mr. Barrack currently serves as Chairman and Chief Executive Officer of
each of Colony Capital and Colony Advisors, Inc. and as Chairman of the Board
of Harveys Casino Resorts. Mr. Barrack has served as Chairman and Chief
Executive Officer of each of Colony Capital and Colony Advisors, Inc. since
August 1997, and as a Director and Chairman of the Board of Harveys Casino
Resorts since February 2, 1999, the date Voteco acquired control of Harveys
Casino Resorts. Mr. Barrack also holds a membership interest in and serves as
a Manager of Voteco. Mr. Barrack served as President of Colony Capital and
Colony Advisors, Inc. from August 1992 and September 1991, respectively, until
August 1997.
The business address of each of Colony Capital, Inc. and Colony Advisors,
Inc. is 1999 Avenue of the Stars, Suite 1200, Los Angeles, California 90067.
Mr. Barrack also is a Director of Continental Airlines, Inc., a commercial
airline; Public Storage, Inc., a developer, owner and operator of self-storage
facilities; Kennedy-Wilson, Inc., a worldwide real estate marketing, brokerage
and investment services company; Kerry Properties Limited, a Hong Kong-based
real estate company; and Firstworld Communications, Inc., a network-based
provider of Internet, data and communications services. The business address
of Continental Airlines, Inc. is 1600 Smith Street, Dept. HQSEO, Houston,
Texas 77002. The business address of Kennedy-Wilson, Inc. is 9601 Wilshire
Boulevard, Suite 220, Beverly Hills, California 90210-5205. The business
address of Kerry Properties Limited is 13 & 14th Floors, Cityplaza 3, 14
Taikoo Wan Road, Taikoo Shing, Hong Kong. The business address of Firstworld
Communications, Inc. is 8390 East Crescent
36
Parkway, Suite 300, Greenwood Village, Colorado 80111. Mr. Barrack also is a
managing partner of Pacific Capital Group, a private investment firm, which
has also made an investment in Colony Capital.
Charles W. Scharer
Mr. Scharer serves as a Director and President and Chief Executive Officer
of Harveys Casino Resorts. He was appointed to such position effective
December 1, 1995. He has served as a Director of Harveys Casino Resorts since
April 1995 and has served as Chairman of the Board of Directors of Harveys
Casino Resorts from May 1, 1997 to February 2, 1999. Prior to becoming
President and Chief Executive Officer of Harveys Casino Resorts, Mr. Scharer
served as Executive Vice President of Harveys Casino Resorts from August 1995.
He was appointed Chief Financial Officer of Harveys Casino Resorts in July
1993 and Treasurer of Harveys Casino Resorts in September 1993.
John J. McLaughlin
Mr. McLaughlin serves as Senior Vice President, Chief Financial Officer,
Treasurer and Secretary of Harveys Casino Resorts. He was appointed Senior
Vice President, Chief Financial Officer and Treasurer of Harveys Casino
Resorts in March 1996. Mr. McLaughlin became Secretary of Harveys Casino
Resorts as of February 2, 1999. He joined Harveys Casino Resorts in September
1995 as Chief Financial Officer. From January 1993 until September 1995, he
was Chief Financial Officer of President Riverboat Casino, Inc.
Gary D. Armentrout
Mr. Armentrout serves as Senior Vice President--Business Development and
Government Relations of Harveys Casino Resorts. He has held such position
since May 1995. Prior to joining Harveys Casino Resorts, Mr. Armentrout was
employed by President Riverboat Casinos, Inc. where he served as Vice
President--Gaming from May 1990 until June 1994 when he was appointed Vice
President--Gaming Development of President Riverboat Casinos, Inc.
James J. Rafferty
Mr. Rafferty serves as Senior Vice President Corporate Marketing of Harveys
Casino Resorts. He was appointed Corporate Vice President of Marketing of
Harveys Casino Resorts in December 1995 and was promoted to Senior Vice
President of Corporate Marketing of Harveys Casino Resorts in 1997. Mr.
Rafferty served as Vice President, Marketing--Lake Tahoe from 1992 to 1995.
John R. Bellotti
Mr. Bellotti serves as Senior Vice President of Human Resources of Harveys
Casino Resorts. He was appointed Corporate Vice President of Human Resources
of Harveys Casino Resorts in August 1997 and was promoted to Senior Vice
President of Human Resources of Harveys Casino Resorts in December, 1999.
Prior to joining Harveys Casino Resorts in August 1997, Mr. Bellotti was
employed by Hyatt Hotels Corporation, serving most recently as Assistant Vice
President of Human Resources from 1993 to 1997.
Edward B. Barraco
Mr. Barraco serves as Senior Vice President and General Manager--Harveys
Wagon Wheel. He has held this position since July 1995. From 1985 to 1995, Mr.
Barraco served as Assistant General Manager--Lake Tahoe, where he was
responsible for overseeing all aspects of the operation on an assigned shift.
William R. Stephens
Mr. Stephens serves as Senior Vice President and General Manager--Harveys
Resort. He was appointed to this position in May 1999. Prior to assuming his
current position, Mr. Stephens was employed by the Hard Rock
37
Hotel/Casino in Las Vegas where he was the director of casino operations from
the opening in 1995 until 1996 when he was promoted to the vice president of
casino operations.
Verne H. Welch, Jr.
Mr. Welch serves as Senior Vice President and General Manager--Harveys
Casino Hotel. He has held this position since September 1995. Prior to moving
to the Council Bluffs property, Mr. Welch served as Senior Vice President and
General Manager--Lake Tahoe from December 1993 to September 1995. From 1988 to
December 1993, he served as Vice President--Casino Operations.
Kelvin L. Davis
Mr. Davis serves as a Director of Harveys Casino Resorts. Mr. Davis has
served as a Director of Harveys Casino Resorts since February 2, 1999. Mr.
Davis is a partner with the Texas Pacific Group, an international private
equity investment firm. Prior to joining the Texas Pacific Group in March
2000, Mr. Davis served as President and Chief Operating Officer of each of
Colony Capital and Colony Advisors, Inc. since August 1997. Mr. Davis served
as Executive Vice President of Colony Capital and Colony Advisors, Inc. from
August 1992 and September 1991, respectively, to August 1997. Mr. Davis also
holds a membership interest in and serves as a Manager of Voteco. As a result
of Mr. Davis' departure from Colony Capital and Colony Advisors in March 2000,
his membership interest in Voteco is anticipated to be redeemed, subject to
the receipt of applicable regulatory approvals, either prior to or following
the closing of the Pinnacle Merger.
The business address of the Texas Pacific Group is 345 California Street,
Suite 3300, San Francisco, California 94014.
Mr. Davis also is a Director of Franchise Finance Corporation of America, a
specialty real estate financing company, and Crestline Capital Corp., a hotel
and senior living community company. The business address of Franchise Finance
Corporation of America is The Perimeter Center, 17207 North Perimeter Drive,
Scottsdale, Arizona 85255. The business address of Crestline Capital Corp. is
6600 Rockledge Drive, Bethesda, Maryland 20817.
Voteco
Voteco, a Delaware limited liability company, is the beneficial owner of
approximately 97.5% of the voting common stock and voting power of Harveys
Casino Resorts. Voteco's principal business is its investment in the voting
common stock and other securities of Harveys Casino Resorts.
The business address and telephone of Voteco is c/o Colony Capital, Inc.,
1999 Avenue of the Stars, Suite 1200, Los Angeles, California 90067, (310)
282-8820.
The business addresses of Messrs. Barrack and Davis are as set forth above
under "--Harveys Casino Resorts."
Each of Messrs. Barrack and Davis is a citizen of the United States.
Present Principal Occupation or
Name Position Employment
---- -------- ---------------------------------------
Thomas J. Barrack, Jr. .... Manager Chairman and Chief
Executive Officer of Colony
Capital, Inc. and Colony Advisors, Inc.
Kelvin L. Davis............ Manager Partner of Texas Pacific Group
The material occupations, positions, offices or employments during the past
five years of each manager of Voteco listed above are described above under
"--Harveys Casino Resorts." As a result of Mr. Davis' departure from Colony
Capital and Colony Advisors in March 2000, his membership interest in Voteco
is anticipated to be
38
redeemed, subject to the receipt of applicable regulatory approvals, either
prior to or following the closing of the Pinnacle Merger.
During the past five years, none of PHCR, Harveys Casino Resorts or Voteco
nor, to the knowledge of PHCR, Harveys Casino Resorts or Voteco, any of the
individuals named in the tables above as directors, executive officers or
managers of PHCR, Harveys Casino Resorts or Voteco, (1) has been convicted in
a criminal proceeding (excluding traffic violations or similar misdemeanors)
or (2) has been a party to any judicial or administrative proceeding (except
for matters that were dismissed without sanction or settlement) that resulted
in a judgment, decree or final order enjoining the person from future
violations of, or prohibiting activities subject to, federal or state
securities laws, or a finding of any violation of federal or state securities
laws.
All information in this Proxy Statement concerning Pinnacle Acq Corp,
Harveys Acq Corp, PHCR, Harveys Casino Resorts or HCR or any of their
respective directors, executive officers or employees, has been supplied by
PHCR for inclusion in this Proxy Statement and has not been independently
verified by Pinnacle.
39
SPECIAL FACTORS
Background of the Pinnacle Merger
Pinnacle Merger
The Company's strategic plan has been to develop a broad base of regionally
diversified casino entertainment facilities. Within the past three years, the
Company has acquired the Boomtown and Casino Magic properties, begun
development of the Belterra Resort and Casino in Indiana, completed the sale
of the Hollywood Park Race Track, and entered into definitive agreements to
sell its Boomtown Biloxi and Casino Magic Bay St. Louis gaming properties and
the Turf Paradise Race Track.
However, as management examined ways in which it could further enhance the
Company's value for the benefit of its stockholders, it realized that several
obstacles and significant development risk existed in its effort to achieve
this goal. While the Company's Belterra Resort & Casino in Indiana, which is
scheduled for completion in August of 2000 at a cost of approximately
$200,000,000, appears to provide the Company with an excellent long-term
growth prospect, similar development projects by experienced gaming companies
had taken, in some cases, a considerable amount of time to provide reasonable
returns to their sponsors. In addition, management concluded that to increase
cash flow they would need to expand and improve several of its key properties.
This type of expansion would involve the spending of significant amounts of
additional capital and the incurrence of increased development risk.
The Company was also mindful of two important factors which have influenced
the gaming industry over the past several years. First, the prospect for more
states legalizing non-Native American casino gaming appears unlikely for the
foreseeable future. Attempts to legalize casino gaming in states such as
Pennsylvania, Ohio, Florida, Kentucky and Arkansas have all met with failure
over the past several years. Therefore, the Company's near-term prospects for
new development opportunities in states that do not presently permit casino
gaming are very limited for the next several years. Second, significant
consolidation within the gaming industry has occurred particularly in the last
two to three years. This consolidation has reduced the Company's ability to
grow through acquisition as it did with Boomtown and Casino Magic. If the
Company were to remain independent, it would face the challenge of continuing
to compete in an industry where a few major companies were actively engaged in
consolidation, thereby creating additional competitive pressure on smaller
companies, such as Pinnacle. Smaller gaming companies suffer the competitive
disadvantage of being unable to borrow funds at the same attractive rates as
such large gaming companies. This prevents smaller companies from investing in
their existing properties to the same degree that large companies are able to
do in the same markets. The combination of these two factors created major
impediments to the Company's future growth prospects.
Other events occurring within the gaming industry have caused management to
evaluate the security and certainty of the Company's existing cash flow at its
various properties. In a recent statewide election, California voters passed
Proposition 1A, which will permit numerous additional and well funded Native
American casinos throughout California. Some of these new casinos are
anticipated to be built in locations that would be expected to adversely
affect the profitability of the Company's Boomtown Reno facility.
Additionally, the prospect of increased gaming taxes in several of the
jurisdictions in which the Company does business exists. Legislation has been
introduced in both Louisiana and Nevada which proposes gaming tax increases.
These factors, taken as a whole, caused the Company's management and Board
of Directors to conclude that at an appropriate price level it would be
advantageous and beneficial for the Company's stockholders to consider a
transaction with a strong merger partner. Such a transaction would allow the
Company's stockholders an opportunity to sell their stock at a premium to its
current trading price, rather than face the risks associated with the
Company's remaining independent, even though the Company's long-term prospects
appear favorable, especially if the Belterra Resort and Casino proves to be
successful.
On November 17, 1999, Thomas J. Barrack, Jr., Chairman and Chief Executive
Officer of Colony Capital, telephoned R.D. Hubbard, Chairman of the Board and
Chief Executive Officer of Pinnacle, and indicated that
40
affiliates of Colony Capital may have an interest in considering an
acquisition of Pinnacle for cash. Mr. Barrack asked if Mr. Hubbard believed
that the Pinnacle Board would be interested in discussing such an acquisition.
Messrs. Barrack and Hubbard had been acquainted for a period of time prior
to November 1999 and on occasion had conversations with respect to their
mutual interest in the gaming industry. However, Messrs. Barrack and Hubbard
previously had no specific discussions regarding combining the operations of
Harveys Casino Resorts and Pinnacle. In February 1999, Colony Capital
completed its acquisition of Harveys Casino Resorts. Pinnacle also had made a
previous proposal to acquire Harveys Casino Resorts. See "-- Pinnacle's Prior
Proposal to Acquire Harveys Casino Resorts" below.
Colony Capital and its representatives engaged in discussions and
negotiations with Pinnacle and its representatives on behalf of, and in their
respective capacities as shareholders, directors and officers of, Harveys
Casino Resorts. Accordingly, references to Colony Capital and its
representatives in this section of the Proxy Statement mean Colony Capital and
its representatives acting in such respective capacities.
Prior to calling Mr. Hubbard, Mr. Barrack had discussed with Lehman
Brothers the possibility of making a proposal to acquire Pinnacle.
On November 22, 1999, Mr. Barrack, Mr. Hubbard and G. Michael Finnigan,
President and Chief Executive Officer of Realty Investment Group, Inc., a
wholly-owned subsidiary of Pinnacle, met and had further discussions as to
whether Colony Capital would have an interest in pursuing an acquisition of
the Company.
For a period of two weeks beginning in early December 1999 Colony Capital
and Lehman Brothers discussed financial information regarding Pinnacle,
including its operating and capital projections and the budget and timing for
the Belterra development project in Indiana. They also discussed the
possibility of obtaining financing for a possible transaction.
On December 16, 1999, Mr. Hubbard advised the Executive Committee of the
Pinnacle Board of Directors of the preliminary discussions with Colony Capital
and that Colony Capital might deliver a written expression of interest.
On December 17, 1999, Mr. Barrack and other representatives of Colony
Capital met with Mr. Hubbard and Mr. Finnigan to discuss the possibility of a
transaction.
On December 19, 1999, Messrs. Hubbard, Finnigan and Barrack met to have
further discussions relative to a possible transaction. On December 20, 1999,
Colony Capital sent a letter to Mr. Hubbard indicating an interest in pursuing
the possible acquisition of the Company by one or more designees of Colony
Capital at a cash price per fully diluted share of $29.00. Colony Capital
informed the Company that this indication of interest was based on certain key
assumptions regarding the pro forma financial position of the Company and
pending asset sales. These assumptions included anticipated levels of after-
tax cash balances to be realized on asset sales, the absence of substantial
change of control costs and the absence of required consents from holders of
Pinnacle's subordinated debt.
On December 29, 1999, Mr. Barrack and Messrs. Hubbard and Finnigan met to
have further discussions relative to a possible transaction. Among other
things, Messrs. Barrack and Hubbard discussed whether the Company's public
debt would be assumed in the proposed transaction and that, if it was not,
Harveys Casino Resorts might incur additional acquisition costs substantially
greater than had been anticipated.
On January 10, 2000, representatives of Colony Capital, Pinnacle, Lehman
Brothers and Bear, Stearns & Co. Inc. ("Bear Stearns") met at Pinnacle's
Newport Beach, California office to discuss the parameters of Colony Capital's
due diligence review of the Company.
Over the next several days, representatives of the Company met with
representatives from Lehman Brothers to develop more detailed financial
information regarding the Company and the assumptions underlying Colony
41
Capital's financial analysis. That information was then conveyed to Bear
Stearns which subsequently discussed the financial information with Lehman
Brothers. During the course of these discussions, it became apparent that the
pro forma financial position of the Company as a result of the proposed
transaction would vary materially from prior assumptions. This projected
financial analysis had assumed a substantially greater projected after-tax
cash balance for Pinnacle as of the projected closing date of the proposed
transaction than the cash balance the Company was projecting. In addition, the
financial analysis did not include any additional acquisition costs which
might be incurred if the Company's public debt was not assumed in the proposed
transaction. Lehman Brothers communicated to the Company that Colony Capital
was not prepared to make an offer at the $29.00 per share price level in light
of the significant difference between the Company's projected cash position
compared to prior assumptions regarding the level of cash at closing and in
light of the fact that such price level did not take into account additional
acquisition costs which might be incurred by Harveys Casino Resorts if the
Company's public debt was not assumed in the proposed transaction.
On January 21, 2000, at a meeting of the Pinnacle Board of Directors, Mr.
Hubbard informed the Board of the status of the discussions with Colony
Capital and indicated that Colony Capital was not prepared to make an offer to
acquire the Company at the time on the basis suggested in Colony Capital's
December 20, 1999 letter.
On February 19, 2000, Mr. Barrack called Mr. Hubbard. Later that day, Mr.
Barrack met with Messrs. Hubbard and Finnigan in Palm Desert, California. At
that meeting, Mr. Barrack indicated that Colony Capital, through Harveys
Casino Resorts, continued to be interested in pursuing a possible acquisition
of Pinnacle, but at a price per fully diluted share in the $23.00 to $24.00
range. Mr. Hubbard indicated to Mr. Barrack that he would not be prepared to
recommend to the Company's Board of Directors that it consider such a
transaction unless the price per share were at least $25.00 per share. Mr.
Barrack indicated that he thought that such a price could only be justified if
certain members of Pinnacle's senior management agreed to contribute a
significant amount of their equity in Pinnacle to the acquiring entity.
On February 29, 2000, Mr. Barrack and other representatives of Colony
Capital met with Messrs. Hubbard and Finnigan to discuss how much equity in
PHCR, the new parent company that would own Pinnacle and Harveys Casino
Resorts, would be owned by the management of Pinnacle. This discussion
involved a valuation of Harveys Casino Resorts relative to Pinnacle and how
the two companies would fit together under a common parent company.
On March 2, 2000, Mr. Barrack sent a letter to the Pinnacle Board of
Directors proposing an acquisition of the Company by an affiliate of Harveys
Casino Resorts at $25.00 per fully diluted share in cash (the "Proposal"). In
the letter, Mr. Barrack stated that continuity of Company management was an
important element of the proposed transaction, and that Colony Capital was
therefore requiring that management be willing to retain a significant equity
interest in the Company and continue their employment. The letter indicated
that Colony Capital was prepared to commence confirmatory due diligence and
the negotiation of definitive agreements. The letter also proposed that for
four weeks from the date of the letter, the Company would not in any respect
solicit from or negotiate with other parties regarding a transaction of the
nature proposed in his letter. Although the Proposal provided for an exclusive
negotiation period, no penalty to the Company or benefit to Colony Capital
existed if the Company were to have received offers from other interested
parties.
On March 7, 2000, the Pinnacle Board of Directors met to consider the
Proposal. In discussing the Proposal, the Board noted that the Proposal
contemplated an equity investment by certain members of management, including
Mr. Hubbard and Mr. Alanis. Mr. Hubbard noted that Colony Capital had agreed
that, if desired by the Company's Board of Directors, a press release could be
disseminated disclosing Colony Capital's interest and its proposed acquisition
price. At the meeting, the Pinnacle Board determined to establish a special
committee (the "Special Committee") comprised of all of the members of the
Board, other than Mr. Alanis and Mr. Hubbard, with full authority to act for
and on behalf of the Company in evaluating and acting upon the Proposal or any
other proposal to acquire the Company which might be received as a result of
the announcement of the Proposal (subject to such approvals by the entire
Board of Directors as might be required by Delaware law). The members of the
Special Committee were Messrs. Reitnouer, Miller, Ornest, Martineau, Torguson,
Parrott and Manfuso.
42
The Special Committee was authorized to and, as discussed below, subsequently
did retain, at the Company's expense, independent legal counsel and financial
advisory counsel to assist it in the evaluation of any such proposals and
appointed Mr. Reitnouer as Chairman of the Special Committee.
At the March 7, 2000 Board meeting, after considering the Company's short
term and long term prospects, including the status of the pending Indiana
project, and various other factors, the Special Committee decided it would be
in best interests of the Company and its stockholders to enter into the
exclusivity agreement proposed by Colony Capital so as to provide an
opportunity to determine if it was in the best interests of the Company and
its stockholders to enter into a definitive agreement to sell the Company, and
on what terms. The Special Committee noted that, in view of the Company's
stock price, financial results and prospects, and the prevailing market
valuation for gaming companies like the Company, the Proposal was at a price
level that merited serious consideration and the advice of outside financial
advisors. The Special Committee also noted that it was a significant benefit
to have a public announcement which included the proposed offering price since
it would provide an early opportunity for other potentially interested buyers
to make their interest known, even if the Company was not able to engage in
negotiations with another interested party during the exclusivity period. The
Special Committee unanimously approved entering into the exclusivity agreement
with Colony Capital to explore whether to enter into an agreement to sell the
Company and at what price and on what terms. Following the Board meeting, the
Company signed the exclusivity agreement.
On March 8, 2000, the Company issued a press release announcing the signing
of the exclusivity agreement and the receipt of the Proposal.
Following the execution of the exclusivity agreement, Colony Capital, its
respective legal and financial advisors and management of Harveys Casino
Resorts commenced confirmatory due diligence with respect to the Company.
On March 11, 2000, Mr. Barrack met with Messrs. Hubbard and Alanis to
further discuss how the new parent company, PHCR, would be run and the roles
that senior management personnel would have with PHCR.
On March 12, 2000, members of the Special Committee retained Munger, Tolles
& Olson LLP ("Munger Tolles") as legal counsel to the Special Committee.
On March 14, 2000, the Special Committee interviewed several financial
advisory firms and retained Jefferies & Company, Inc. ("Jefferies & Company")
as its financial advisor. Later that same day, Mr. Reitnouer, the Chairman of
the Special Committee, met with representatives of Colony Capital to inform
them that the Special Committee had been formed and had retained financial and
legal advisers to provide assistance in connection with the consideration of
the Proposal. Colony Capital's representatives indicated Colony Capital's
continued interest in a transaction with Company and urged the Special
Committee and its advisers to initiate contact with Colony Capital's financial
and legal advisers. On March 15, 2000, the Company issued a press release
announcing the retention of Jefferies & Company and Munger Tolles as its
respective financial and legal advisors.
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 breached their fiduciary duty to
the stockholders of the Company by agreeing to negotiate exclusively with
Harveys Casino Resorts. On March 21, 2000, Leta Hilliard filed a similar class
action lawsuit in the Superior Court of the State of California. The
plaintiffs in the lawsuits claim that the Company and its directors failed to
undertake an appropriate process for evaluating the value of the Company and
eliciting bids from third parties, and that the price for the stock is
inadequate. The Company intends to vigorously defend these actions.
From mid-March through mid-April, due diligence continued and discussions
were held among Colony Capital, the Special Committee and senior management of
the Company and their respective legal and financial advisors regarding the
possible transaction. During this period, Colony Capital and members of the
Company's
43
senior management, including Messrs. Hubbard, Alanis and Finnigan, engaged in
negotiations regarding the details of the management equity investment in, and
their ongoing employment with, PHCR.
On March 27, 2000, the Special Committee met telephonically with Jefferies
& Company and Munger Tolles to evaluate the Proposal. Jefferies & Company
reviewed with the Special Committee the terms and conditions of the Proposal,
the Company's historic financial performance, Jefferies & Company's estimates
of the Company's future financial performance based on information provided by
the Company, various valuation models for the Company and other gaming
acquisitions which had been recently completed. Jefferies & Company also
addressed the possibility that other acquirors might express an interest
during this process. After an extended discussion, the Special Committee
directed Jefferies & Company to indicate to Bear Stearns, certain aspects of
the Company's financial condition and operations bearing on the price set
forth in the Proposal.
At this same meeting, the Special Committee received a report concerning
the two lawsuits that had been filed regarding the Proposal. A full discussion
among the Special Committee, Jefferies & Company and Munger Tolles took place,
during which the Special Committee considered the allegations of the
complaints of the two lawsuits and also considered the relative advantages and
disadvantages of proceeding with the Proposal. The Special Committee
unanimously authorized Jefferies & Company to schedule a meeting for Mr.
Reitnouer with representatives of Colony Capital to discuss the Proposal
further.
In the afternoon of March 27, 2000, Mr. Reitnouer met with representatives
of Colony Capital at Colony Capital's offices in Los Angeles to discuss the
Proposal. The parties present discussed the information that Jefferies &
Company had prepared regarding the Company. Mr. Reitnouer communicated to
these Colony Capital representatives the Special Committee's desire that
Colony Capital increase the proposed price per share from $25.00.
On March 28, 2000, the Special Committee met telephonically with Jefferies
& Company and Munger Tolles to discuss the Proposal in light of Mr.
Reitnouer's meeting of the previous day. Mr. Reitnouer conveyed Colony
Capital's decision not to increase the proposed price per share. The Special
Committee considered the conditions necessary to increase the certainty of
closing any potential transaction, while maintaining the Company's flexibility
before any such closing.
On March 29, 2000, Mr. Reitnouer again met telephonically with
representatives of Colony Capital to discuss Colony Capital's ability to
terminate a transaction for failure to obtain financing. Colony Capital's
representatives explained the risks associated with the long regulatory
waiting periods associated with gaming transactions. The parties discussed
various other proposals relating to the financing condition. The meeting ended
with Mr. Reitnouer's commitment to take these proposals back to the Special
Committee for consideration.
On March 30, 2000, the Special Committee met telephonically to evaluate the
proposals discussed at Mr. Reitnouer's March 29, 2000 meeting with Colony
Capital. Mr. Reitnouer summarized the negotiation he had with Colony Capital's
representatives and the details of the Proposal.
Later that same day, in order to provide additional time for the completion
of Colony Capital's due diligence and the negotiations, the Company and Colony
Capital extended the exclusivity period by two weeks, through April 14, 2000.
On that day, Pinnacle issued a press release to that effect. Although the
exclusivity period was extended, no penalty to the Company or benefit to
Colony Capital existed if the Company were to have received offers from other
interested parties.
During the course of the due diligence and negotiations, it became apparent
that, in making its $25.00 per share proposal, Colony Capital had been relying
on a financial analysis that had assumed that all significant contingencies to
the sale by the Company of the Company's 97 acres of surplus land in
Inglewood, California would be satisfied by the time the proposed merger
closed, even if the Inglewood land sale had not closed prior to the closing of
the proposed merger. Pinnacle's representatives made it clear to Colony
Capital that, unlike the
44
other pending asset dispositions, there was no then existing agreement to sell
the Inglewood land and, even if there were, there could be no assurance that
the entitlement process for a buyer of the Inglewood land would be completed
prior to the completion of the proposed merger. The Inglewood land issue
remained as a significant open issue during this period of the negotiations.
On April 10, 2000, a meeting was held with representatives of Colony
Capital, the Company and the Special Committee, and their respective advisors,
to discuss all of the open issues with respect to the Proposal.
On April 11, 2000, the Special Committee met telephonically to evaluate the
negotiations and significant open issues with respect to the transaction.
On April 12, 2000, Jonathan Grunzweig, a principal of Colony Capital, and
other representatives of Colony Capital met with Messrs. Alanis, Finnigan (who
participated by telephone) and Loren Ostrow, Senior Vice President, Secretary
and General Counsel of the Company, to further discuss the arrangements with
respect to management equity investment and employment matters.
On April 13, 2000, Mr. Reitnouer had a telephonic conversation with
representatives of Colony Capital regarding a proposal associated with the
sale by the Company of the Company's 97 acres of surplus land in Inglewood,
California.
On April 14, 2000, Mr. Barrack, Mr. Grunzweig and other representatives of
Colony Capital met with Messrs. Hubbard and Finnigan to discuss a variety of
open issues including the treatment of the Inglewood land sale. At this
meeting, the parties reached a tentative resolution of the Inglewood land sale
issue, subject to approval by the Special Committee, which involved PHCR
paying $24.00 in cash at the closing of the merger with a contingent payment
entitling stockholders to up to an additional $1.00 per share if the Inglewood
land sale was closed prior to December 31, 2001 at a sale price yielding at
least a certain level of net after tax proceeds to Pinnacle. Such minimum
level of after tax proceeds was determined to be $40,750,000 in the final
negotiations on April 16, 2000, as discussed below, with a proration of the
$1.00 to the extent that the net after tax proceeds are within a range between
$13,054,000 and $40,750,000. In addition, at this meeting, management equity
issues were finalized. Finally, the parties discussed certain tax issues
related to the transaction structure which affected Mr. Hubbard but did not
affect the other Management Stockholders or the public stockholders and
concluded that, in order to afford him tax treatment that was not worse than
that of the public stockholders with the respect to his stock which was not
being contributed to PHCR, Pinnacle should repurchase such shares immediately
prior to the completion of the proposed merger.
On April 14, 2000, the Special Committee met telephonically to evaluate the
open issues relating to the proposed merger, the general status of negotiation
of the agreement and plan of merger and to discuss Colony Capital's proposal
associated with the Inglewood property.
Over the course of the next two days, April 15 and 16, the parties
negotiated to finalize the definitive agreements. On April 16, 2000, the
Special Committee held a meeting to consider the proposed merger agreement.
Jefferies & Company then presented its opinion that Colony Capital's proposal
to acquire all of the outstanding shares of the Company for $24.00 per fully
diluted share in cash, plus a possibility to receive up to another $1.00 in
cash per fully diluted share if the Company were to sell the Inglewood
property, was fair to the Company's stockholders from a financial point of
view. During the entire period of negotiation with Colony Capital, the Company
did not receive any other offers or any indications of interest from any party
other than Colony Capital. After discussion, the Special Committee voted
unanimously to recommend Colony Capital's proposed transaction to the
Company's Board of Directors for its approval. Immediately following the
meeting of the Special Committee, the Board of Directors of Pinnacle (with
Messrs. Hubbard and Alanis attending the meeting but abstaining from the vote)
met and approved the Merger Agreement and resolved to recommend that
stockholders of the Company approve and adopt the Merger Agreement.
On April 17, 2000, the Merger Agreement was executed by Pinnacle, PHCR and
Pinnacle Acq Corp, and the Voting and Contribution Agreement and the
Memorandum of Understanding were executed by PHCR and
45
the members of Pinnacle management who would receive certain equity interests
in PHCR. A press release to that effect was issued.
Pinnacle's Prior Proposal to Acquire Harveys Casino Resorts
In January 1998, the Company (then named Hollywood Park, Inc.), as one of
several potential purchasers, made a proposal to the Board of Directors of
Harveys Casino Resorts in which the Company would acquire Harveys Casino
Resorts in a merger in which the Company would issue common stock. The Company
also proposed that up to one-third of the merger consideration could be paid
in cash. The Company later proposed an all-cash offer at an increased price.
However, Colony Capital also had submitted a proposal as a potential
purchaser, and Harveys Casino Resorts instead decided to accept the offer from
Colony Capital. In February 1998, after Harveys Casino Resorts and an
affiliate of Colony Capital had entered into a definitive agreement with
respect to Colony Capital's acquisition of Harveys Casino Resorts, the Company
made another offer to acquire Harveys Casino Resorts at an increased price per
share in cash if the Colony Capital break-up fee were eliminated. Harveys
Casino Resorts did not accept any of the Company's proposals and was acquired
by an affiliate of Colony Capital.
Purpose and Reasons for the Pinnacle Merger
The purpose of the Pinnacle Merger is to enable PHCR to acquire the Company
through a merger of its indirect wholly-owned subsidiary, Pinnacle Acq Corp,
with and into the Company. The Company will be the surviving corporation in
the Pinnacle Merger and will be a wholly-owned subsidiary of PHCR. PHCR is
currently a newly formed wholly-owned subsidiary of Harveys Casino Resorts.
Concurrently with the Pinnacle Merger, another newly formed subsidiary of
PHCR, Harveys Acquisition Corporation, will merge into Harveys Casino Resorts,
with the result that, immediately following the two mergers, the Company and
Harveys Casino Resorts will be wholly-owned subsidiaries of PHCR. Immediately
following the Pinnacle Merger and the Harveys Merger, it is currently expected
that Voteco, an affiliate of Colony Capital, will own approximately 82.7% of
the voting power of PHCR's common stock, and the Management Stockholders will
own in the aggregate, approximately 15.6% of the voting power of PHCR's common
stock. See "The Pinnacle Merger--Interests of Certain Persons in the Pinnacle
Merger; Certain Relationships." It is currently expected that the remaining
1.7% of the voting power of PHCR's common stock will be owned by members of
current management of Harveys Casino Resorts. The respective percentage
ownership interests of Voteco, the Management Stockholders and current
management of Harveys Casino Resorts with respect to PHCR common stock
following the Pinnacle Merger and the Harveys Merger that are set forth in
this paragraph and throughout the Proxy Statement are subject to adjustment in
the event that affiliates of PHCR determine to make any equity investment in
PHCR or any of its subsidiaries. Affiliates of PHCR are under no obligation to
make any such equity investment, and if affiliates of PHCR elect, in their
sole discretion, to make an equity investment in PHCR or its subsidiaries
prior to the closing of the Pinnacle Merger, such equity investment will be
subject to the reasonable approval of Mr. Hubbard.
Certain Effects of the Pinnacle Merger
Benefits and Detriments of the Pinnacle Merger to the Company
Upon completion of the Pinnacle Merger, the Company will become a private
company. As a result, the Company's management will be able to react with
greater speed and flexibility to changing conditions and opportunities,
increasing the operating flexibility of the Company. In addition, the
Company's management will be able to make decisions based on its long-range
business interests without the necessary consideration of the possible adverse
short-term effect of such decisions upon the market price of Pinnacle Common
Stock and without the constraint of the public market's emphasis on quarterly
earnings.
Becoming a private company also will reduce the operational and
administrative costs arising from and in connection with the Company's status
as a public reporting company. Pinnacle Common Stock is currently
46
registered under the Securities Exchange Act of 1934, as amended (the
"Exchange Act"). If the Merger Agreement is approved at the Annual Meeting and
the Pinnacle Merger is completed, Pinnacle Common Stock will become eligible
for termination of registration under Section 12(g)(4) of the Exchange Act,
and the registration of Pinnacle Common Stock under the Exchange Act will be
terminated as soon as practicable after the Pinnacle Merger is completed.
Termination of registration of the shares of Pinnacle Common Stock under the
Exchange Act will substantially reduce the information required to be
furnished by the Company to its stockholders and to the SEC and will make
certain provisions of the Exchange Act inapplicable to the Company, such as
the obligation to file reports under Section 15(d) of the Exchange Act, the
short-swing profit recovery provisions of Section 16(b), the requirement of
furnishing a proxy statement in connection with stockholders' meetings and the
requirements of Rule 13e-3 with respect to going-private transactions. The
shares of Pinnacle Common Stock will also be delisted from the New York Stock
Exchange as a result of the Pinnacle Merger.
As the surviving company in the Pinnacle Merger, the principal detriments
to the Company will be its inability to use publicly-traded securities as
acquisition capital or to grant options to its employees exercisable for
publicly-traded securities. In addition, as a result of the Financing, PHCR
will have a significant amount of debt. A substantial portion of the cash flow
from the operations of Pinnacle and Harveys Casino Resorts may be required to
be used to pay interest and principal on the debt and such cash flow therefore
may be unavailable for other purposes, including capital expenditures, project
expansion, development and acquisition efforts. PHCR's level of debt may also
limit its ability to obtain additional financing and heighten its
vulnerability to downturns in its industry or in the general economy.
Benefits and Detriments of the Pinnacle Merger to the Public Stockholders
The benefit to the holders of Pinnacle Common Stock of the transaction will
be the payment of a premium, in cash, above the market value for such Pinnacle
Common Stock prior to the public announcement that the Company had received a
proposal regarding the transaction. If the Pinnacle Merger is completed,
stockholders of the Company (other than the Company or any of its
subsidiaries, Pinnacle Acquisition Corporation, stockholders who have
perfected their appraisal rights in accordance with Delaware law and
Management Stockholders with respect to the shares of Pinnacle Common Stock to
be contributed to PHCR) will be entitled to receive $24.00 in cash, without
interest, for each share of Pinnacle Common Stock and, if applicable, up to an
additional $1.00 in cash for each outstanding share of Pinnacle Common Stock,
contingent on the sale by the Company of the Company's 97 acres of surplus
land in Inglewood, California under certain circumstances. Holders of options
to purchase shares of Pinnacle Common Stock ("Pinnacle Stock Options") (other
than options to be exchanged by Management Stockholders) with an exercise
price of less than $24.00 per share will be entitled to receive an amount in
cash equal to the difference between $24.00 and the exercise price per share,
without interest, for each share underlying such option, regardless of whether
the option is fully vested. Each such option holder also will be entitled to
receive the contingent payment described above to the extent that the cash
merger consideration (taking into account any Contingent Payment to be paid in
cash at the effective time of the Pinnacle Merger) exceeds the per share
exercise price of such option. The merger consideration of $24.00 per share
represents a 39.1% premium to the closing price of the common stock on March
6, 2000 (the second to last trading day prior to the public announcement that
the Company had received a proposal regarding the proposed transaction) and a
21.5% premium to the closing price for the common stock on April 14, 2000 (the
last trading day before the signing of the definitive Merger Agreement was
announced). This cash payment will assure that all public stockholders will
receive the same amount for their shares, rather than taking the risks
associated with attempting to sell their shares in the open market.
Additionally, the risk of any possible decline in the value of the
stockholders' investment in the Company will be eliminated and stockholders
will not pay the commissions on brokerage fees they would have incurred in
connection with the sale of their shares of Pinnacle Common Stock.
The detriment to such holders will be their inability to participate as
continuing stockholders in the possible future growth of the Company. If the
Pinnacle Merger is consummated, the Management Stockholders, together with
other stockholders of PHCR, will indirectly hold the entire equity interest in
the Company and will therefore be the sole beneficiaries of any future
earnings or growth of the Company and any increases in value of the
47
Company. See "The Pinnacle Merger--Interests of Certain Persons in the
Pinnacle Merger; Certain Relationships." Further, stockholders may recognize a
taxable gain as a result of the Pinnacle Merger. See "--Certain Federal Income
Tax Consequences of the Pinnacle Merger."
Benefits and Detriments of the Pinnacle Merger to the Management Stockholders
The Pinnacle Merger will benefit the Management Stockholders by allowing
them the opportunity to participate in the Company's and Harveys Casino
Resorts' future earnings and growth through their equity stakes in the Company
through PHCR. Upon consummation of the Pinnacle Merger, the Management
Stockholders will contribute on a tax-free basis certain of their shares of
Pinnacle Common Stock to PHCR in exchange for shares of common stock of PHCR
and will exchange certain Pinnacle Stock Options held by them for fully vested
options to purchase common stock of PHCR. The employment agreements of the
Management Stockholders that have such agreements will be assumed by PHCR or
its subsidiaries without modification (except as necessary to reflect the
Pinnacle Merger) and, unless earlier terminated, will terminate on the
respective dates set forth therein. PHCR and the Management Stockholders will
also enter into additional agreements with respect to matters related to
corporate governance and stockholder rights. See "The Pinnacle Merger--
Interests of Certain Persons in the Pinnacle Merger; Certain Relationships",
"Voting and Contribution Agreement; Memorandum of Understanding" and
"Stockholders Agreement."
The principal detriment to the Management Stockholders of the completion of
the Pinnacle Merger will be that they will bear the risk of any decrease in
the future value of the equity of the Company and Harveys Casino Resorts after
the Pinnacle Merger.
Benefits and Detriments of the Pinnacle Merger to Directors and Executive
Officers Other Than Management Stockholders
Members of the Board of Directors and executive officers (other than the
Management Stockholders) and certain other employees of the Company own shares
of Pinnacle Common Stock and Pinnacle Stock Options. The treatment of such
members of the Board of Directors, executive officers and other employees is
identical to treatment of stockholders of the Company who are not members of
the Board of Directors, executive officers or employees. Therefore, the
benefits and detriments of the Pinnacle Merger to such directors (including
the Special Committee members), executive officers and employees are generally
similar to those applicable to the public stockholders.
All executive officers of the Company are Management Stockholders. The
benefits and detriments to such persons are described above under the heading
"--Benefits and Detriments of the Pinnacle Merger to the Management
Stockholders."
As a result of the Pinnacle Merger, the members of the Special Committee
will be entitled to receive, in the aggregate, $14,540,424 in cash, plus up to
an additional $605,851 if the Inglewood sale closes before December 31, 2001,
for their shares of Pinnacle Common Stock and $4,986,214 in cash, plus up to
an additional $321,738 if the Inglewood sale closes before December 31, 2001,
for their Pinnacle Stock Options. In addition, members of the Special
Committee will be paid a fee for their service on the Special Committee. See
"The Pinnacle Merger--Fees and Expenses."
In addition, the Merger Agreement provides that the existing
indemnification obligations set forth in Pinnacle's certificate of
incorporation and bylaws as of the date of the Merger Agreement shall be
maintained and not amended, repealed or otherwise modified for a period of six
years after the effective time in any manner that would adversely affect the
rights thereunder of individuals who at or prior to the effective time of the
Pinnacle Merger were directors, officers, employees or agents of the Company.
The Merger Agreement also provides that, for six years after the closing of
the Pinnacle Merger, the Company will provide directors' and officers'
liability insurance to cover persons covered by the Company's directors' and
officers' liability insurance policy in effect on the date of the Merger
Agreement (which insurance shall be of at least the same coverage,
48
with comparable carriers, and shall contain terms and conditions no less
favorable to such persons) with respect to those matters covered by such
policy.
Other Effects of the Pinnacle Merger
Subject to the obligation to maintain the existing indemnification
obligations set forth therein, as discussed above, the certificate of
incorporation and bylaws of the Company will be amended upon consummation of
the Pinnacle Merger and, as amended, will be the certificate of incorporation
and bylaws of the Company until thereafter amended. In addition, at the
effective time of the Pinnacle Merger, the Board of Directors of Pinnacle Acq
Corp will replace the Board of Directors of the Company, and the officers of
Pinnacle Acq Corp will become the officers of the Company.
Recommendation of the Special Committee and Board of Directors; Fairness of
the Pinnacle Merger
The Special Committee unanimously recommended that the Board of Directors
and the stockholders of the Company approve the Merger Agreement, the Pinnacle
Merger and the transactions contemplated by the Merger Agreement, and
determined the Merger Agreement and the Pinnacle Merger to be advisable, fair
to and in the best interests of the Company's stockholders.
Factors Considered by the Special Committee
The decision of the Special Committee to recommend the approval of the
Merger Agreement to the Board of Directors of Pinnacle was based upon its
consideration of a number of factors, including the following reasons for the
merger and countervailing considerations, which are not listed in order of
significance:
(a) The current and past market price of Pinnacle Common Stock (see
"Common Stock Market Price and Dividend Information") in relation to the
merger consideration, the historical volatility of the price of Pinnacle
Common Stock over the last several years, and the substantial premium
represented by the merger consideration of at least $24.00 per share of
Pinnacle Common Stock over the then-prevailing market price of the Pinnacle
Common Stock;
(b) The absence of any competing offers or proposals during the
significant period between the first public announcement relating to PHCR's
interest in a merger and the execution of the Merger Agreement;
(c) The Company's prospects for growth, including the lack of attractive
properties to acquire during the last 18 months in its target markets
outside of the Las Vegas and Atlantic City markets, the successful and
unsuccessful attempts of the Company to grow by acquisition of other gaming
companies, and the very limited near-term prospects for expansion into
states that do not currently allow non-Native American casino gaming;
(d) The need for expansion of, and improvements to, the Company's
existing properties and the potential sources and costs of capital required
therefor;
(e) Increased competition in certain of the Company's markets, including
anticipated competition from new Native American casinos that could
adversely affect the Company's Boomtown casino in Reno, Nevada;
(f) The financial condition, results of operations, businesses and
properties of the Company, on a historical and prospective basis;
(g) The Special Committee's view of current industry, economic and
market conditions;
(h) The geographic diversity of properties held by the Company and by
Harveys Casino Resorts, and the potential for synergies between the
companies;
(i) The requirement of approval of gaming authorities for any merger or
acquisition of the Company, coupled with the agreement by PHCR in the
Merger Agreement to file within a specified period of time corporate
applications for gaming licenses in each jurisdiction in which gaming
approvals are required to
49
permit the consummation of the transactions contemplated by the Merger
Agreement and to use all reasonable efforts to obtain such approvals, as
well as the fact that Harveys Casino Resorts currently holds a gaming
license from one of the states required to approve the Pinnacle Merger, and
the right of the Company to terminate the Merger Agreement if the required
approvals are not received within defined time periods;
(j) The terms of the Merger Agreement that prohibit the Company from,
among other things, soliciting, negotiating or entering into agreements
relating to a sale of the Company or a portion of its assets or securities
or a merger or similar transaction involving the Company; the proviso that,
to the extent the Company complies with the terms of the Merger Agreement,
including payment of a $25,000,000 termination fee, it may terminate the
Merger Agreement prior to the vote of the Company's stockholders, in order
that it may accept an unsolicited proposal for certain types of
transactions for which the Board determines (1) the value of the
consideration exceeds the value of the merger consideration under the
Merger Agreement and (2) such unsolicited proposal is more favorable to the
Company's stockholders than any proposal made pursuant to the Merger
Agreement and any alternative proposal presented by Pinnacle Acq Corp or
any of its affiliates; and the Special Committee's belief that these
provisions of the Merger Agreement should not deter a superior offer for
the Company;
(k) The other terms of the proposed Merger Agreement;
(l) The status and timing of the disposition of various assets and
properties by the Company, including, but not limited to, the Casino Magic
Bay St. Louis property, the Boomtown Biloxi property, the Turf Paradise
racetrack and the Inglewood, California property;
(m) The advice of Jefferies & Company to the Special Committee and the
oral opinion delivered to the Special Committee by Jefferies & Company on
April 16, 2000 (confirmed in writing on the next day) to the effect that as
of such date the merger consideration was fair to the Company's
stockholders from a financial point of view;
(n) The risk that the Pinnacle Merger would not be consummated,
including, among other reasons, due to the lack of regulatory approvals;
the inability of PHCR to obtain the Financing, whether due to changes in
interest rates, the capital markets or otherwise; the failure of PHCR to
obtain any required consents and related tenders of outstanding debt
securities of the Company and of Harveys Casino Resorts; or the inability
of the Company to sell the Casino Magic Bay St. Louis property, the
Boomtown Biloxi property or the Turf Paradise racetrack for specified
amounts of net proceeds by the closing date;
(o) The copies provided to the Company of (1) a commitment letter issued
by certain lenders to PHCR regarding the anticipated provision, subject to
significant conditions, of a senior secured credit facility for the
acquisition of the Company on the terms set forth therein, and (2) letters
from two investment banks to PHCR and certain of its affiliates indicating,
subject to significant conditions, that it is highly confident of its
ability to place senior subordinated notes on the terms set forth therein;
(p) The agreement of Harveys Casino Resorts to be jointly and severally
liable with PHCR and Pinnacle Acq Corp for any claims brought against PHCR
and Pinnacle Acq Corp under the Merger Agreement as to which PHCR and
Pinnacle Acq Corp are liable, subject to a $15,000,000 cap on the aggregate
liability of Harveys Casino Resorts relating to any such claim or arising
under such agreement, or otherwise pertaining to the Merger Agreement, and
subject to the right of Harveys Casino Resorts to assert defenses and
setoffs of PHCR and Pinnacle Acq Corp;
(q) The proposal by PHCR with respect to the contingent payment of
additional consideration to the Company's stockholders based upon the
timing and net after tax proceeds from the sale by the Company of the
Company's surplus land in Inglewood, California; and
(r) The prospects for the Company's Belterra Resort and Casino, which is
scheduled to be completed in August 2000, and the conditions in the Merger
Agreement relating to the timing and cost of the project.
50
In light of the number and nature of the factors considered by the Special
Committee, including those listed above, the Special Committee did not assign
relative weight to the factors considered in reaching its conclusions. Rather,
the Special Committee viewed its conclusions and recommendation to the Board
as being based on the totality of the information being presented to and
considered by it. The Special Committee determined that the factors leading it
to support the Merger Agreement outweighed the factors that detracted from the
attractiveness of the proposal, taken as a whole, of PHCR. The Special
Committee, therefore, voted unanimously to recommend the Merger Agreement to
the Board of Directors for its approval.
Reasons for the Board's Determination
The Board of Directors adopted the Special Committee's recommendation and
unanimously approved the Merger Agreement (with Messrs. Hubbard and Alanis
abstaining from the vote in light of their interest in the transaction--see
"The Pinnacle Merger--Interests of Certain Persons in the Pinnacle Merger;
Certain Relationships"). In reaching its decision to approve the Merger
Agreement, the Board of Directors relied on the Special Committee's
recommendation and the factors considered by the Special Committee as
described above. In view of the wide variety of factors considered in
connection with its evaluation of the proposed Pinnacle Merger, the Board of
Directors did not find it practicable to, and did not, quantify or otherwise
attempt to assign relative weights to the foregoing factors or determine that
any factor was of particular importance relative to any other factor. Rather,
the Board of Directors viewed its position as being based on the totality of
the information presented and considered by it. In connection with its
consideration of the determination by the Special Committee, as part of its
determination with respect to the fairness of the consideration to be received
by holders of Pinnacle Common Stock pursuant to the Merger Agreement, the
Board of Directors adopted the conclusion, and the analyses, underlying such
conclusion, of the Special Committee, based upon its view as to the
reasonableness of such analyses and adopted the financial analyses, underlying
the Jefferies & Company opinion based upon its review as to the reasonableness
of such analyses.
Opinion of Financial Advisor to the Special Committee
Pursuant to an engagement letter dated March 23, 2000, amended April 16,
2000, the Special Committee retained Jefferies & Company to render an opinion
as to the fairness of the merger consideration, from a financial point of
view, to the holders of Pinnacle Common Stock.
On April 16, 2000 at meetings of the Special Committee and the Pinnacle
Board of Directors held to evaluate the proposed Pinnacle Merger, Jefferies &
Company delivered to the Special Committee and the Pinnacle board its oral
opinion (confirmed in writing in an opinion dated the next day) that, as of
the date of the opinion, based on the assumptions made, the matters considered
and the limitations on the review undertaken described in the opinion, the
merger consideration was fair from a financial point of view to the holders of
Pinnacle Common Stock. No limitations were imposed by the Special Committee on
Jefferies & Company with respect to the investigations made or procedures
followed by it in furnishing its opinion, other than to comply with the no
solicitation provisions in the exclusivity agreement entered into between
Pinnacle and Colony Capital on March 7, 2000. See "--Background of the
Pinnacle Merger." The Jefferies & Company opinion was prepared for the benefit
and use of the Pinnacle Board of Directors and the Special Committee in their
consideration of the Pinnacle Merger and does not constitute a recommendation
to stockholders of Pinnacle as to how they should vote upon, or take any other
action with respect to, the Pinnacle Merger.
The full text of the Jefferies & Company opinion, which sets forth the
assumptions made, matters considered and limitations on the review undertaken
is attached as Annex B to this Proxy Statement. Stockholders are urged to read
the opinion carefully and in its entirety.
The Jefferies & Company opinion is expressly intended for the benefit and
use of the Special Committee and the Pinnacle Board of Directors and does not
address:
--the relative merits of the Pinnacle Merger and the other business
strategies that the Pinnacle Board of Directors has considered or may be
considering; or
51
--the underlying business decision of the Pinnacle Board of Directors to
proceed with the Pinnacle Merger.
In addition, the Jefferies & Company opinion does not constitute a
recommendation to any stockholder of Pinnacle as to whether to tender such
holder's shares of Pinnacle Common Stock in the Pinnacle Merger or as to how
such holder should vote with respect to the Pinnacle Merger.
In the course of performing its review and analyses for rendering its
opinion, Jefferies & Company, among other things:
--reviewed certain publicly available financial statements and other
business and financial information of Pinnacle;
--reviewed certain internal financial statements and other financial and
operating data concerning Pinnacle, prepared by the management of
Pinnacle;
--reviewed certain financial forecasts and other forward looking financial
information prepared by the management of Pinnacle;
--considered non-recurring revenues and expenses on a pro forma basis;
--held discussions with the management of Pinnacle concerning the business,
past and current operations, financial condition and future prospects of
Pinnacle;
--reviewed the financial terms and conditions set forth in the Merger
Agreement;
--reviewed the stock price and trading history of Pinnacle Common Stock;
--compared the financial performance of Pinnacle and the prices and trading
activity of Pinnacle Common Stock with that of certain other publicly-
traded companies comparable with Pinnacle;
--compared the financial terms of the Pinnacle Merger with the financial
terms, to the extent publicly available, of other transactions it deemed
relevant;
--prepared a discounted cash flow analysis of Pinnacle;
--participated in discussions among representatives of Pinnacle and their
financial and legal advisors; and
--made such other studies and inquiries, and took into account such other
matters, as it deemed relevant, including an assessment of general
economic, market and monetary conditions.
In its review and analysis, and in arriving at its opinion, Jefferies &
Company assumed and relied upon the accuracy and completeness of all of the
financial and other information provided to it (including information
furnished to it orally or otherwise discussed with it by the management of
Pinnacle) or publicly available and neither attempted to verify, nor assumed
responsibility for verifying, any of such information. Jefferies & Company
relied upon the assurances of management of Pinnacle that they were not aware
of any facts that would make such information inaccurate or misleading.
Furthermore, Jefferies & Company did not obtain or make, or assume any
responsibility for obtaining or making, any independent evaluation or
appraisal of the properties, assets or liabilities (contingent or otherwise)
of Pinnacle, nor was Jefferies & Company furnished with any such evaluation or
appraisal.
In addition, Jefferies & Company assumed that:
--the Pinnacle Merger will be consummated upon the terms set forth in the
Merger Agreement without material alteration thereof;
--the minimum consideration offered ($24.00 per common share) would be
paid, disregarding the $1.00 per share contingent upon the sale of
property in Inglewood, California, in evaluating the fairness of the
offer; and
--the historical financial statements of Pinnacle reviewed by it had been
prepared and fairly presented in accordance with U.S. generally accepted
accounting principles consistently applied.
Jefferies & Company relied as to all legal matters relevant to rendering
its opinion on the advice of counsel.
52
The Jefferies & Company opinion is necessarily based upon market, economic
and other conditions as in effect on, and information made available to
Jefferies & Company as of, the date of the Jefferies & Company opinion. It
should be understood that subsequent developments may affect the conclusion
expressed in the Jefferies & Company opinion and that Jefferies & Company
disclaims any undertaking or obligation to advise any person of any change in
any matter affecting the opinion which may come or be brought to its attention
after the date of the opinion. The Jefferies & Company opinion is limited to
the fairness, from a financial point of view and as of the date thereof, of
the merger consideration to the holders of Pinnacle Common Stock, the
Management Stockholders and holders of dissenting shares. Jefferies & Company
does not express any opinion as to:
--the value of any employee agreement or other arrangement entered into in
connection with the Pinnacle Merger; or
--any tax or other consequences that might result from the Pinnacle Merger.
The following is a summary of the material financial analyses performed by
Jefferies & Company in connection with rendering the Jefferies & Company
opinion. The summary of the financial analyses is not a complete description
of all of the analyses performed by Jefferies & Company. Certain of the
information in this section is presented in a tabular form. IN ORDER TO BETTER
UNDERSTAND THE FINANCIAL ANALYSES PERFORMED BY JEFFERIES & COMPANY, THESE
TABLES MUST BE READ TOGETHER WITH THE TEXT OF EACH SUMMARY. THE JEFFERIES &
COMPANY OPINION IS BASED UPON THE TOTALITY OF THE VARIOUS ANALYSES PERFORMED
BY JEFFERIES & COMPANY AND NO PARTICULAR PORTION OF THE ANALYSES HAS ANY MERIT
STANDING ALONE.
Premiums Paid Analysis. Using publicly available information, Jefferies &
Company analyzed, among other things, the premium paid relative to the stock
price of the Pinnacle Common Stock as of March 8, 2000 compared to a large
sample of other acquisition transactions. The results of such analysis are
included in the table below.
Period Prior to March 8,
2000
----------------------------
One Day One Week Four Weeks
------- -------- ----------
Pinnacle price per share during period........... $19.25 $16.63 $19.31
Proposed purchase price per share................ 24.00 24.00 24.00
------ ------ ------
Purchase premium--Pinnacle....................... 24.7% 44.4% 24.3%
Average premium paid in other public
transactions(1)(2)(3)
All offers..................................... 24.7% 30.4% 37.0%
All cash offers................................ 24.4% 30.3% 36.5%
Average premium paid in selected gaming
transactions(4)
All offers..................................... 36.8% 40.7% 38.7%
All cash offers................................ 36.8% 40.7% 38.7%
- --------
(1) Source: Securities Data Company.
(2) All public transactions announced and completed from January 1, 1997 to
March 7, 2000 with transaction value of $100 million to $1,500 million.
(3) Trimmed average, which excludes top 10% and bottom 10% of premiums paid.
(4) See " Similar Transaction Analysis" below.
53
In addition to analyzing the premium paid relative to other acquisitions,
Jefferies & Company reviewed the premium paid relative to the trading history
of shares of Pinnacle Common Stock as outlined in the table below.
Stock
Period Prior to March 8, 2000 Price Premium
- ----------------------------- ------ ------- ---
90 day average............................................... $19.84 20.9%
52 week average.............................................. 16.45 45.9%
52 week high (1/21/00)....................................... 23.50 2.1%
52 week low (3/8/99)......................................... 8.69 176.3%
Comparable Companies Analysis. Using publicly available information,
Jefferies & Company analyzed and compared, among other things, the trading
multiples of Pinnacle to the corresponding trading multiples of selected
publicly-traded companies that Jefferies & Company believed were generally
comparable to Pinnacle. These comparable companies are set forth in the table
below.
Comparable Publicly-Traded Companies
Ameristar Casinos, Inc.
Argosy Gaming Company
Boyd Gaming Corp.
Hollywood Casino Corp.
Isle of Capri Casinos, Inc.
Penn National Gaming, Inc.
Station Casinos, Inc.
The purpose of the comparable company analysis was to establish that the
acquisition multiple being considered for Pinnacle was in the range of the
comparable publicly-traded companies. This was accomplished by deriving a
range of multiples determined by dividing the total enterprise value and the
public market capitalizations of these companies by their operating results.
54
Multiples compared by Jefferies & Company included: (1) total enterprise
value ("TEV") to revenues and to earnings before interest, taxes, depreciation
and amortization ("EBITDA") for the last twelve months and forward twelve
months, (2) public market capitalization to net income for the estimated
calendar years 2000 and 2001 and (3) public market capitalization to current
stockholder's equity. All multiples were based on closing stock prices as of
April 12, 2000.
Historical Forward
---------- -------
Total Enterprise Value to
Net Revenues
High.................................................. 2.1x 2.0x
Low................................................... 1.1x 1.0x
Average............................................... 1.4x 1.3x
Pinnacle Acquisition Multiple......................... 1.7x 1.5x
EBITDA
High.................................................. 8.4x 7.4x
Low................................................... 4.7x 4.8x
Average............................................... 6.6x 5.9x
Pinnacle Acquisition Multiple......................... 7.7x 6.1x
2000E 2001E
---------- -------
Price to
Earnings per Share
High.................................................. 16.0x 14.2x
Low................................................... 6.7x 6.0x
Average............................................... 11.9x 10.1x
Pinnacle Acquisition Multiple......................... 24.0x 17.1x
Current
----------
Price to
Book Value per Share
High.................................................. 7.2x
Low................................................... (1.3x)
Average............................................... 2.7x
Pinnacle Acquisition Multiple......................... 2.2x
Similar Transaction Analysis. Using publicly available information,
Jefferies & Company analyzed the consideration offered, and the implied
transaction value multiples paid or proposed to be paid, in acquisition
transactions that were completed in the past two years in the gaming industry
that Jefferies & Company deemed generally comparable to the Pinnacle Merger.
These transactions included:
Announcement
Target Acquirer Date
------ -------- ------------
Boomtown Biloxi and Penn National Gaming, Inc. 12/9/99
Casino Magic Bay St. Louis
Lady Luck Gaming Corp. Isle of Capri Casinos, Inc. 10/6/99
Players International, Inc. Harrahs Entertainment, Inc. 8/16/99
Empress Entertainment, Inc. Horseshoe Gaming Holding Corp. 9/2/98
Grand Casinos, Inc. Park Place Entertainment, Inc. 6/30/98
Casino Magic Corp. Hollywood Park, Inc. 2/19/98
Harveys Casino Resorts Colony Capital, Inc. 2/5/98
55
The purpose of the similar transaction analysis was to establish that the
acquisition multiple being considered for Pinnacle was in the range of the
similar public acquisition multiples. This was accomplished by dividing the
aggregate consideration paid in the selected similar transactions by the
projected operating results of the acquired companies.
Multiples compared by Jefferies & Company included the total consideration
in such transactions as a multiple of the preceding twelve months ("LTM")
revenues and EBITDA on an unadjusted basis ("Raw Multiple") and on an adjusted
basis ("Adjusted Multiple") to take into consideration, among other things,
synergies and proceeds of excess asset sales. All multiples for the similar
transactions were based on public information available at the time of the
announcement. Based on this information and other publicly available
information, the following table illustrates the implied Pinnacle acquisition
multiples compared to multiples that Jefferies & Company derived from the
similar transactions.
Similar Transaction Multiples
-----------------------------
Adjusted
Raw Multiple Multiple
-------------- --------------
Revenue EBITDA Revenue EBITDA
------- ------ ------- ------
High.............................................. 1.6x 7.1x 1.5x 6.3x
Low............................................... 1.2x 5.5x 1.1x 5.1x
Average........................................... 1.4x 6.3x 1.3x 5.6x
Pinnacle Acquisition Multiple..................... 1.7x 7.7x 1.5x 6.2x
Jefferies & Company noted that no company, business or transaction compared
in the comparable companies analysis or similar transaction analysis is
identical to Pinnacle or the Pinnacle Merger. Accordingly, an analysis of the
results of the foregoing is not entirely mathematical; rather it involves
complex considerations and judgments concerning differences in financial and
operating characteristics and other factors that could affect the acquisition,
public trading and other values of the comparable companies or the similar
transactions which are being compared.
Discounted Cash Flow Analysis. Jefferies & Company also performed a
discounted cash flow analysis of the after-tax free cash flows of Pinnacle
using information, which Jefferies & Company obtained from the Company. The
purpose of the discounted cash flow analysis was to establish a range for the
potential equity value of Pinnacle by determining a range for the net present
value of Pinnacle's future cash flows. Jefferies & Company first used
information provided by the Company to estimate after-tax free cash flows
through December 31, 2004, and then used discount rates ranging from 12% to
13% to discount those cash flows, which discount rates were based upon
Pinnacle's weighted average cost of capital as measured by Jefferies &
Company. Pinnacle's after-tax free cash flows were calculated as the after-tax
operating earnings of Pinnacle adjusted to add back non-cash expenses and
deduct uses of cash not reflected in the income statement. Jefferies & Company
then added to the present value of the free cash flows the terminal value of
Pinnacle at December 31, 2004, discounted back at the same discount rate to
represent a present value. The terminal value was computed by growing the
estimated free cash flow for Pinnacle in calendar year 2004 by a perpetual
growth rate ranging from 2.0% to 3.0%, and then dividing such amount by a
capitalization rate equal to the discount rate minus the perpetual growth
rate. The perpetual growth rate represents the average long-term rate of
growth that can be expected beginning in 2005, as measured by Jefferies &
Company, based upon Pinnacle's business plan. The following table summarizes
the resulting implied Pinnacle equity valuations and implied Pinnacle equity
values per share which can be compared to the minimum merger consideration
offered of $24.00 per share:
Perpetual Growth
Rate
--------------------
Discount Rate 2.0% 2.5% 3.0%
------------- ------ ------ ------
13.0%................................................... $22.77 $23.99 $25.34
12.5%................................................... 24.53 25.90 27.42
12.0%................................................... 26.48 28.03 29.74
56
While the foregoing summary describes certain analyses and factors that
Jefferies & Company deemed material in its presentation to the Special
Committee, it is not a comprehensive description of all analyses and factors
considered by Jefferies & Company. The preparation of a fairness opinion is a
complex process that involves various determinations as to the most
appropriate and relevant methods of financial analysis and the application of
these methods to the particular circumstances and, therefore, such an opinion
is not readily susceptible to summary description. Jefferies & Company
believes that its analyses must be considered as a whole and that selecting
portions of its analyses and of the factors considered by it, without
considering all analyses and factors, would create an incomplete view of the
evaluation process underlying the Jefferies & Company opinion. Several
analytical methodologies were employed and no one method of analysis should be
regarded as critical to the overall conclusion reached by Jefferies & Company.
Each analytical technique has inherent strengths and weaknesses, and the
nature of the available information may further affect the value of particular
techniques. The conclusions reached by Jefferies & Company are based on all
analyses and factors taken as a whole and also on application of Jefferies &
Company's own experience and judgment. Such conclusions may involve
significant elements of subjective judgment and qualitative analysis.
Jefferies & Company therefore gives no opinion as to the value or merit
standing alone of any one or more parts of the analyses it performed. In
performing its analyses, Jefferies & Company considered general economic,
market and financial conditions and other matters, many of which are beyond
the control of Pinnacle. The analyses performed by Jefferies & Company are not
necessarily indicative of actual values or future results, which may be
significantly more or less favorable than those suggested by such analyses.
Accordingly, analyses relating to the value of a business do not purport to be
appraisals or to reflect the prices at which the business actually may be
purchased. Furthermore, no opinion is being expressed as to the prices at
which shares of Pinnacle Common Stock may be traded at any future time.
The engagement letter, dated March 23, 2000 as amended April 16, 2000,
between Jefferies & Company and the Special Committee provides that, for its
services, Jefferies & Company is entitled to receive an opinion fee of
$400,000, payable upon delivery of the Jefferies & Company opinion. Pinnacle
has also agreed to reimburse Jefferies & Company for certain of its out-of-
pocket expenses, including legal fees, and to indemnify and hold harmless
Jefferies & Company and its affiliates and any director, employee or agent of
Jefferies & Company or any of its affiliates, or any person controlling
Jefferies & Company or its affiliates for certain losses, claims, damages,
expenses and liabilities relating to or arising out of services provided by
Jefferies & Company as financial advisor to Pinnacle. The terms of the fee
arrangement with Jefferies & Company, which Pinnacle and Jefferies & Company
believe are customary in transactions of this nature, were negotiated at arm's
length between Pinnacle and Jefferies & Company, and the Special Committee was
aware of such fee arrangements. Jefferies & Company maintains a market in the
shares of Pinnacle Common Stock. In the ordinary course of its business,
Jefferies & Company may trade in Pinnacle's securities and securities for its
own account and the account of its customers and, accordingly, may at any time
hold a long or short position in Pinnacle's securities.
Jefferies & Company was retained based on Jefferies & Company's experience
as a financial advisor in connection with mergers and acquisitions and in
securities valuations generally.
Jefferies & Company is a nationally recognized investment banking firm. As
part of its investment banking business, Jefferies & Company is frequently
engaged in the valuation of businesses and their securities in connection with
mergers and acquisitions, negotiated underwritings, secondary distributions of
securities, private placements and other purposes.
Position of Pinnacle Acq Corp, PHCR, Harveys Casino Resorts and Voteco
Because the transaction may be considered a "going private" transaction,
the rules under the Exchange Act may be interpreted to require each of
Pinnacle Acq Corp, PHCR, Harveys Casino Resorts and Voteco to express its
belief as to the fairness of the transaction to the holders of Pinnacle Common
Stock because, under a potential interpretation of the rules governing "going
private" transactions, one or more of Pinnacle Acq Corp, PHCR, Harveys Casino
Resorts and Voteco may be deemed to be an affiliate of the Company. Although
representatives
57
of Pinnacle Acq Corp, PHCR, Harveys Casino Resorts and Voteco negotiated the
transaction with Pinnacle management and the Special Committee on an arm's-
length basis with directly opposing interests and PHCR will acquire shares of
Pinnacle Common Stock held by existing Pinnacle stockholders in the
transaction and, therefore, may have interests that are in conflict with the
interests of those stockholders, each of Pinnacle Acq Corp, PHCR, Harveys
Casino Resorts and Voteco believes that the transaction is fair, from a
financial point of view, to the holders of shares of Pinnacle Common Stock, on
the basis of the following factors, in each case, based only on the more
limited facts and information available to them:
. Pinnacle Acq Corp, PHCR, Harveys Casino Resorts and Voteco have considered
the factors listed above in "--Recommendation of the Special Committee and
the Board of Directors; Fairness of the Pinnacle Merger." These factors
were taken into consideration by Pinnacle Acq Corp, PHCR, Harveys Casino
Resorts and Voteco, in each case based, however, only on the more limited
facts and information available to them.
. Each of Pinnacle Acq Corp, PHCR, Harveys Casino Resorts and Voteco has also
reviewed the opinion of Jefferies & Company as set forth in this Proxy
Statement with respect to the fairness of the merger consideration based on
the analyses of such firm as set forth in this Proxy Statement, subject to
the assumptions and limitations of such conclusions and analyses as set
forth in such opinion and this Proxy Statement. See "--Opinion of Financial
Advisor to the Special Committee." Although Pinnacle Acq Corp, PHCR,
Harveys Casino Resorts and Voteco reviewed and considered as positive
factors the Jefferies & Company opinion, the Jefferies & Company opinion
was delivered to the Special Committee and the Pinnacle Board of Directors,
and none of Pinnacle Acq Corp, PHCR, Harveys Casino Resorts or Voteco is
entitled to rely on the Jefferies & Company opinion.
. In addition, each of Pinnacle Acq Corp, PHCR, Harveys Casino Resorts and
Voteco considered the measures taken by the Pinnacle Board of Directors and
the Special Committee, including the formation of the Special Committee,
the retention of legal and financial advisors by the Special Committee and
the arm's-length nature of the negotiations. See "--Recommendation of the
Special Committee and the Board of Directors; Fairness of the Pinnacle
Merger."
In view of the wide variety of factors considered in connection with the
evaluation of the transaction, Pinnacle Acq Corp, PHCR, Harveys Casino Resorts
and Voteco did not find it practicable to, and did not attempt to, quantify,
rank or otherwise assign relative weights to the specific factors they
considered in reaching their conclusions regarding the fairness of the
transaction.
Certain Federal Income Tax Consequences of the Pinnacle Merger
The following is a summary of certain material U.S. federal income tax
consequences of the Pinnacle Merger to holders of Pinnacle Common Stock in
general. This summary is based on the U.S. federal income tax law currently in
effect, which is subject to change, possibly with retroactive effect. This
summary does not discuss all aspects of U.S. federal income taxation which may
be important to particular holders of Pinnacle Common Stock in light of their
individual investment circumstances, including certain types of holders
subject to special tax rules (e.g., financial institutions, broker dealers,
insurance companies, partnerships, tax-exempt organizations, and foreign
taxpayers), or to holders who acquired their shares of Pinnacle Common Stock
through the exercise of options or otherwise as compensation. In addition,
this summary does not address state, local or foreign tax consequences. The
discussion below assumes that holders of Pinnacle Common Stock hold such stock
as "capital assets" (generally, property held for investment) under the
Internal Revenue Code of 1986, as amended (the "Code"). No rulings have been
or will be requested from the Internal Revenue Service (the "Service") with
respect to any of the matters discussed herein. There can be no assurance that
the Service would not take positions contrary to those described below or that
a court would not sustain the Service's position. Holders are urged to consult
their tax advisors regarding the specific federal, state, local and foreign
income and other tax consequences of the Pinnacle Merger.
58
The receipt of the merger consideration in the Pinnacle Merger by holders
of Pinnacle Common Stock will be a taxable transaction for federal income tax
purposes. Each holder's gain or loss per share of Pinnacle Common Stock will
generally be equal to the difference between the merger consideration received
per share and the holders basis in that particular share of the Pinnacle
Common Stock (subject to the discussion below relating to a stockholder's
contingent right to receive proceeds after closing). Such gain or loss will
generally be a capital gain or loss. In the case of individuals, trusts and
estates, such capital gain will be subject to a maximum federal income tax
rate of 20% for shares of Pinnacle Common Stock held for more than 12 months
prior to the date of disposition. Gain or loss must be calculated separately
for each block of stock held by a stockholder.
As described below in the section of this Proxy Statement titled "Merger
Agreement", at closing, a stockholder may receive not only cash but also a
Contingent Payment. If a stockholder receives cash and a Contingent Payment at
closing, and amounts due under the Contingent Payment are paid to the
stockholder in the same tax year as the closing, then the stockholder should
include the Contingent Payment in the calculation of gain or loss for the year
in which the closing occurs. If, on the other hand, a the Contingent Payment
remains outstanding at the end of the year in which the closing occurs, there
is a degree of uncertainty regarding the proper U.S. federal income tax
treatment of the receipt of the Contingent Payment.
The Company believes that the most appropriate treatment is to value the
Contingent Payment at the time of the Pinnacle Merger and include such value
as part of the merger consideration for purposes of determining gain or loss
from the Pinnacle Merger. Installment sale reporting is not available with
respect to such amounts because the Pinnacle Common Stock is publicly traded.
When cash is distributed with respect to the Contingent Payment, a portion
will be subject to tax as interest income (taxable at ordinary income rates),
and the remainder will be subject to tax as a principal payment. To the extent
the total principal payments vary from the value the stockholder placed on the
right to receive the contingent merger consideration proceeds, the stockholder
would recognize capital gain or loss to account for the variation. Any capital
loss associated with the principal payments in excess of three thousand
dollars may only offset capital gain and may not be carried back to prior
years.
It is possible that the receipt of the Contingent Payment could be treated
differently for tax purposes than described above. First, in rare and unusual
circumstances where the contingent rights in question are not susceptible to
valuation at the closing, it is possible for a stockholder to take the
position that this transaction falls under the "open transaction" doctrine.
Under the open transaction doctrine, the stockholder would not be required to
place a value on the Contingent Payment at the closing for purposes of
computing taxable income for that year. Rather any amounts received in the
future with respect to the Contingent Payment would be included in the
stockholder's taxable income in the year of receipt. Second, it is also
possible that the Internal Revenue Service (the "IRS") could require a
stockholder to include the full amount of potential payments related to the
Contingent Payment in income in the year in which the closing takes place.
Because the tax treatment with respect to the contingent right to receive
proceeds allocable to the Contingent Payment is unclear, and because the IRS
could assert that the Contingent Payment is a debt instrument, resulting in
tax treatment different than that described above, each holder of Pinnacle
Common Stock is urged to consult their tax advisor concerning the manner in
which they will report this transaction.
A holder of Pinnacle Common Stock may be subject to backup withholding at
the rate of 31% with respect to merger consideration received pursuant to the
Pinnacle Merger, unless the holder (i) is a corporation or comes within
certain other exempt categories and, when required, demonstrates this fact or
(ii) provides a correct taxpayer identification number ("TIN"), certifies
concerning no loss of exemption from backup withholding and otherwise complies
with applicable requirements of the backup withholding rules. To prevent the
possibility of backup federal income tax withholding on payments made with
respect to shares of Pinnacle Common Stock pursuant to the Pinnacle Merger,
each holder must provide the Disbursement Agent with his current TIN by
completing a Form W-9 or Substitute Form W-9. A holder of Pinnacle Common
Stock who does not provide his or her correct TIN may be subject to penalties
imposed by the IRS, as well as backup withholding. Any amount withheld under
these rules will be credited against the holder's federal income tax
liability. The Company (or its agent) will report to the holders of Pinnacle
Common Stock and the IRS the amount of any "reportable payments," as defined
in Section 3406 of the Code, and the amount of tax, if any, withheld with
respect thereto.
59
THE PINNACLE MERGER
Interests of Certain Persons in the Pinnacle Merger; Certain Relationships
In considering the recommendation of the Board of Directors with respect to
the Merger Agreement, Pinnacle's stockholders should be aware that the
following Management Stockholders of Pinnacle have interests in the Pinnacle
Merger that are in addition to or different from the interests of Pinnacle's
stockholders generally: R.D. Hubbard (Chairman of the Board and Chief
Executive Officer), G. Michael Finnigan (President and Chief Executive Officer
of Realty Investment Group, Inc., a subsidiary of the Company), Paul R. Alanis
(President and Chief Operating Officer), Loren Ostrow (Senior Vice President,
General Counsel and Secretary), J. Michael Allen (Senior Vice President and
Chief Operating Officer of the Company's Gaming Division), Clifford Kortman
(Vice President--Construction and Development of the Company's Gaming
Division), Bruce C. Hinckley (Chief Financial Officer, Senior Vice President
and Treasurer), Richard Delaney (Vice President--Hotel, Food & Beverage
Operations), Chris Plant (Corporate Controller), and Robert A. Callaway
(Associate General Counsel). The Special Committee and the Board of Directors
were aware of these actual or potential conflicts of interest and considered
them along with other matters described under "Special Factors--Recommendation
of the Special Committee and Board of Directors; Fairness of the Pinnacle
Merger."
Retained Equity Interest; Voting and Contribution Agreement
In connection with the Pinnacle Merger, the Management Stockholders will
contribute shares of Pinnacle Common Stock to PHCR in exchange for shares of
PHCR common stock and will exchange Pinnacle Stock Options (which will fully
vest on the closing of the Pinnacle Merger) for fully vested options to
purchase shares of PHCR common stock. As a result, the Management Stockholders
will have a continuing ownership interest in PHCR following the Pinnacle
Merger. See "Special Factors--Certain Effects of the Pinnacle Merger" and
"Voting and Contribution Agreement; Memorandum of Understanding."
The following table sets forth the shares and options that the Management
Stockholders currently plan to contribute and exchange, respectively as well
as the cash to be received with respect to shares of Pinnacle Common Stock and
Pinnacle Stock options not to be contributed to PHCR or exchanged for PHCR
options. Although the Management Stockholders may elect to change the mix of
stock and options to be contributed and exchanged set forth below, the
aggregate value of such items will remain the same.
Total Value
of Stock to Total Cash
Be to Be
Number of Number of Contributed Received in
Number of Number of Shares to Options and Options Respect of
Shares Options Be to Be to Be Stock and
Name Owned Owned Contributed Exchanged Exchanged Options
- ---- --------- --------- ----------- --------- ----------- -----------
R. D. Hubbard........... 2,619,820 282,000 1,349,545 0 $32,389,076 $34,079,604
G. Michael Finnigan..... 25,415 135,000 0 86,867 $ 1,000,000 $ 1,269,335
Paul R. Alanis.......... 300,000 400,000 300,000 273,756 $10,200,005 $ 1,743,745
Loren Ostrow(1)......... 50,000 125,000 50,000 90,176 $ 2,250,244 $ 481,007
J. Michael Allen........ 0 200,000 0 200,000 $ 2,371,875 $ 0
Cliff Kortman........... 0 92,500 0 66,131 $ 822,289 $ 318,649
Bruce Hinckley.......... 5,000 25,000 5,000 25,000 $ 477,813 $ 0
Richard Delaney......... 0 10,000 0 10,000 $ 92,500 $ 0
Robert Callaway......... 0 24,633 0 19,992 $ 200,000 $ 39,679
Chris Plant............. 50 18,300 0 18,300 $ 196,200 $ 0
--------- --------- --------- ------- ----------- -----------
Total................... 3,000,285 1,312,433 1,704,545 790,222 $50,000,000 $37,932,019
========= ========= ========= ======= =========== ===========
- --------
(1) The Ostrow Family Partnership holds a pecuniary interest in the shares Mr.
Ostrow holds.
60
For information regarding the merger consideration to be paid to members of
the Special Committee, see "Special Factors--Certain Effects of the Pinnacle
Merger."
Directors and Management of the Surviving Corporation
In accordance with the Memorandum of Understanding (described below) and
agreements among the parties thereto, upon consummation of the Pinnacle Merger
and subject to licensing and regulatory requirements, it is currently expected
that the Board of Directors of PHCR will include R. D. Hubbard, Chairman of
the PHCR Board, and Thomas J. Barrack, Jr. The PHCR Board of Directors also
may include other nominees determined by Colony Investors III, L.P., an
affiliate of Colony Capital formed to make private equity investments ("Colony
III"), or otherwise in accordance with agreements among the parties to the
Memorandum of Understanding, subject to licensing and regulatory restrictions.
In accordance with the Memorandum of Understanding and agreements among the
parties thereto, it is currently expected that Mr. Hubbard will be a member
of, and Mr. Barrack shall be designated as the Chairman of, the Executive
Committee of the PHCR Board. See "Voting and Contribution Agreement;
Memorandum of Understanding" and "--Plans for the Company After the Pinnacle
Merger--Board of Directors; Management."
Employment Agreements
Each of Messrs. Finnigan, Alanis, Ostrow, Allen and Kortman currently have
employment agreements with the Company. In connection with the Pinnacle
Merger, such agreements will be assumed by PHCR or its subsidiaries without
modification (except as necessary to reflect the Pinnacle Merger) and will
terminate, unless earlier terminated, on the respective dates set forth
therein.
Conduct of the Business of the Company if the Pinnacle Merger is Not
Consummated
If the Merger Agreement is not approved and adopted by the stockholders at
the Annual Meeting or if the Pinnacle Merger is not consummated, the Company
will continue to operate its business as presently operated.
Plans for the Company After the Pinnacle Merger
Acquired Shares; Continued Operation of the Company
Pursuant to the Merger Agreement, Pinnacle Acq Corp will be merged with and
into the Company, with the Company surviving as a wholly-owned subsidiary of
PHCR. As a result of the Pinnacle Merger, PHCR will acquire ownership of all
of the outstanding shares of capital stock of the Company. The shares of
Pinnacle Common Stock so acquired will be retired. PHCR has informed the
Company that, while no specific decisions have been made by the PHCR Board of
Directors with respect to the operations of the Company following the Pinnacle
Merger, except as otherwise described below or in other sections of this Proxy
Statement, it is expected that following the completion of the Pinnacle
Merger, PHCR will continue the business and operations of the Company and its
subsidiaries substantially as they currently are being conducted or are
proposed to be conducted.
Following the completion of the Pinnacle Merger, it is anticipated that the
operations of the Company will be integrated with the operations of Harveys
Casino Resorts. The nature, timing and other terms of this integration have
not been determined and will not likely be known with any certainty prior to
the time of the Annual Meeting. The Board of Directors and management of PHCR
and the Company following the Pinnacle Merger will, however, continue to
evaluate the Company's business, operations, corporate structure and
organization, policies, management and personnel over time and consider what
other changes, if any, would be desirable and, subject to the terms of the
Stockholders Agreement (described below) and the terms of any other agreements
governing the relationship among the parties, will make changes as they deem
appropriate. See "Stockholders Agreement."
61
To support the tax position of the Management Stockholders with respect to
their shares of Pinnacle Common Stock contributed to PHCR, PHCR has agreed in
the Memorandum of Understanding that upon the closing of the Pinnacle Merger
it:
. will represent and warrant that it has no present plan or intention to
liquidate the Company following the Pinnacle Merger,
. will not liquidate the Company for two years after the closing date of
the Pinnacle Merger unless it provides to the Management Stockholders an
opinion of counsel, based on customary assumptions but otherwise
substantially unqualified, that the liquidation would not cause the
contributions to PHCR of Pinnacle Common Stock by such Management
Stockholders to fail to qualify as exchanges under Section 351 of the
Internal Revenue Code, and
. will deliver to each Management Stockholder on the closing date of the
Pinnacle Merger a letter dated as of the closing date from Colony III
and each other investment vehicle used by Colony Capital that holds an
interest in PHCR at such time representing and warranting to such
stockholder that each such investment vehicle has no present intention
or plan to sell, exchange or otherwise dispose of any of its interests
in PHCR. The representations, warranties and covenants described in the
preceding two bullet points above will survive any transfer of the
ownership of 51% of the equity interest in PHCR held by Colony III or
any of its affiliates.
In addition, in the event that the Inglewood Sale has not closed on or
prior to the fifth business day prior to the closing date of the Pinnacle
Merger, the Company following the Pinnacle Merger will use its commercially
reasonable efforts to consummate such sale during the period beginning on the
date following the closing date and continuing through to but not including
December 31, 2001. See "Merger Agreement--Conditions to the Merger." No
assurances can be given that the Inglewood land sale will be consummated
either prior to or after the closing date of the Pinnacle Merger, and no
assurances can be given as to the terms of any such sale should any such sale
occur.
The amount and terms of any financing to be incurred by PHCR or its
subsidiaries in connection with the Pinnacle Merger and other transactions
described in this Proxy Statement and the use of the proceeds of any such
financing will be determined by the Board of Directors of Harveys Casino
Resorts, acting on behalf of PHCR. The Board of Directors of Harveys Casino
Resorts has not determined with certainty the amount, terms or use of proceeds
of any such financing. One of the conditions to Pinnacle Acq Corp's obligation
to consummate the Pinnacle Merger is the receipt by Pinnacle Acq Corp and
Harveys Acq Corp of cash proceeds of the "Financing." The "Financing" means
debt financing satisfying the terms specified in the Merger Agreement. See
"Merger Agreement--Conditions to the Pinnacle Merger."
PHCR has received a commitment letter with respect to a $900,000,000
aggregate principal amount senior secured credit facility, and PHCR and
certain of its affiliates have received "highly confident" letters with
respect to $550,000,000 aggregate principal amount of senior subordinated
debt. These amounts, together with substantially all of the Company's
available cash balance on hand at the closing, are material components of the
collective sources of funds expected to be used by PHCR to complete the
acquisition of the Company. In addition to the need to obtain the Financing,
to the extent that the Company's available cash balance on hand at the closing
is less than the aggregate amount necessary, together with such Financing, to
consummate the Pinnacle Merger and the other transactions contemplated by the
Merger Agreement, then PHCR's ability to consummate the Financing and the
Pinnacle Merger would likely be materially impaired. While the amount cannot
be known with certainty, it is expected that an aggregate of at least
$1,600,000,000 would be necessary to enable the payment in full of all amounts
to be paid by PHCR in connection with the Pinnacle Merger and the other
transactions contemplated by the Merger Agreement in the case where no
Pinnacle indebtedness is assumed by the acquiror.
Pinnacle Acq Corp has agreed in the Merger Agreement to use commercially
reasonable efforts to obtain and effectuate the Financing, however, PHCR and
its affiliates are under no obligation to obtain any additional financing or
make any equity investment in PHCR or its subsidiaries. In addition, the
Voting Agreement provides
62
that if affiliates of PHCR elect, in their sole discretion, to make an equity
investment in PHCR or its subsidiaries prior to the closing of the Pinnacle
Merger, such equity investment will be subject to the reasonable approval of
Mr. Hubbard. See "--Financing of the Pinnacle Merger and the Harveys Merger,"
"Merger Agreement--Financing of the Pinnacle Merger and the Harveys Merger"
and "Voting and Contribution Agreement; Memorandum of Understanding."
Board of Directors; Management
The Company. At the effective time of the Pinnacle Merger, the directors
and executive officers of Pinnacle Acq Corp immediately prior to the effective
time will become the directors and executive officers of the Company.
The sole director of Pinnacle Acq Corp is Thomas J. Barrack, Jr.
The officers of Pinnacle Acq Corp are:
Thomas J. Barrack, Jr. Chief Executive Officer
Charles W. Scharer President
John J. McLaughlin Chief Financial Officer, Treasurer and Secretary
PHCR. In accordance with the Memorandum of Understanding and agreements
among the parties thereto, upon consummation of the Pinnacle Merger and
subject to licensing and regulatory requirements, it is currently expected
that the PHCR Board of Directors will include R.D. Hubbard as Chairman and
Thomas J. Barrack, Jr. The PHCR Board of Directors also may include other
nominees determined by Colony III or otherwise in accordance with agreements
among the parties to the Memorandum of Understanding. The size of the PHCR
board following the Pinnacle Merger has not been determined and no other
determinations have been made as to board composition following the Pinnacle
Merger.
The Memorandum of Understanding also provides that following the Pinnacle
Merger the PHCR Board of Directors will delegate to an executive committee of
the PHCR Board of Directors, to the extent permitted under applicable law,
substantially all of its powers to govern the business and affairs of the
Company. In accordance with the Memorandum of Understanding and agreements
among the parties thereto, it is currently expected that Mr. Hubbard will be a
member of, and Mr. Barrack will be designated as the Chairman of, the
executive committee.
Certificate of Incorporation and Bylaws of the Company
As a result of the Pinnacle Merger, the certificate of incorporation of
Pinnacle Acq Corp, as in effect immediately prior to the effective time of the
Pinnacle Merger, will become the certificate of incorporation of the Company
after the effective time. The certificate of incorporation will be amended to
provide that the name of the Company will be a name to be selected by Pinnacle
Acq Corp prior to the effective time of the Pinnacle Merger. Also as a result
of the Pinnacle Merger, the bylaws of Pinnacle Acq Corp, as in effect
immediately prior to the effective time of the Pinnacle Merger, will become
the bylaws of the Company. In addition to any changes to the certificate of
incorporation and bylaws of Pinnacle Acq Corp which may be made by Pinnacle
Acq Corp prior to the effective time, the certificate of incorporation and
bylaws of the Company may be amended after the effective time in accordance
with their respective terms and as provided by law.
Delisting and Deregistration of Pinnacle Common Stock
Following the closing of the Pinnacle Merger, the Pinnacle Common Stock
will be delisted from the New York Stock Exchange and will become eligible for
termination of registration pursuant to Section 12(g)(4) of the Exchange Act.
The Company intends to terminate the registration of the Pinnacle Common Stock
under
63
the Exchange Act as soon as practicable following the completion of the
Pinnacle Merger. Upon such termination of registration, the Company will cease
to be a reporting company.
Other Plans or Proposals
Except as described in this Proxy Statement, none of Harveys Casino
Resorts, PHCR, Pinnacle Acq Corp, the Company or the Management Stockholders
has any present plans or proposals involving the Company or its subsidiaries
which relate to or would result in an extraordinary corporate transaction such
as a merger, reorganization, liquidation, or purchase, sale or transfer of a
material amount of assets; any material change in the present dividend rate or
policy, indebtedness or capitalization; or any other material change in the
Company's corporate structure or business.
Financing of the Pinnacle Merger and the Harveys Merger
The amount and terms of any financing to be incurred by PHCR or its
subsidiaries in connection with the Pinnacle Merger and the other transactions
described in this Proxy Statement and the use of the proceeds of any such
financing will be determined by the Board of Directors of Harveys Casino
Resorts, acting on behalf of PHCR. The Board of Directors of Harveys Casino
Resorts has not determined with certainty the amount, terms or use of proceeds
of any such financing. However, PHCR has received a commitment letter with
respect to a $900,000,000 aggregate principal amount senior secured credit
facility, and PHCR and certain of its affiliates have received "highly
confident" letters with respect to $550,000,000 aggregate principal amount of
senior subordinated debt. Such commitment letter and such highly confident
letters are referred to in this Proxy Statement as the "Financing Letters." As
of the date of this Proxy Statement, the Financing Letters are in full force
and effect and have not been terminated. The Financing Letters are summarized
below.
Senior Secured Credit Facility
PHCR has received a commitment from Canadian Imperial Bank of Commerce,
Bankers Trust Company and Lehman Commercial Paper Inc. to provide, on a
several and not joint basis, a $900,000,000 senior secured credit facility
(the "Senior Credit Facility") in accordance with the allocations set forth in
the letter agreement providing such commitment. CIBC World Markets Corp has
agreed to use reasonable commercial efforts to arrange a syndicate of other
banks and financial institutions (including the above referenced lenders) to
provide a portion of the Senior Credit Facility. The obligations of PHCR under
the Senior Credit Facility are expected to be guaranteed by all of the direct
and indirect domestic subsidiaries (the "Guarantors") of PHCR, including
Harveys Casino Resorts and Pinnacle. The Senior Credit Facility is expected to
be secured by a security interest in substantially all the assets of PHCR and
the Guarantors and 65% of the stock of PHCR's foreign subsidiaries. The Senior
Credit Facility is expected to contain representations and warranties,
negative and affirmative covenants (including financial maintenance
covenants), conditions and events of default which are customarily required
for similar financings. The commitment to provide the Senior Credit Facility
is subject to conditions precedent customary for facilities of this nature.
Senior Subordinated Debt
PHCR and certain of its affiliates also have received "highly confident"
letters with respect to $550,000,000 of senior subordinated debt (the "Senior
Subordinated Debt"). Certain affiliates of PHCR have received a letter dated
April 12, 2000 from Bear Stearns stating that based on current market
conditions and the information received as of the date thereof regarding
Harveys Casino Resorts and Pinnacle, it is highly confident, as of the date
thereof, of its ability to privately place the Senior Subordinated Debt.
Similarly, PHCR has received a letter dated April 16, 2000 from Lehman
Brothers, confirming that, based upon current market conditions and its
present understanding of the transaction as of the date thereof, Lehman is
highly confident, as of the date thereof, of its ability to sell or place the
Senior Subordinated Debt. The placement and sale of the Senior Subordinated
Debt under both highly confident letters are subject to conditions precedent
customary for financing of this type. Neither of the highly confident letters
constitutes a commitment or an undertaking on the part of either Bear
64
Stearns or Lehman Brothers to place or purchase the Senior Subordinated Debt
or provide any portion of the financing. The receipt of the highly confident
letters does not ensure the successful placement or completion of an offering
of senior subordinated debt.
Other Plans With Respect to Financing
If the financing described above is obtained, PHCR currently has no plans
to refinance or repay such financing except in accordance with the respective
terms of the Senior Credit Facility and the Senior Subordinated Debt. The
board of directors and management of PHCR following the merger will, however,
continue to evaluate the business, operations and financial condition of PHCR
and its subsidiaries over time and consider what other changes, if any, would
be desirable and, subject to the terms of any applicable agreements governing
the relationship among the parties, will make changes as they deem
appropriate.
One of the conditions to Pinnacle Acq Corp's obligation to consummate the
Pinnacle Merger is the receipt by Pinnacle Acq Corp and Harveys Acq Corp of
cash proceeds of the "Financing." See "Merger Agreement--Conditions to the
Pinnacle Merger." "Financing" means debt financing satisfying the terms
specified in the Merger Agreement. (See Merger Agreement--Financing of the
Pinnacle Merger and the Harveys Merger"), which financing, together with any
indebtedness of the Company assumed in the Pinnacle Merger, is in an amount
sufficient to enable the payment, in full, of (1) the Pinnacle merger
consideration, (2) all payments in connection with the cancellation of the
Pinnacle stock options, (3) all other related payments in connection with the
Pinnacle Merger and the Harveys Merger and (4) related fees and expenses. The
sum of such amounts is not known and will not be known with any certainty at
the time of the Annual Meeting. It is expected that an aggregate of at least
$1,600,000,000 would be necessary to enable the payment in full of such
amounts in the case where no such Pinnacle indebtedness is assumed.
As described above, PHCR has received a commitment letter with respect to a
$900,000,000 aggregate principal amount senior secured credit facility, and
PHCR and certain of its affiliates have received "highly confident" letters
with respect to $550,000,000 aggregate principal amount of senior subordinated
debt. These amounts, together with substantially all of the Company's
available cash balance on hand at the closing are material components of the
collective sources of funds expected to be used by PHCR to complete the
acquisition of the Company. In addition to the need to obtain the Financing,
to the extent that the Company's available cash balance on hand at the closing
is less than the aggregate amount necessary, together with such Financing, to
consummate the Pinnacle Merger and the other transactions contemplated by the
Merger Agreement, then PHCR's ability to consummate the Financing and the
Pinnacle Merger would likely be materially impaired. Pinnacle Acq Corp has
agreed in the Merger Agreement to use commercially reasonable efforts to
obtain and effectuate the Financing, however, PHCR and its affiliates are
under no obligation to obtain any additional financing or make any equity
investment in PHCR or its subsidiaries. In addition, the Voting Agreement
provides that if affiliates of PHCR elect, in their sole discretion, to make
an equity investment in PHCR or its subsidiaries prior to the closing of the
Pinnacle Merger, such equity investment will be subject to the reasonable
approval of Mr. Hubbard. See "Voting and Contribution Agreement; Memorandum of
Understanding."
The amount and terms of any financing to be incurred by PHCR or its
subsidiaries in connection with the Pinnacle Merger and the other transactions
described in this Proxy Statement and the use of the proceeds of any such
financing will be determined by the Board of Directors of Harveys Casino
Resorts, acting on behalf of PHCR. The Board of Directors of Harveys Casino
Resorts has not determined with certainty the amount, terms or use of proceeds
of any such financing.
As of the date of this Proxy Statement, PHCR has not entered into any
definitive loan agreements with respect to any financing and no assurance can
be given that PHCR will enter into definitive loan agreements with respect to
any financing or that any financing will be obtained. PHCR currently does not
have any alternative financing plans or arrangements in the event that
financing is not obtained.
65
Regulatory Requirements
Antitrust Laws
Transactions such as the Pinnacle Merger are reviewed by the Antitrust
Division of the United States Department of Justice (the "DOJ") and the United
States Federal Trade Commission (the "FTC") to determine whether they comply
with applicable antitrust laws. Under the provisions of the Hart-Scott-Rodino
Antitrust Improvements Act of 1976, as amended (the "HSR Act"), the Pinnacle
Merger may not be consummated until such time as the applicable waiting period
under the HSR Act has expired or been terminated. The Merger Agreement also
provides that the expiration or termination of such applicable waiting period
is a contractural condition to the closing of the Pinnacle Merger. See "Merger
Agreement--Conditions to Closing." Pinnacle and one or more affiliates of PHCR
intend to file notification reports, together with requests for early
termination of the waiting period, with the DOJ and the FTC under the HSR Act
immediately following the Annual Meeting. At any time before or after
consummation of the Pinnacle Merger, the DOJ, the FTC or a private person or
entity could seek under the antitrust laws, among other things, to enjoin the
Pinnacle Merger or cause PHCR following the Pinnacle Merger to divest, in
whole or in part, Harveys Casino Resorts, Pinnacle or any other business
conducted by PHCR. There can be no assurance that a challenge to the Pinnacle
Merger will not be made or that, if such a challenge is made, Pinnacle and
PHCR will prevail.
Gaming Regulation
The Company's gaming operations are subject to extensive regulation, and
the Company now holds gaming licenses or permits in the six jurisdictions in
which it operates gaming activities (Nevada, Mississippi, Louisiana,
Argentina, California and Arizona) and has received a certificate of
suitability (pending completion of the project and receipt of a riverboat
owner's license) in Indiana, the location of the new Belterra Resort and
Casino which is scheduled for completion on August 2000. In each such
jurisdiction, certain regulatory requirements must be complied with,
applications filed, and/or certain approvals must be obtained in connection
with the Pinnacle Merger. The parties' obligations to consummate the Pinnacle
Merger are subject, among other things, to the condition that all necessary
gaming licenses, permits, findings of suitability and other regulatory
approvals and authorizations shall have been obtained. No assurances can be
given that the necessary gaming regulatory approvals and authorizations will
be obtained or that they will be obtained on a timely basis. Review of the
Pinnacle Merger by gaming regulatory authorities will involve examination of
the structure of the Company and its financial stability after the Pinnacle
Merger and will require the demonstration of qualifications and suitability of
key individuals associated with PHCR and Voteco. The failure to obtain the
required approval of the Pinnacle Merger, or the failure to comply with the
procedural requirements prescribed by any applicable gaming regulatory
authority the failure of the Company or such key individuals to qualify or
make disclosure or license applications as required or a determination that
any limited partner of Colony III or any other affiliate of Colony Capital is
obligated to make any filings or be found suitable under the laws and
regulations of any applicable gaming regulatory authority may result in the
loss of license or denial of application for licensure in one or all
jurisdictions.
The following is an abbreviated description of the various gaming
regulatory requirements applicable to the Pinnacle Merger. For a more detailed
description of these gaming regulatory requirements generally, please see
"Government Regulation" in Item 1 of the Annual Report on Form 10-K of
Pinnacle for the year ended December 31, 1999 and "Regulatory Matters" in Item
1 of the Annual Report on Form 10-K of Harveys Casino Resorts for the year
ended December 31, 1999.
Nevada Gaming Regulations. The ownership and operation of casino gaming
facilities in Nevada are subject to the Nevada Gaming Control Act and the
regulations of the Nevada Gaming Commission and the Nevada State Gaming
Control Board (collectively, the "Nevada Act") and various local ordinances
and regulations. Pinnacle's gaming operations are subject to the licensing and
regulatory control of the Nevada Gaming Commission, the Nevada State Gaming
Control Board, the Clark County Liquor and Gaming Licensing Board and Washoe
County (collectively, the "Nevada Gaming Authorities").
66
Regulations of the Nevada Gaming Commission provide that control of a
registered publicly traded corporation such as Pinnacle cannot be acquired
through a tender offer, merger, consolidation, acquisition of assets,
management or consulting agreements or any form of takeover whatsoever without
the prior approval of the Nevada Gaming Commission. PHCR will file
applications seeking the necessary approvals with the Nevada State Gaming
Control Board and the Nevada Gaming Commission. The Nevada State Gaming
Control Board reviews and investigates applications for approval and makes
recommendations on those applications to the Nevada Gaming Commission for
final action. There can be no assurance that these approvals will be granted
or will be granted on a timely basis or without burdensome conditions.
Furthermore, any such approval, if granted, does not constitute a finding,
recommendation or approval by the Nevada State Gaming Control Board or the
Nevada Gaming Commission as to the merits of the Pinnacle Merger. Any
representation to the contrary is unlawful.
In seeking approval to acquire control of Pinnacle, PHCR must satisfy the
Nevada Gaming Commission as to a variety of stringent standards. The Nevada
State Gaming Control Board and the Nevada Gaming Commission will consider all
relevant material facts in determining whether to grant this approval, and may
consider not only the effects of the Pinnacle Merger but also any other facts
that are deemed relevant. Such facts may include, among others, (1) the
business history of the applicant, including its record of financial
stability, integrity and success of its operations, as well as its current
business activities, (2) the adequacy of the proposed financing, and (3)
whether the Pinnacle Merger will create a significant risk that Pinnacle or
its subsidiaries will not satisfy their financial obligations as they become
due or satisfy all financial and regulatory requirements imposed by the Nevada
Act.
The Nevada State Gaming Control Board and the Nevada Gaming Commission will
also consider whether the acquisition of control of Pinnacle is in the best
interests of the State of Nevada under the multiple licensing criteria in the
Nevada Act. Among other factors set forth in such multiple licensing criteria,
they may consider whether the acquisition would pose problems or create a
monopoly, and what the result of the acquisition of control will be in respect
of the percentage of interest of Pinnacle to similarly situated competitors on
a statewide, countrywide and geographical basis in the following categories;
total number of slot machines, total number of games, total number of tables,
gross revenue, percentage tax, casino entertainment tax, number of rooms
available for the public, number of employees hired and total payroll.
Following receipt of the necessary approvals of the Nevada Gaming
Commission and completion of the Pinnacle Merger, Pinnacle will be registered
by the Nevada Gaming Commission as an intermediary company of its gaming
subsidiaries.
PHCR will file an application with the Nevada State Gaming Control Board
and the Nevada Gaming Commission to be registered as a publicly traded
corporation and to be found suitable as the sole stockholder of Pinnacle and
Harveys Casino Resorts at the time of completion of the Pinnacle Merger. In
addition, certain officers, directors and key employees of PHCR at the time of
completion of the Pinnacle Merger who will be actively and directly involved
in Pinnacle's and Harveys Casino Resorts' gaming activities may also be
required to be found suitable or licensed by the Nevada Gaming Authorities.
The Nevada Gaming Authorities may deny an application for licensing, a finding
of suitability or registration for any cause that they deem reasonable. A
finding of suitability is comparable to licensing, and both require the
submission of detailed personal and financial information followed by a
thorough investigation. All individuals required to file applications for
findings of suitability as officers and directors of PHCR at the time of
completion of the Pinnacle Merger will file applications with the Nevada State
Gaming Control Board and the Nevada Gaming Commission. Certain approvals may
also be required to be obtained in connection with the Financing and such
approvals will be applied for. There can be no assurances that these approvals
will be granted or will be granted within this time.
Mississippi Gaming Regulations. The ownership and operation of casino
gaming facilities in Mississippi are subject to the Mississippi Gaming Control
Act and various local regulations. Pinnacle's gaming operations in Mississippi
are subject to the licensing and regulatory control of the Mississippi Gaming
Commission.
67
Regulations of the Mississippi Gaming Commission provide that control of a
registered publicly traded corporation such as Pinnacle cannot be acquired
through a tender offer, merger, consolidation, acquisition of assets,
management or consulting agreements or any form of takeover whatsoever without
the prior approval of the Mississippi Gaming Commission. PHCR will file an
application seeking the necessary approvals with the Mississippi Gaming
Commission. There can be no assurance that these approvals will be granted or
will be granted on a timely basis or without burdensome conditions.
Furthermore, any such approval, if granted, does not constitute a finding,
recommendation or approval by the Mississippi Gaming Commission as to the
merits of the Pinnacle Merger. Any representation to the contrary is unlawful.
In seeking approval to acquire control of Pinnacle, PHCR must satisfy the
Mississippi Gaming Commission as to a variety of stringent standards. The
Mississippi Gaming Commission will consider all relevant material facts in
determining whether to grant this approval, and may consider not only the
effects of the Pinnacle Merger but also any other facts that are deemed
relevant. Such facts may include, among others, (1) the business history of
the applicant, including its record of financial stability, integrity and
success of its operations, as well as its current business activities, and (2)
whether the Pinnacle Merger will create a significant risk that Pinnacle or
its subsidiaries will not satisfy their financial obligations as they become
due or satisfy all financial and regulatory requirements imposed by the
Mississippi Gaming Control Act.
The Mississippi Gaming Commission must approve PHCR as a holding company of
Pinnacle. Following receipt of the necessary approvals of the Mississippi
Gaming Commission and completion of the Pinnacle Merger, Pinnacle will be
registered by the Mississippi Gaming Commission as an intermediary company of
PHCR.
Certain officers, directors and key employees of Pinnacle prior to the
Pinnacle Merger, or PHCR after completion of the Pinnacle Merger, who will be
actively and directly involved in Pinnacle's gaming activities may also be
required to be found suitable or licensed by the Mississippi Gaming
Commission. The Mississippi Gaming Commission may deny an application for
licensing, a finding of suitability or registration for any cause that it
deems reasonable. A finding of suitability is comparable to licensing, and
both require the submission of detailed personal and financial information
followed by a thorough investigation. All individuals required to file
applications for findings of suitability as officers and directors of PHCR and
Pinnacle at the time of completion of the Pinnacle Merger will file
applications with the Mississippi Gaming Commission. Certain approvals may
also be required to be obtained in connection with the Financing and such
approvals will be applied for. There can be no assurances that these approvals
will be granted or will be granted within this time.
Other Jurisdictions. Approvals for the Pinnacle Merger also will be
required in the states of Washington, Indiana, Iowa, Colorado and Louisiana.
Approvals or filings with respect to the Pinnacle Merger may also be required
in California and Argentina. All required applications and filings will be
made.
Legal Proceedings
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 breached their fiduciary duty to
the stockholders of the Company by agreeing to negotiate exclusively with
Harveys Casino Resorts. See "Special Factors--Background of the Pinnacle
Merger." On March 21, 2000, Leta Hilliard filed a similar class action lawsuit
in the Superior Court of the State of California. The plaintiffs in the
lawsuits claim that the Company and its directors failed to undertake an
appropriate process for evaluating the value of the Company and eliciting bids
from third parties, and that the price for the stock is inadequate. The
Company intends to vigorously defend these actions and believes that the
plaintiffs' claims are without merit.
68
Fees and Expenses
Except as disclosed in this Proxy Statement and as set forth in the Merger
Agreement, all fees and expenses incurred in connection with the Pinnacle
Merger, the Merger Agreement and any other transactions contemplated thereby
will be paid by the party incurring such fees and expenses, whether or not the
Pinnacle Merger is consummated, except that the Company will pay all expenses
relating to the printing, filing and mailing of the Proxy Statement.
The Company will pay $150,000 to Mr. Reitnouer for his service as chairman
of the Special Committee and $50,000 to each other member of the Special
Committee for his service thereon.
The Company estimates that merger-related fees and expenses will total
approximately $ , as follows:
Financing and Commitment Fees...................................... $
Filing Fees........................................................
Special Committee's Legal and Financial Advisors' Fees and
Expenses..........................................................
Legal Fees and Expenses............................................
Accounting Fees and Expenses.......................................
Special Committee Fees.............................................
Printing, Solicitation and Mailing Costs...........................
Miscellaneous......................................................
-----
Total.............................................................. $
=====
Under certain circumstances, the Company is obligated to pay Pinnacle Acq
Corp a Termination Fee. See "Merger Agreement--Termination Fee."
Accounting Treatment
The Pinnacle Merger will be accounted for as a "purchase" in accordance with
generally accepted accounting principles. Consequently, the aggregate
consideration paid in connection with the Pinnacle Merger will be allocated to
the assets and liabilities of the Company based upon their fair values, with
any excess being treated as goodwill.
APPRAISAL RIGHTS
If the Pinnacle Merger is consummated, holders of shares of Pinnacle Common
Stock are entitled to appraisal rights under Section 262 of the Delaware
General Corporation Law ("Section 262"), provided that they comply with the
conditions established by Section 262.
Section 262 is reprinted in its entirety as Annex C to this Proxy Statement.
The following discussion is not a complete statement of the law relating to
appraisal rights and is qualified in its entirety by reference to Annex C. This
discussion and Annex C should be reviewed carefully by any holder who wishes to
exercise statutory appraisal rights or who wishes to preserve the right to do
so, as failure to comply with the procedures set forth in Section 262 will
result in the loss of appraisal rights.
A record holder of shares of Pinnacle Common Stock who makes the demand
described below with respect to such shares, who continuously is the record
holder of such shares through the effective time of the Pinnacle Merger, who
otherwise complies with the statutory requirements of Section 262 and who
neither votes in favor of the Pinnacle Merger nor consents thereto in writing
will be entitled to an appraisal by the Delaware Court of Chancery (the
"Delaware Court") of the fair value of his or her shares of Pinnacle Common
Stock. All references in this summary of appraisal rights to a "stockholder" or
"holders of shares of Pinnacle Common
69
Stock" are to the record holder or holders of shares of Pinnacle Common Stock.
Except as set forth herein, stockholders of the Company will not be entitled
to appraisal rights in connection with the Pinnacle Merger.
Under Section 262, where a merger is to be submitted for approval at a
meeting of stockholders, such as the Annual Meeting, not less than 20 days
prior to the meeting a constituent corporation must notify each of the holders
of its stock for whom appraisal rights are available that such appraisal
rights are available and include in each such notice a copy of Section 262.
This Proxy Statement shall constitute such notice to the record holders of
Pinnacle Common Stock.
Holders of shares of Pinnacle Common Stock who desire to exercise their
appraisal rights must not vote in favor the Pinnacle Merger and must deliver a
separate written demand for appraisal to the Company prior to the vote by the
stockholders of the Company on the Pinnacle Merger. A demand for appraisal
must be executed by or on behalf of the stockholder of record and must
reasonably inform the Company of the identity of the stockholder of record and
that such stockholder intends thereby to demand appraisal of the Pinnacle
Common Stock. A proxy or vote against the Pinnacle Merger will not by itself
constitute such a demand. Within ten days after the effective time of the
Pinnacle Merger, the Company must provide notice of the effective time of the
Pinnacle Merger to all stockholders who have complied with Section 262.
A stockholder who elects to exercise appraisal rights should mail or
deliver his or her written demand to 330 North Brand Boulevard, Suite 1100,
Glendale, California 91203, Attention: Corporate Secretary.
A person having a beneficial interest in shares of Pinnacle Common Stock
that are held of record in the name of another person, such as a broker,
fiduciary, depositary or other nominee, must act promptly to cause the record
holder to follow the steps summarized herein properly and in a timely manner
to perfect appraisal rights. If the shares of Pinnacle Common Stock are owned
of record by a person other than the beneficial owner, including a broker,
fiduciary (such as a trustee, guardian or custodian), depositary or other
nominee, such demand must be executed by or for the record owner. If the
shares of Pinnacle Common Stock are owned of record by more than one person,
as in a joint tenancy or tenancy in common, such demand must be executed by or
for all joint owners. An authorized agent, including an agent for two or more
joint owners, may execute the demand for appraisal for a stockholder of
record; however, the agent must identify the record owner and expressly
disclose the fact that, in exercising the demand, such person is acting as
agent for the record owner. If a stockholder holds shares of Pinnacle Common
Stock through a broker who in turn holds the shares through a central
securities depository nominee such as Cede & Co., a demand for appraisal of
such shares must be made by or on behalf of the depository nominee and must
identify the depository nominee as record holder.
A record holder, such as a broker, fiduciary, depositary or other nominee,
who holds shares of Pinnacle Common Stock as a nominee for others, may
exercise appraisal rights with respect to the shares held for all or less than
all beneficial owners of shares as to which such person is the record owner.
In such case, the written demand must set forth the number of shares covered
by such demand. Where the number of shares is not expressly stated, the demand
will be presumed to cover all shares of Pinnacle Common Stock outstanding in
the name of such record owner.
Within 120 days after the effective time of the Pinnacle Merger, either the
Company or any stockholder who has complied with the required conditions of
Section 262 may file a petition in the Delaware Court, with a copy served on
the Company in the case of a petition filed by a stockholder, demanding a
determination of the fair value of the shares of all dissenting stockholders.
There is no present intent on the part of the Company to file an appraisal
petition and stockholders seeking to exercise appraisal rights should not
assume that the Company will file such a petition or that the Company will
initiate any negotiations with respect to the fair value of such shares.
Accordingly, holders of Pinnacle Common Stock who desire to have their shares
appraised should initiate any petitions necessary for the perfection of their
appraisal rights within the time periods and in the manner prescribed in
Section 262. Within 120 days after the effective time of the Pinnacle Merger,
any stockholder who has theretofore complied with the applicable provisions of
Section 262 will be entitled, upon written request, to receive from the
Company a statement setting forth the aggregate number of shares of
70
Pinnacle Common Stock not voting in favor of the Pinnacle Merger and with
respect to which demands for appraisal were received by the Company and the
number of holders of such shares. Such statement must be mailed (i) within 10
days after the written request therefor has been received by the Company or
(ii) within 10 days after the expiration of the period for the delivery of
demands as described above, whichever is later.
If a petition for an appraisal is timely filed, at the hearing on such
petition, the Delaware Court will determine which stockholders are entitled to
appraisal rights. The Delaware Court may require the stockholders who have
demanded an appraisal for their shares and who hold stock represented by
certificates to submit their certificates of stock to the Register in Chancery
for notation thereon of the pendency of the appraisal proceedings; and if any
stockholder fails to comply with such direction, the Delaware Court may
dismiss the proceedings as to such stockholder. Where proceedings are not
dismissed, the Delaware Court will appraise the shares of Pinnacle Common
Stock owned by such stockholders, determining the fair value of such shares
exclusive of any element of value arising from the accomplishment or
expectation of the Pinnacle Merger, together with a fair rate of interest, if
any, to be paid upon the amount determined to be the fair value.
Although the Company believes that the merger consideration is fair, no
representation is made as to the outcome of the appraisal of fair value as
determined by the Delaware Court and stockholders should recognize that such
an appraisal could result in a determination of a value higher or lower than,
or the same as, the merger consideration. Moreover, the Company does not
anticipate offering more than the merger consideration to any stockholder
exercising appraisal rights and reserves the right to assert, in any appraisal
proceeding, that, for purposes of Section 262, the "fair value" of a share of
Pinnacle Common Stock is less than the merger consideration. In determining
"fair value", the Delaware Court is required to take into account all relevant
factors. In Weinberger v. UOP, Inc., the Delaware Supreme Court discussed the
factors that could be considered in determining fair value in an appraisal
proceeding, stating that "proof of value by any techniques or methods which
are generally considered acceptable in the financial community and otherwise
admissible in court" should be considered and that "[f]air price obviously
requires consideration of all relevant factors involving the value of a
company." The Delaware Supreme Court has stated that in making this
determination of fair value the court must consider market value, asset value,
dividends, earnings prospects, the nature of the enterprise and any other
facts which could be ascertained as of the date of the merger which throw any
light on future prospects of the merged corporation. Section 262 provides that
fair value is to be "exclusive of any element of value arising from the
accomplishment or expectation of the merger." In Cede & Co. v. Technicolor,
Inc., the Delaware Supreme Court stated that such exclusion is a "narrow
exclusion [that] does not encompass known elements of value," but which rather
applies only to the speculative elements of value arising from such
accomplishment or expectation. In Weinberger, the Delaware Supreme Court
construed Section 262 to mean that "elements of future value, including the
nature of the enterprise, which are known or susceptible of proof as of the
date of the merger and not the product of speculation, may be considered."
The cost of the appraisal proceeding may be determined by the Delaware
Court and charged against the parties as the Delaware Court deems equitable
under the circumstances. However, costs do not include attorneys' and expert
witness fees. Each dissenting stockholder is responsible for his or her
attorneys' and expert witness expenses, although, upon application of a
dissenting stockholder of the Company, the Delaware Court may order that all
or a portion of the expenses incurred by any dissenting stockholder in
connection with the appraisal proceeding, including without limitation,
reasonable attorneys' fees and the fees and expenses of experts, be charged
pro rata against the value of all shares of stock entitled to appraisal.
Any holder of shares of Pinnacle Common Stock who has duly demanded
appraisal in compliance with Section 262 will not, after the effective time of
the Pinnacle Merger, be entitled to vote for any purpose any shares subject to
such demand or to receive payment of dividends or other distributions on such
shares, except for dividends or distributions payable to stockholders of
record at a date prior to the effective time of the Pinnacle Merger.
At any time within 60 days after the effective time of the Pinnacle Merger,
any stockholder will have the right to withdraw such demand for appraisal and
to accept the terms offered in the Pinnacle Merger; after this
71
period, the stockholder may withdraw such demand for appraisal only with the
consent of the Company. If no petition for appraisal is filed with the
Delaware Court within 120 days after the effective time of the Pinnacle
Merger, stockholders' rights to appraisal shall cease, and all holders of
shares of Pinnacle Common Stock will be entitled to receive the consideration
offered pursuant to the Merger Agreement. Inasmuch as the Company has no
obligation to file such a petition, and the Company has no present intention
to do so, any holder of shares of Pinnacle Common Stock who desires such a
petition to be filed is advised to file it on a timely basis. Any stockholder
may withdraw such stockholder's demand for appraisal by delivering to the
Company a written withdrawal of his or her demand for appraisal, except (i)
that any such attempt to withdraw made more than 60 days after the effective
time of the Pinnacle Merger will require written approval of the Company and
(ii) that no appraisal proceeding in the Delaware Court shall be dismissed as
to any stockholder without the approval of the Delaware Court, and such
approval may be conditioned upon such terms as the Delaware Court deems just.
FAILURE TO COMPLY STRICTLY WITH ALL OF THE PROCEDURES SET FORTH IN SECTION
262 WILL RESULT IN THE LOSS OF A STOCKHOLDER'S STATUTORY APPRAISAL RIGHTS.
CONSEQUENTLY, ANY STOCKHOLDER WISHING TO EXERCISE APPRAISAL RIGHTS IS URGED TO
CONSULT LEGAL COUNSEL BEFORE ATTEMPTING TO EXERCISE SUCH RIGHTS.
MERGER AGREEMENT
The terms and conditions of the Pinnacle Merger are contained in the Merger
Agreement, a copy of which is attached as Annex A to this Proxy Statement.
Stockholders are urged to read the Merger Agreement carefully. The
descriptions of certain terms and conditions of the Merger Agreement are set
forth below and are qualified in their entirety by reference to the complete
text of the Merger Agreement, which is incorporated herein by reference.
Capitalized terms not otherwise defined in the following description have the
meanings set forth in the Merger Agreement.
General
The Merger Agreement provides that at the Effective Time (as defined
below), Pinnacle Acq Corp will be merged with and into the Company in
accordance with the Delaware General Corporation Law (the "DGCL"). Following
the Pinnacle Merger, Pinnacle shall continue as the surviving corporation (the
"Pinnacle Surviving Corporation") and the separate corporate existence of
Pinnacle Acq Corp will cease.
Effective Time
The Merger Agreement provides that the Pinnacle Merger will become
effective at the time the Certificate of Merger is duly filed with the
Secretary of State of the State of Delaware, or at such later time as PHCR,
Pinnacle, and Pinnacle Acq Corp shall agree and specify in the Certificate of
Merger (the "Effective Time"). Such filing will be made on or prior to the
closing date of the Pinnacle Merger. Such closing date shall be no later than
the third business day after the date on which all of the conditions to the
parties' obligations to consummate the Pinnacle Merger have been satisfied or
waived unless another date is agreed to in writing by PHCR, the Company and
Pinnacle Acq Corp. Such conditions include the receipt by Pinnacle Acq Corp of
the necessary gaming licenses, permits and approvals from the gaming
authorities of the states of Arizona, California, Colorado, Indiana, Iowa,
Louisiana, Mississippi, Nevada and Washington, the Washoe County Board of
Commissioners, the Yakama Tribal Gaming Commission, the National Indian Gaming
Commission and the Provincial Government of Neuquen, Argentina (taken
together, "Gaming Authorities"). See "--Conditions to the Pinnacle Merger."
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Conversion of Pinnacle Shares and Stock Options; Contingent Payment
Shares of Pinnacle Common Stock
As of the Effective Time, each share of Pinnacle Common Stock outstanding
immediately prior to the Effective Time (other than (i) shares held by PHCR,
Pinnacle and its subsidiaries or Pinnacle Acq Corp, (ii) shares with respect
to which holders have perfected their appraisal rights in accordance with
Delaware law, (iii) Hubbard Redemption Shares (as defined below), and (iv)
Contributed Shares (as defined below)) will be converted into the right to
receive $24.00 in cash, without interest, subject to increase by up to $1.00
per share as described below. All shares of Pinnacle Common Stock held by
Pinnacle or any of its subsidiaries as treasury shares, or by Pinnacle Acq
Corp, will be canceled, and each issued and outstanding share of Pinnacle Acq
Corp stock will be converted into an equivalent share of common stock of the
Pinnacle Surviving Corporation.
The $24.00 per share merger consideration may be increased by up to an
additional $1.00 in cash per share, contingent upon the closing of the sale by
Pinnacle of Pinnacle's 97 acres of surplus land in Inglewood, California
("Inglewood Sale") with certain minimum required net proceeds prior to
December 31, 2001. If the after tax proceeds (using an assumed 42% tax rate)
to Pinnacle of the Inglewood Sale are equal to or greater than $40,750,000,
then the Contingent Payment shall equal $1.00 per share. If the after tax
proceeds of the Inglewood Sale are less than or equal to $13,054,000, then the
Contingent Payment shall equal zero. If the after tax proceeds of the
Inglewood Sale are less than $40,750,000, but more than $13,054,000, then the
Contingent Payment shall equal a prorated fraction of $1.00, as described
below. See "--Calculation of Prorated Contingent Payment."
The merger consideration (including the adjustment for the Contingent
Payment) is referred to in this discussion as the "Pinnacle Merger
Consideration."
In the event that the Inglewood Sale occurs on or prior to the fifth
Business Day prior to the Closing Date, the Pinnacle Merger Consideration will
equal the sum of $24.00 and the Contingent Payment, if any, both to be paid in
cash. In the event that the Inglewood Sale has not closed on or prior to the
fifth Business Day prior to the Closing Date of the Pinnacle Merger, then the
Pinnacle Merger Consideration shall equal $24.00 in cash, plus the right to
receive the applicable Contingent Payment, if any, provided that the Inglewood
Sale closes prior to December 31, 2001.
Any right to receive the Contingent Payment, if any, will not represent an
equity or other ownership interest in PHCR or the Pinnacle Surviving
Corporation, will not be transferable except by operation of law or will, will
not be represented by any form of certificate or instrument, and will not bear
interest. Any right to receive the Contingent Payment, if any, also will not
entitle the holder to any voting or other rights as a stockholder of PHCR or
the Pinnacle Surviving Corporation. In the event that the Inglewood Sale does
not close by December 31, 2001, the Contingent Payment will be $0 regardless
of proceeds. On December 31, 2001, the right to receive the Contingent Payment
shall expire and thereafter holders shall have no rights to Inglewood Sale
proceeds if the Inglewood Sale has not closed prior to that date.
For the purposes of this section, "Hubbard Redemption Shares" shall mean
that portion of the shares of Pinnacle Common Stock owned by R.D. Hubbard,
Chairman of the Board and Chief Executive Officer of Pinnacle, which will not
be contributed to PHCR pursuant to the Voting Agreement and will instead be
redeemed by Pinnacle immediately prior to the Effective Time for a price equal
to the Pinnacle Merger Consideration (including any right to receive the
applicable Contingent Payment, if any). It is expected that 1,020,285 shares
owned by Mr. Hubbard will be repurchased in this manner. "Contributed Shares"
shall mean shares of Pinnacle Common Stock held by the Management Stockholders
which are to be contributed to PHCR immediately prior to the Effective Time in
exchange for shares of PHCR Common Stock. See "--Voting Agreement" and "--
Contribution of Stock by the Management Stockholders."
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Pinnacle Stock Options
Immediately prior to the Effective Time, Pinnacle will cause all
outstanding Pinnacle Stock Options (except for certain Pinnacle Stock Options
held by Management Stockholders which are to be exchanged in accordance with
the Voting Agreement for fully vested options to acquire PHCR common stock),
whether or not vested, to be cancelled in exchange for the right to receive a
cash payment equal to (1) the number of shares of Pinnacle Common Stock
subject to such Pinnacle Stock Option immediately prior to the fifth Business
Day prior to the Closing Date multiplied by (2) the excess, if any, of the
cash amount of the Pinnacle Merger Consideration over the per share exercise
price of such Pinnacle Stock Option. In addition, in the event that the
Inglewood Sale shall not have closed on or prior to the fifth Business Day
prior to the Closing Date, holders of Pinnacle Stock Options with an exercise
price of less than $24.00 shall have the right to receive any applicable
Contingent Payment for each share covered by such Pinnacle Stock Option.
Atlantic Land Corporation is the holder of an option to purchase 46,920
shares of Pinnacle Common Stock at an exercise price of $24.78 per share (the
"Atlantic Land Warrant"). The Atlantic Land Warrant is only "in the money" to
the extent that the cash portion of the Pinnacle Merger Consideration (taking
into account any Contingent Payment to be paid in cash at the Effective Time)
exceeds $24.78 per share. Pinnacle will use commercially reasonable efforts to
cause the option agreement governing the Atlantic Land Warrant to be amended
to provide for each of the following: (i) in the event the Inglewood Sale
shall have closed on or prior to the fifth Business Day prior to the Closing
Date, then the Atlantic Land Warrant shall be converted into the right to
receive an amount in cash equal to 46,920 (the number of shares of Pinnacle
Common Stock subject to the Atlantic Land Warrant immediately prior to the
Effective Time) times the excess (if any) of the cash amount of the Pinnacle
Merger Consideration (taking into account any Contingent Payment to be paid in
cash at the Effective Time) over the exercise price per share ($24.78) of the
Atlantic Land Warrant immediately prior to the Effective Time, (ii) in the
event the Inglewood Sale shall not have closed on or prior to the fifth
Business Day prior to the Closing Date, the holder of the Atlantic Land
Warrant shall receive only the right to receive any applicable Contingent
Payment with respect to each underlying share of Pinnacle Common Stock, and
(iii) as of the Effective Time, the Atlantic Land Warrant shall be cancelled
and shall cease to exist.
Calculation of Prorated Contingent Payment
If the Inglewood Sale closes prior to December 31, 2001 and the after tax
proceeds to Pinnacle from the Inglewood Sale are greater than $13,054,000 but
less than $40,750,000, then the amount of the Contingent Payment will be a
prorated fraction of $1.00. In essence, the prorated fraction is computed by
dividing the after tax proceeds over and above $13,054,000 by the number of
fully diluted shares (or, if the Contingent Payment is computed after the
Effective Time, then by the number of Contingent Payment rights, in either
case taking into account the aggregate spread with respect to Pinnacle Stock
Options having exercise prices below $24.00 per share), except that the first
$0.78 per fully diluted share or Contingent Payment right that would otherwise
be distributed to the holder of the Atlantic Land Warrant would be distributed
pro rata to the holders of all other fully diluted shares. To the extent that
the prorated Contingent Payment exceeds $0.78 per fully diluted share, then
all holders of fully diluted shares, including the holder of the Atlantic Land
Warrant, would share in such payment. The precise formula for computing the
amount of the Contingent Payment is set forth in Section 10.11 of the Merger
Agreement.
Surrender of Shares and Payment
Immediately prior to the Effective Time, Pinnacle Acq Corp will designate a
bank or trust company to act as paying agent (the "Paying Agent") and on or
prior to the Effective Time will deposit with the Paying Agent funds in an
amount needed for payment of the Pinnacle Merger Consideration upon surrender
of stock certificates by stockholders.
DO NOT SEND IN YOUR STOCK CERTIFICATES AT THIS TIME. YOU WILL RECEIVE A
LETTER OF TRANSMITTAL AND FURTHER INSTRUCTIONS AS SOON AS REASONABLY
PRACTICABLE AFTER THE EFFECTIVE TIME OF THE PINNACLE MERGER.
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Each holder of shares of Pinnacle Common Stock that have been converted
into the right to receive the Pinnacle Merger Consideration will be entitled
to receive the Pinnacle Merger Consideration upon surrender of the holder's
certificate or certificates representing such shares to the Paying Agent,
together with a properly executed letter of transmittal. The stock certificate
or certificates surrendered will be canceled. After the Effective Time, stock
certificates for Pinnacle Common Stock will represent for all purposes only
the right to receive the Pinnacle Merger Consideration. Holders of Pinnacle
Common Stock will have no further ownership rights in Pinnacle Common Stock
and there will be no further registration of transfers of shares of Pinnacle
Common Stock. If certificates representing shares of Pinnacle Common Stock are
presented for transfer after the Effective Time, they will be canceled and
exchanged for the Pinnacle Merger Consideration pursuant to the terms of the
Merger Agreement. No interest will be paid or will accrue on the consideration
payable upon the surrender of any certificate. The Paying Agent will withhold
or deduct for taxes as required under applicable law.
Any amounts made available to the Paying Agent pursuant to the Merger
Agreement for payment of the Pinnacle Merger Consideration that remain
unclaimed by holders of shares of Pinnacle Common Stock twelve months after
the Effective Time will, upon the Pinnacle Surviving Corporation's request, be
delivered to an entity to be chosen by the Pinnacle Surviving Corporation. Any
such holder who has not exchanged shares of Pinnacle Common Stock prior to
that time will be entitled to look only to such entity for payment of the
holder's claim for the Pinnacle Merger Consideration. None of Pinnacle,
Pinnacle Acq Corp, PHCR, the Pinnacle Surviving Corporation or the Paying
Agent will be liable to any Pinnacle stockholder or any other person for any
unclaimed amounts that are delivered to a government official pursuant to any
abandoned property, escheat or similar law.
The Contingent Payment, if any, will be paid to holders who have properly
surrendered their certificates without the need to take any other action.
Contribution of Stock by the Management Stockholders
Under the Voting Agreement, the Management Stockholders will contribute the
Contributed Shares to PHCR immediately prior to the Effective Time in exchange
for shares of common stock of PHCR. In addition, the Management Stockholders
have agreed to exchange certain Pinnacle Stock Options they hold, which would
become fully vested by virtue of the Pinnacle Merger, for new fully vested
stock options to acquire PHCR common stock. The value of all Pinnacle Common
Stock to be contributed by the Management Stockholders and all Pinnacle Stock
Options to be cancelled by the Management Stockholders will equal $50,000,000.
See "Voting and Contribution Agreement; Memorandum of Understanding."
The Harveys Merger
PHCR, a wholly-owned subsidiary of Harveys Casino Resorts, has formed two
wholly-owned subsidiaries, Pinnacle Acq Corp and Harveys Acq Corp.
Simultaneously with the Pinnacle Merger, Harveys Acq Corp will merge with and
into Harveys Casino Resorts (the "Harveys Merger") with Harveys Casino Resorts
surviving as a wholly-owned subsidiary of PHCR.
Currently, Voteco owns approximately 97.5% of the voting common stock of
Harveys Casino Resorts, and it is currently expected that following the
Pinnacle Merger and the Harveys Merger would own approximately 82.7% of the
voting power of PHCR's common stock.
Representations and Warranties
In the Merger Agreement, each of Pinnacle, on the one hand, and PHCR and
Pinnacle Acq Corp, on the other hand, have made customary representations and
warranties to the other party or parties with respect to their organization,
operations and financial and other matters. The representations and warranties
in the Merger Agreement do not survive the closing of the Pinnacle Merger.
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Conduct of Business Pending the Pinnacle Merger
In the Merger Agreement, Pinnacle has agreed that during the term of the
Agreement, Pinnacle and its subsidiaries will carry on their respective
businesses in the ordinary course of business, keep available the services of
current officers and employees and preserve their ongoing business
relationships consistent with past practice. Pinnacle has also agreed that it
shall not, and shall not permit any of its subsidiaries to, among other
things:
(a) issue any capital stock or other voting securities (other than the
issuance of Pinnacle Common Stock upon the exercise of Pinnacle Stock
Options), sell or pledge any shares of its capital stock, split or combine
any outstanding stock, redeem or purchase any outstanding stock other than
as required by gaming laws, or declare or pay any dividends or
distributions in respect of capital stock other than the declaration and
payment of dividends or distributions by any direct or indirect wholly-
owned subsidiary of Pinnacle to its parent;
(b) amend its Certificate of Incorporation or By-laws or comparable
organizational documents;
(c) except in connection with the transactions contemplated by the
Merger Agreement, voluntarily take any action that would result in the
failure to maintain the listing of the Pinnacle Common Stock on the New
York Stock Exchange;
(d) develop or acquire any projects, assets or lines of business, other
than purchases of inventory, furnishings, or equipment in the ordinary
course of business, expenditures consistent with Pinnacle's current capital
budget, or certain specifically identified acquisitions or projects
contemplated in the Merger Agreement;
(e) sell, lease, mortgage or otherwise encumber or dispose of any of its
properties or assets other than in the ordinary course of business;
(f) incur any indebtedness, including through the issuance of debt
securities or guaranties, or forgive any existing indebtedness of any
person to Pinnacle or its subsidiaries, exceeding $20 million in the
aggregate, other than working capital borrowings in the ordinary course of
business, projects contemplated in the Merger Agreement and specific
projects at existing facilities consistent with Pinnacle's current capital
budget; or make any loans, advances or investments other than advances to
employees, suppliers or customers in the ordinary course of business and
other than budgeted projects;
(g) settle any audit relating to material taxes, make any material tax
election or amend any material tax return;
(h) pay, settle or satisfy any material liabilities, other than in the
ordinary course of business, or in accordance with their terms of
liabilities reserved against the Base Balance Sheet, or the optional
redemption of the 13% First Mortgage Notes due 2003 issued by Casino Magic
of Louisiana, Corp. at prices and on terms consistent with the existing
indenture governing such debt, or, except in the ordinary course of
business waive the benefit of any confidentiality, standstill or similar
agreement;
(i) make any change in the compensation payable to any officers,
directors, employees, agents or consultants, other than general increases
for employees who are not officers, directors or affiliates in the ordinary
course or salary increases and bonuses payable to Pinnacle officers
pursuant to existing agreements or regular annual reviews in the ordinary
course or enter into or amend any employee benefit plan with, or make any
loans to, any of its officers, directors, employees, affiliates, agents or
consultants or make any change in its existing borrowing or lending
arrangements for or on behalf of any of such persons;
(j) pay or make any accrual or arrangement for any payment pursuant to
any employee benefit plan to any officers, directors, or employees other
than in the ordinary course of business; adopt or pay, grant, issue,
accelerate or accrue salary or other benefits pursuant to any such plan,
other than as required under applicable law or the current terms of any
such plan; or amend in any material respect any such plan in a manner
inconsistent with the foregoing;
(k) except as required by law, enter into any collective bargaining
agreement;
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(l) except pursuant to agreements existing on the date of the Merger
Agreement, or specifically identified in the Merger Agreement, make any
payments (other than regular compensation payable to officers and employees
of Pinnacle in the ordinary course of business), or other distributions to,
or enter into any transaction, agreement or arrangement with, any officers,
directors, stockholders or affiliates of Pinnacle or any of its
subsidiaries, or the affiliates, associates or family members of any such
parties, or do any of the foregoing with respect to employees, agents or
consultants other than in the ordinary course of business;
(m) except in the ordinary course of business and except as otherwise
permitted by the Merger Agreement, modify or amend in a manner adverse to
Pinnacle or its subsidiaries the material economic terms of any material
contract or agreement or terminate any material contract or agreement or
waive, release or assign any material rights or claims;
(n) fail to make any scheduled principal or interest payment on
indebtedness evidenced by debt instruments to which Pinnacle or any of its
subsidiaries is a party; or
(o) authorize any of, or commit or agree to take any of, the foregoing
actions except as otherwise permitted by the Merger Agreement.
Pinnacle will be permitted to expend amounts consistent with and in the
manner prescribed by the budget related to the development opportunities and
activities for the Belterra Resort and Casino, including, without limitation,
the hiring of employees and the entering into of employment agreements with
senior management personnel, to the extent contained in the budget.
Pinnacle will be permitted to consummate the pending sales of Boomtown
Biloxi, Casino Magic Bay St. Louis and Turf Paradise substantially on the
terms and subject to the conditions contained in the respective definitive
agreements in effect as of the date of the Merger Agreement. Pinnacle shall
also be permitted to consummate the Inglewood Sale substantially in accordance
with the terms and conditions of the draft purchase agreement provided to
Pinnacle Acq Corp, provided that the net proceeds are not less than
$13,054,000. Pinnacle shall also be permitted to consummate certain other
specified asset dispositions on terms approved by Pinnacle's Board of
Directors, in good faith. Pinnacle shall not amend, waive, or modify any of
the terms or conditions contained in the agreements relating to the pending
sales of Boomtown Biloxi, Casino Magic Bay St. Louis and Turf Paradise (or in
the case of the Inglewood Sale, the draft purchase agreement) without the
prior written consent of Pinnacle Acq Corp, except where such amendments,
waivers or modifications would not reasonably be expected to significantly
delay the consummation of the transactions contemplated by the Merger
Agreement, or impair in any material respect the ability of Pinnacle to
perform its obligations under the Merger Agreement, and which are not
materially adverse to the original terms of such principal asset disposition.
Immediately prior to the Effective Time, Pinnacle will redeem the shares of
Pinnacle Common Stock owned by R.D. Hubbard on the date of the Merger
Agreement that are not being contributed to PHCR under the Voting Agreement.
See "Voting and Contribution Agreement; Memorandum of Understanding". The
purchase price to be paid for such shares will be a price equal to the
Pinnacle Merger Consideration (including the right to receive the applicable
Contingent Payment, if any). It is expected that 1,020,285 shares owned by Mr.
Hubbard will be repurchased in this manner. The purpose of this repurchase is
to mitigate a tax disadvantage of the transaction structure which affected Mr.
Hubbard but did not affect the other Management Stockholders or the public
stockholders and therefore to allow him to have the same tax treatment as
Pinnacle's stockholders generally.
Conditions to the Pinnacle Merger
The obligations of Pinnacle, Pinnacle Acq Corp and PHCR to consummate the
Pinnacle Merger are subject to the satisfaction or waiver of a number of
conditions.
Conditions to Each Parties Obligations
The respective obligations of each party are subject to the following
conditions:
(a) The holders of a majority of the outstanding shares of Pinnacle
Common Stock shall have approved and adopted the Merger Agreement;
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(b) No statute, rule, regulation, executive order, decree, temporary
restraining order, injunction or any other legal restraint preventing the
consummation of the Pinnacle Merger or the transactions contemplated by the
Merger Agreement shall be in effect; and
(c) Any waiting period (and any extension thereof) applicable to the
Pinnacle Merger under the HSR Act shall have expired or shall have been
terminated. See "The Pinnacle Merger--Regulatory Requirements."
Conditions to Obligations of Pinnacle Acq Corp
The obligations of Pinnacle Acq Corp are further subject to the following
conditions:
(a) All licenses, permits, registrations, consents, findings of
suitability and other approvals required to be obtained from any gaming
authorities or governmental entity in order to permit Pinnacle Acq Corp and
Pinnacle to consummate the Pinnacle Merger, to permit Harveys Acq Corp and
Harveys to complete the Harveys Merger, and to permit the Pinnacle
Surviving Corporation and the Harveys surviving corporation and each of
their respective subsidiaries to conduct their respective businesses in the
same manner as before the Effective Time shall have been obtained or made,
as applicable; provided that the condition shall not be deemed satisfied if
any Gaming Approval requires any consent, approval, license, other
authorization or application with respect to any limited partner of Colony
III or its affiliates;
(b) Pinnacle shall have performed, in all material respects, all
obligations and complied with all covenants required by the Merger
Agreement to be performed or complied with prior to the Effective Time and
all representations and warranties given by Pinnacle in the Merger
Agreement shall be true and accurate in all material respects except that
representations and warranties qualified as to materiality shall be true
and accurate in all respects;
(c) Since April 17, 2000, no events have occurred which reasonably would
be expected to have a material adverse effect (as defined below) on
Pinnacle or the transactions contemplated by the Merger Agreement;
(d) Pinnacle Acq Corp and Harveys Acq Corp shall have received the cash
proceeds of the Financing (see "The Pinnacle Merger--Financing of the
Pinnacle Merger and the Harveys Merger");
(e) To the extent required, Pinnacle Acq Corp shall have received valid
consents and related tenders under the outstanding principal amount of debt
of Pinnacle and Harveys pursuant to tender offers for such debt, and
Pinnacle Acq Corp also shall have received the requisite consents under the
instruments under which such debt was issued for any amendments of such
instruments necessary to effect the transactions contemplated by the Merger
Agreement, and any such amendments shall have become effective;
(f) The pending sales of Boomtown Biloxi, Casino Magic Bay St. Louis and
Turf Paradise shall have been consummated on substantially the terms and
conditions contained in the respective definitive agreements for such
transactions and for at least a minimum amount of net proceeds;
(g) The transactions contemplated by the Voting Agreement shall have
been consummated immediately prior to the Effective Time;
(h) The aggregate number of Pinnacle Dissenting Shares shall not exceed
5% of the total number of shares of Pinnacle Common Stock outstanding
immediately prior to the Annual Meeting; and
(i) All material phases of the Belterra Resort and Casino (other than
the golf course and performance theater) shall have been substantially
completed and open to the public by not later than September 15, 2000, and
the cost associated with the Belterra Resort and Casino shall not be, in
the aggregate, more than $207,000,000, and the Belterra Resort and Casino
(other than the golf course and performance theater) will have been
completed in substantial conformity with the written budgets, plans and
policies previously provided to Pinnacle Acq Corp.
As used in the Merger Agreement, the term "material adverse change" or
"material adverse effect" with respect to any person means any change or
effect that is individually or in the aggregate materially adverse to
78
the business, prospects, properties, assets or financial condition or results
of operations of such person and its subsidiaries, taken as a whole; provided,
however, that in no event shall the following, either individually or in the
aggregate, in and of itself be deemed to constitute a "material adverse
change" or a "material adverse effect": (i) the effects of changes that are
applicable to the national financial, banking, currency or capital markets in
general, individually or in the aggregate, solely in and of itself, (ii) the
failure by Pinnacle to meet independent, third party analysts' projections of
earnings, revenue or other financial performance measures solely in and of
itself, provided, however, that the underlying facts, circumstances, operating
results or prospects which cause Pinnacle to fail to meet such projections may
be considered in determining whether a "material adverse change" or a
"material adverse effect" has occurred or (iii) the effects of certain events
or circumstances (including the actual occurrence of any proposed action)
specified in the Merger Agreement.
Conditions to Obligations of Pinnacle
The obligations of Pinnacle are further subject to the following
conditions:
(a) All licenses, permits, registrations, consents, findings of
suitability and other approvals required to be obtained from any gaming
authorities in order to permit Pinnacle Acq Corp to consummate the Pinnacle
Merger shall have been obtained or made, as applicable; and
(b) Pinnacle Acq Corp shall have performed, in all material respects,
all obligations and complied with all covenants required by the Merger
Agreement to be performed or complied with prior to the Effective Time and
all representations and warranties given by Pinnacle Acq Corp in the Merger
Agreement shall be true and accurate in all material respects except that
representations and warranties qualified as to materiality shall be true
and accurate in all respects.
Expenses of the Pinnacle Merger
The Merger Agreement provides that, whether or not the Pinnacle Merger is
consummated, Pinnacle, Pinnacle Acq Corp and PHCR will each pay their own
costs and expenses in connection with the Pinnacle Merger except that, if the
Merger Agreement is terminated under certain circumstances, Pinnacle must pay
Pinnacle Acq Corp a termination fee of $25,000,000. See "--Termination Fee"
and "--Termination."
Financing of the Pinnacle Merger and the Harveys Merger
It is a condition to the obligations of Pinnacle Acq Corp to consummate the
Pinnacle Merger that Pinnacle Acq Corp and Harveys Acq Corp shall have
received the proceeds of debt financing on terms no less favorable to the
borrower than:
. a total of $900,000,000 of senior debt at a blended rate not to exceed
9.5%, and
. a total of $550,000,000 of subordinated notes at a rate not to exceed
11.5%,
which, together with any indebtedness of the Company assumed in the Pinnacle
Merger, is in an amount sufficient to enable the payment, in full, of (1) the
Pinnacle Merger Consideration, (2) all payments in connection with the
cancellation of the Pinnacle Stock Options, (3) all other related payments in
connection with the Pinnacle Merger and the Harveys Merger and (4) related
fees and expenses. Debt financing satisfying such terms is referred to in this
Proxy Statement as the "Financing."
Pinnacle Acq Corp has agreed in the Merger Agreement to use its
commercially reasonable efforts to obtain and effectuate the Financing.
Pinnacle has agreed in the Merger Agreement to use its commercially reasonable
efforts to cooperate with and assist Pinnacle Acq Corp in obtaining and
effectuating the Financing. However, "commercially reasonable efforts" shall
not require Pinnacle Acq Corp to expend money in excess of specified fees and
expenses, seek or provide any equity or supplemental investment in connection
with the Pinnacle Merger or related transactions, or amend in any manner
adverse to Pinnacle Acq Corp any of the terms of the Financing. See "The
Pinnacle Merger--Financing of the Pinnacle Merger and the Harveys Merger."
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Neither Pinnacle Acq Corp nor PHCR shall, and each shall cause Harveys not
to, voluntarily enter into any agreement, commitment or understanding with
respect to or concerning any financing, acquisition, disposition or corporate
transaction not contemplated by the Merger Agreement or the Voting Agreement
which would, as of the date of such transaction, reasonably be expected to
materially impair the ability of PHCR to obtain the Financing.
Indemnification and Insurance
The Merger Agreement provides that the existing indemnification obligations
set forth in the charter documents of Pinnacle and its subsidiaries shall be
maintained and not amended, repealed or modified for a period of six years
after the Effective Time in a manner that would adversely affect the rights
thereunder of individuals who at or prior to the Effective Time of the
Pinnacle Merger were directors, officers, employees or agents of the Company.
In addition, the Merger Agreement provides that for six years after the
Effective Time, Pinnacle will provide directors' and officers' liability
insurance to cover persons covered by Pinnacle's and its subsidiaries'
directors' and officers' liability insurance policy in effect on the date of
the Merger Agreement (which insurance shall be of at least the same coverage,
with comparable carriers, and shall contain terms and conditions no less
favorable to such persons) with respect to those matters covered by such
policy.
No Solicitation
The Merger Agreement provides that Pinnacle will not, nor will it permit
any of its subsidiaries to, nor will it authorize or permit any agent,
officer, director or employee of, or any investment banker, attorney or other
advisor or representative of, Pinnacle or any of its subsidiaries to, directly
or indirectly:
. solicit or initiate, or encourage any inquiries regarding or the
submission of, any Takeover Proposal (as defined below) (including,
without limitation, any proposal or offer to Pinnacle's stockholders) or
. participate in any discussions or negotiations regarding, or furnish to
any person or entity any non-public information with respect to, or take
any other action to facilitate the making of any proposal that would
constitute a Takeover Proposal.
However, Pinnacle may, in response to an unsolicited, written Competitive
Proposal (as defined below) (or Takeover Proposal which, based on the advice
of its financial advisors, the Board of Directors of Pinnacle determines in
good faith is reasonably likely to result in a Competitive Proposal):
. furnish information with respect to Pinnacle to the person or entity who
made such unsolicited proposal, and
. participate in negotiations with such person or entity regarding such
Competitive Proposal (or Takeover Proposal which, based on the advice of
its financial advisors, the Board of Directors of Pinnacle determines in
good faith is reasonably likely to result in a Competitive Proposal) if:
. in the opinion of the Board of Directors of Pinnacle, after
consultation with outside legal counsel, such failure to act would
be inconsistent with its fiduciary duties to Pinnacle's stockholders
under applicable law,
. Pinnacle advises Pinnacle Acq Corp promptly of any request for non-
public information or of any Takeover Proposal, or any proposal with
respect to any Takeover Proposal, the material terms and conditions
of such request or Takeover Proposal, and the identity of the Person
making any such Takeover Proposal or inquiry,
. Pinnacle uses reasonable efforts to keep Pinnacle Acq Corp informed
of the status and details (including amendments or proposed
amendments) of any such request, Takeover Proposal or inquiry, and
. Pinnacle takes such action pursuant to an executed confidentiality
agreement with customary terms and conditions and, in any case,
which includes customary standstill provisions which prohibit such
party from seeking to directly or indirectly accomplish a Takeover
80
with the consent of the Board of Directors of Pinnacle, and which
expressly permits Pinnacle to fulfill its obligations under the two
immediately preceding bullet points listed above.
The Merger Agreement also provides that neither the Board of Directors of
Pinnacle nor any committee thereof will:
. withdraw or modify, or publicly propose to withdraw or modify in a
manner adverse to Pinnacle Acq Corp, the approval or recommendation by
the Pinnacle Board of Directors or any such committee of the Merger
Agreement or the Pinnacle Merger,
. approve or recommend, or publicly propose to approve or recommend, any
Takeover Proposal, or
. cause Pinnacle to enter into any agreement with respect to any Takeover
Proposal.
Notwithstanding the foregoing, the Pinnacle Board of Directors or the
Special Committee, may withdraw or modify its approval or recommendation of
the Merger Agreement or the Pinnacle Merger, or approve or recommend a
Competitive Proposal, prior to stockholder approval of the Merger Agreement or
the Pinnacle Merger (including as the same may be modified hereafter),
. to the extent required by the fiduciary duties to Pinnacle's
stockholders under applicable law,
. after consultation with outside legal counsel,
. subject to the terms of this and the following paragraph, and
. in each case at any time after five days following receipt by Pinnacle
Acq Corp of notice, which notice specifies the material terms and
conditions of such Competitive Proposal and identifies the person making
such Competitive Proposal. Pinnacle Acq Corp will have the opportunity,
until the end of the fifth day after it receives such a notice, to make
an offer to the Board of Directors of Pinnacle.
Neither the Board of Directors of Pinnacle nor any committee of the Board
of Directors may withdraw, or modify or publicly propose to withdraw, or
modify in a manner adverse to Pinnacle Acq Corp, its approval or
recommendation of the Merger Agreement or the Pinnacle Merger or approve or
recommend a Competitive Proposal unless and until it shall have determined, in
its good faith judgment that:
. the value of the consideration (based on the opinion, with only
customary qualifications, of an independent financial advisor of good
national reputation in such matters) of such proposal exceeds the value
of each of the Pinnacle Merger Consideration and any alternative
proposal presented by Pinnacle Acq Corp or any of its affiliates and
. such proposal is more favorable to Pinnacle's stockholders than the
Pinnacle Merger and any alternative proposal presented by Pinnacle Acq
Corp or any of its affiliates.
In addition, if Pinnacle enters into an agreement with respect to any
Competitive Proposal, it will, concurrently with entering into such agreement,
pay, or cause to be paid, to Pinnacle Acq Corp the $25,000,000 termination
fee. See "--Termination Fee."
Nothing in the Merger Agreement prohibits Pinnacle from taking and
disclosing to Pinnacle's stockholders a position with respect to a tender
offer by a third party if, in the good faith judgment of the Board of
Directors or the Special Committee, following consultation with outside
counsel, failure to so disclose would be a violation of its obligations under
applicable law. However, neither Pinnacle nor its Board of Directors, the
Special Committee, nor any other committee thereof will withdraw or modify, or
propose publicly to withdraw or modify, its position with respect to the
Pinnacle Merger or the Merger Agreement, except in accordance with the
preceding paragraphs.
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As used in this Proxy Statement:
"Competitive Proposal" means, other than the transactions contemplated by
the Merger Agreement:
. any proposal or offer from any person relating to any direct or indirect
acquisition or purchase of assets of Pinnacle or any of its Material
Subsidiaries (defined below) comprising 50% or more of Pinnacle's
consolidated assets or over 50% of any class of equity securities of
Pinnacle or any of its Material Subsidiaries, or
. any tender offer or exchange offer that, if consummated, would result in
any person or entity beneficially owning 50% of any class of equity
securities of Pinnacle or any of its Material Subsidiaries, or
. any merger, consolidation, business combination, liquidation,
dissolution or similar transaction involving Pinnacle with a third
party,
in each case, with respect to which the Board of Directors of Pinnacle
determines in its good faith judgment that
. the value of the consideration (based on the opinion, with only
customary qualifications, of an independent financial advisor of good
national reputation in such matters) of such proposal exceeds the value
of each of the Pinnacle Merger Consideration and any alternative
proposal presented by Pinnacle Acq Corp or any of its affiliates and
. such proposal is more favorable to Pinnacle's stockholders than the
Pinnacle Merger and any alternative proposal presented by Pinnacle Acq
Corp or any of its affiliates.
Notwithstanding the foregoing, the consummation of (a) the pending sales of
Boomtown Biloxi, Casino Magic Bay St. Louis and Turf Paradise substantially on
the terms and subject to the conditions contained in the respective definitive
agreements in effect as of the date of the Merger Agreement (or as amended or
modified in accordance with the Merger Agreement), and (b) the Inglewood Sale
and certain other asset dispositions identified in the Merger Agreement, in
each case on terms approved by Pinnacle's Board of Directors, in good faith,
shall not be deemed to constitute a Competitive Proposal.
"Takeover Proposal" means (other than the transactions contemplated by the
Merger Agreement):
. any proposal or offer from any person relating to any direct or indirect
acquisition or purchase of assets (including capital stock of any
subsidiaries) of Pinnacle or any of its subsidiaries comprising 10% or
more of Pinnacle's consolidated assets or of over 10% of any class of
equity securities of Pinnacle or any of its Material Subsidiaries, or
. any tender offer or exchange offer that if consummated would result in
any person beneficially owning 10% or more of any class of equity
securities of Pinnacle or any of its Material Subsidiaries or which
would require approval under any gaming law, or
. any merger, consolidation, business combination, recapitalization,
liquidation, dissolution or similar transaction involving Pinnacle (or
any of its Material Subsidiaries) and a third party.
Notwithstanding the foregoing, consummation of (a) the pending sales of
Boomtown Biloxi, Casino Magic Bay St. Louis and Turf Paradise substantially on
the terms and subject to the conditions contained in the respective definitive
agreements in effect as of the date of the Merger Agreement (or as amended or
modified in accordance with the Merger Agreement), and (b) the Inglewood Sale
and certain other asset dispositions specifically identified in the Merger
Agreement, in each case on terms approved by Pinnacle's Board of Directors, in
good faith, and (c) any transaction which would otherwise constitute a
Takeover Proposal but which is consented to by PHCR in writing prior to the
initiation of any substantive negotiations or discussions with respect
thereto, shall not be deemed to constitute a Takeover Proposal.
"Material Subsidiary" shall mean each of: Boomtown Hotel & Casino, Inc., a
Nevada corporation; Louisiana--I Gaming, a Louisiana Partnership in Commendam;
Biloxi Casino Corp., a Mississippi corporation; Casino Magic of Louisiana,
Corp., a Louisiana corporation; and Belterra Resort (Indiana), LLC, an Indiana
limited liability company.
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Termination
The Merger Agreement may be terminated at any time prior to the Effective
Time by mutual written consent of Pinnacle, PHCR and Pinnacle Acq Corp.
Termination Rights of All Parties. The Merger Agreement may be terminated
by either Pinnacle or Pinnacle Acq Corp if any of the following occurs:
(a) Injunction. Any governmental entity has issued an order or taken any
other action permanently enjoining or prohibiting payment for or acceptance
for payment of the Pinnacle Common Stock and such order has become final
and nonappealable. The party seeking to terminate the Merger Agreement must
have complied with its reasonable efforts covenant in the Merger Agreement.
With respect to a party to the Merger Agreement, the reasonable efforts
covenant requires that party to, among other things, use all reasonable
efforts to consummate and make effective the Pinnacle Merger, the Financing
and the other transactions contemplated by the Merger Agreement, subject to
specified exceptions.
(b) Outside Closing Date. The Effective Time has not occurred by January
15, 2001. However, Pinnacle Acq Corp may, at its option, extend that date
for up to two months if the parties can obtain reasonable assurances that a
hearing with respect to each outstanding required approval from each of the
gaming authorities is or can reasonably be expected to be scheduled prior
to March 15, 2001. Furthermore, Pinnacle Acq Corp may, at its option,
extend the January 15, 2001 date for up to six months if Pinnacle Acq Corp
can demonstrate that there is a reasonable likelihood that it will receive
the gaming approvals by such date, and Pinnacle Acq Corp delivers to
Pinnacle one or more commitment letters and "highly confident" letters
reflecting amounts that are at least sufficient to cover the Financing with
expiration dates at least coextensive with the date of such extension.
(c) No Gaming Approval. Either Pinnacle or Pinnacle Acq Corp receives a
final and nonappealable written statement from a gaming authority stating
that such gaming authority has disapproved or will not give approval to the
Merger Agreement, which disapproval would cause Pinnacle Acq Corp to be
unable to consummate the Pinnacle Merger, or if Pinnacle Acq Corp has
finally withdrawn (with no intent to resubmit) its gaming application with
such gaming authority.
(d) No Stockholder Approval. At a duly held stockholders meeting of
Pinnacle or any adjournment thereof at which the Merger Agreement is voted
upon, the requisite vote of the stockholders in favor of the adoption of
the Merger Agreement is not obtained.
(e) Termination of Financing Letters. The Financing Letters have been
withdrawn or terminated by the issuing lenders, and Pinnacle Acq Corp is
unable, despite the exercise of its reasonable efforts, to obtain one or
more replacement commitment letters and/or "highly confident" letters
reflecting amounts that are at least sufficient to cover the Financing,
within 20 Business Days following such withdrawal or termination.
Additional Termination Rights of Pinnacle Acq Corp. The Merger Agreement
also may be terminated by Pinnacle Acq Corp if any of the following occurs:
(a) Outside Meeting Date. Pinnacle's stockholders have not approved the
Merger Agreement on or prior [to August 15, 2000] [as it may be extended
pursuant to the Merger Agreement], or
(b) Withdrawal of Recommendation by Pinnacle Board. The Board of
Directors of Pinnacle amends, modifies or withdraws its recommendation or
publicly proposes to amend, modify in a manner adverse to Pinnacle Acq
Corp, or withdraw its recommendation of the Pinnacle Merger or the Merger
Agreement, or if, following a Takeover Proposal, Pinnacle fails to comply
with the "No Solicitation" provisions outlined above including any required
notice, or fails to comply with its reasonable efforts covenant in the
Merger Agreement.
Additional Termination Right of Pinnacle Upon Execution of Definitive
Agreement for Competitive Proposal. The Merger Agreement may be terminated by
Pinnacle if:
. prior to approval of the Merger Agreement or the Pinnacle Merger by
the Company's stockholders, to the extent required by the fiduciary
duties to the Company's stockholders, after
83
consultation with outside legal counsel, the Pinnacle Board of
Directors or the Special Committee approves a Competitive Proposal,
. prior to such approval, the Company's Board of Directors complied
with the provisions of the Merger Agreement requiring the Company to
give notice to Pinnacle Acq Corp and to give Pinnacle Acq Corp the
opportunity to make an alternative proposal,
. concurrently with the termination of the Merger Agreement, the
Company enters into a definitive agreement with respect to the
Competitive Proposal, and
. concurrently with the termination of the Merger Agreement, the
Company pays to Pinnacle Acq Corp the $25,000,000 termination fee.
See "--No Solicitation" and "--Termination Fee."
Termination Fee
Pinnacle has agreed to pay to Pinnacle Acq Corp $25,000,000 (the
"Termination Fee") upon demand if any of the following occurs:
. if Pinnacle Acq Corp or Pinnacle, as applicable, terminates the Merger
Agreement because of "No Stockholder Approval," as described above, and
prior to such termination a Significant Takeover Proposal (which definition
is identical to that of a Takeover Proposal, with the exception that the
10% thresholds have been raised to 20%) shall have been made,
. if Pinnacle Acq Corp terminates the Merger Agreement because of "Withdrawal
of Recommendation by Pinnacle Board", as described above
. as described under "Additional Termination Right of Pinnacle Upon Execution
of Definitive Agreement for Competitive Proposal" above, or
. if prior to any other termination of the Merger Agreement because the
"Outside Meeting Date" or "Outside Closing Date" described above shall have
occurred (which termination does not follow from the failure of Pinnacle
Acq Corp to cause the conditions to Pinnacle's obligation to close
described under "--Conditions to the Pinnacle Merger--Conditions to
Obligations of Pinnacle" above to not be satisfied), as described above,
(x) a Competitive Proposal (disregarding the determination of the Board) or
(y) a Significant Takeover Proposal shall have been made on or after March
2, 2000, and within 12 months of such termination, a transaction
constituting a Significant Takeover Proposal is consummated or Pinnacle
enters into an agreement (which is thereafter consummated) with respect to,
or the Board of Directors of Pinnacle or a committee thereof approves or
recommends, or publicly proposes to approve or recommend, a Significant
Takeover Proposal (which is thereafter consummated), subject to certain
exceptions.
Amendment
The Merger Agreement may be amended at any time by mutual agreement of
Pinnacle, PHCR and Pinnacle Acq Corp. However, after approval of the Merger
Agreement by the Pinnacle stockholders, no amendment which would require
further approval of such stockholders may be made without the further approval
of such stockholders.
Limited Joint and Several Liability of Harveys Casino Resorts
Harveys Casino Resorts has agreed to be jointly and severally liable with
PHCR and Pinnacle Acq Corp for any claims brought against PHCR or Pinnacle Acq
Corp under the Merger Agreement as to which PHCR and Pinnacle Acq Corp are
liable. However, in no event shall the aggregate liability of Harveys Casino
Resorts relating to any such claim or arising under such agreement, or
otherwise pertaining to the Merger Agreement, exceed $15,000,000. In addition,
Harveys Casino Resorts will have the benefit of and the right to assert any
and all defenses to such claims and any and all setoffs that are available to
PHCR or Pinnacle Acq Corp or both as primary obligors under the Merger
Agreement.
84
VOTING AND CONTRIBUTION AGREEMENT; MEMORANDUM OF UNDERSTANDING
The descriptions of the terms and conditions of the Voting and Contribution
Agreement and the Memorandum of Understanding set forth below do not purport
to be complete and are qualified in their entirety by reference to the entire
text of the respective documents, which are incorporated herein by reference
to Exhibits (d)(2) and (d)(3), respectively, of the Company's Schedule 13E-3
dated [ ], 2000. Stockholders are urged to read the Voting and
Contribution Agreement and Memorandum of Understanding carefully. Capitalized
terms not otherwise defined in the following description have the meanings set
forth in the Merger Agreement.
Voting and Contribution Agreement
Concurrently with the execution of the Merger Agreement and as a condition
for PHCR and Pinnacle Acq Corp to enter into the Merger Agreement, the
Management Stockholders entered into a Voting and Contribution Agreement with
PHCR (the "Voting Agreement"). In the Voting Agreement, the Management
Stockholders, among other things,
. have agreed to vote their shares of Pinnacle Common Stock in favor of
the Pinnacle Merger, the Merger Agreement and the transactions
contemplated thereby, and have granted to PHCR an irrevocable proxy
coupled with an interest to vote their shares in favor of the Pinnacle
Merger, the Merger Agreement and the transactions contemplated thereby;
. have agreed to vote their shares of Pinnacle Common Stock against any
Takeover Proposal, and any amendment of Pinnacle's certificate of
incorporation or bylaws or other proposal or transaction involving
Pinnacle or any of its subsidiaries that would in any manner impede,
interfere with, materially delay, frustrate, prevent or nullify or
result in a breach of any covenant, representation or warranty or any
other obligation or agreement of Pinnacle or any Management Stockholder
under or with respect to, the Pinnacle Merger, the Merger Agreement or
any of the other transactions contemplated by the Merger Agreement or
the Voting Agreement;
. have agreed not to solicit any Takeover Proposal or participate in any
discussions or negotiations regarding a Takeover Proposal or provide
nonpublic information with respect to a Takeover Proposal, provided that
a Management Stockholder may furnish nonpublic information with respect
to Pinnacle to, or participate in negotiations with respect to a
Takeover Proposal with the person making the Takeover Proposal, if such
Management Stockholder is instructed to do so in writing by the Board of
Directors of Pinnacle; and
. have agreed not to transfer their shares of Pinnacle Common Stock or
Pinnacle Stock Options.
The no-solicitation provisions in the Voting Agreement also apply to
affiliates, agents, partners, employees of, and any investment banker,
attorney or other advisor or representative of a Management Stockholder.
All of the 3,000,285 shares of Pinnacle Common Stock currently owned by the
Management Stockholders are subject to the Voting Agreement. Such shares
represent in the aggregate approximately 11.4% of the outstanding shares of
Pinnacle Common Stock as of the date hereof. In addition, any additional
shares of Pinnacle Common Stock acquired by the Management Stockholders,
including pursuant to vested and unvested stock options to purchase an
additional 1,312,433 shares of Pinnacle Common Stock, will be subject to the
Voting Agreement.
In addition, each of the Management Stockholders agreed in the Voting
Agreement
. to contribute, immediately prior to the effective time of the Pinnacle
Merger, a certain number of such Management Stockholder's shares of
Pinnacle Common Stock to PHCR in exchange for shares of PHCR's common
stock and/or
85
. to exchange a certain number of such Management Stockholder's Pinnacle
Stock Options (which shall become fully vested in connection with the
Merger Agreement) for fully vested options to purchase shares of PHCR's
common stock with the exercise price adjusted to preserve the value of
each Management Stockholder's option spread.
Based on the merger consideration, the value of all shares of Pinnacle
Common Stock to be contributed and all Pinnacle Stock Options to be exchanged,
and the value of and all shares of PHCR common stock and options to be
received by the Management Stockholders in return therefor, is $50,000,000 in
the aggregate.
While the Management Stockholders may decide prior to the Closing to change
the mix of stock contributed and stock options cancelled, the aggregate value
of such items will remain at $50,000,000. It is currently contemplated that R.
D. Hubbard will contribute 1,349,545 shares of Pinnacle Common Stock to PHCR,
Paul Alanis will contribute 300,000 shares, Loren Ostrow will contribute
50,000 shares and Bruce Hinckley will contribute 5,000 shares in exchange for
shares of PHCR common stock in the aggregate. If the Inglewood Sale is not
closed on or prior to the fifth Business Day prior to the Closing Date, then
the Management Stockholders also will have the right to receive any applicable
Contingent Payment for each share of Pinnacle Common Stock contributed to
PHCR.
The Management Stockholders currently contemplate exchanging Pinnacle Stock
Options covering the following number of shares of Pinnacle Common Stock: Mr.
Hubbard, 0 shares; Mr. Finnigan, 86,867 shares; Mr. Alanis, 273,756 shares;
Mr. Ostrow, 90,176 shares; Mr. Allen, 200,000 shares; Mr. Kortman, 66,131
shares; Mr. Hinckley, 25,000 shares; Mr. Delaney, 10,000 shares; Mr. Plant,
18,300 shares; and Mr. Callaway, 19,992 shares. It is anticipated that most of
the Management Stockholders will exercise Pinnacle Stock Options prior to the
Closing on a cashless basis and contribute the shares of Pinnacle Common Stock
so acquired to PHCR. It is contemplated that the Pinnacle Board of Directors
will take action to amend the stock option agreements covering Pinnacle Stock
Options held by the Management Stockholders to permit such a cashless
exercise. In connection with such exercise, PHCR has agreed to loan certain of
such Management Stockholders money, subject to the limitations and on the
terms described below, to pay any taxes due in connection with such exercise.
See "--Memorandum of Understanding."
As a result of these contributions, immediately following the Effective
Time, it is currently expected that the Management Stockholders will own, in
the aggregate, approximately 15.6% of the voting power of PHCR common stock.
The contribution of the shares of Pinnacle Common Stock to PHCR and the
exchange of Pinnacle Stock Options for PHCR options by the Management
Stockholders are intended to be effected on a tax-free basis for the
Management Stockholders since such transactions would take place
simultaneously with the Pinnacle Merger and the Harveys Merger. In connection
with such contribution and exchange, PHCR and each of the Management
Stockholders will enter into the Stockholders Agreement. See "Stockholders
Agreement."
The Voting Agreement contemplates that, immediately prior to the Effective
Time, Mr. Hubbard shall sell to Pinnacle the shares of Pinnacle Common Stock
owned by Mr. Hubbard which are not being contributed to PHCR. This repurchase
by Pinnacle prior to the Pinnacle Merger is intended to mitigate a tax
disadvantage of the transaction structure which affects Mr. Hubbard but does
not affect the other Management Stockholders or the public stockholders. The
purchase price to be paid for these shares would be equal to the Pinnacle
Merger Consideration (including any right to receive the applicable Contingent
Payment, if any).
The Voting Agreement terminates (i) if the closing of the Pinnacle Merger
has occurred, (ii) if the Pinnacle Merger has been consummated in accordance
with the terms of the Merger Agreement or (iii) if the Merger Agreement has
been terminated in accordance with the termination provision thereof.
Memorandum of Understanding
Concurrently with the execution of the Merger Agreement and the Voting
Agreement, the Management Stockholders also entered into a binding Memorandum
of Understanding with PHCR (the "MOU"). In addition
86
to providing for the roll-over of Pinnacle Common Stock and Pinnacle Stock
Options described above, the MOU provides that:
. a Management Stockholder may, immediately following the Pinnacle Merger,
perform a cashless exercise of his options to purchase PHCR stock or,
immediately prior to the Closing, his Pinnacle Stock Options,
. PHCR will make available to such Management Stockholders (other than
Messrs. Hubbard, Finnigan and Alanis) interest bearing loans, in an
aggregate amount not to exceed $2.5 million and with a four year
maturity, to pay taxes incurred in connection with the cashless exercise
of the options,
. each of the Management Stockholders (other than Messrs. Finnigan and
Hubbard) who is also an employee of Pinnacle will have the right,
individually, to require PCHR to repurchase his shares of PHCR stock and
PHCR will have the right to acquire such shares, upon the termination of
such employee's employment with PHCR, and
. at the closing of the Pinnacle Merger the Management Stockholders would
receive restricted stock grants and be eligible to receive unvested
stock options to purchase PHCR stock.
At the Closing, PHCR will grant 604,464 shares of restricted PHCR common
stock to the Management Stockholders in the following amounts (which may vary
to a limited degree based on the amount of the Contingent Payment actually
made, if any):
Number
of
Name shares
---- -------
R. D. Hubbard........................................................ 391,561
G. Michael Finnigan.................................................. 12,089
Paul Alanis.......................................................... 123,311
Loren Ostrow......................................................... 27,204
J. Michael Allen..................................................... 28,674
Cliff Kortman........................................................ 9,941
Bruce Hinckley....................................................... 5,776
Richard Delaney...................................................... 1,118
Chris Plant.......................................................... 2,372
Robert Callaway...................................................... 2,418
Such stock shall be fully vested when granted, but shall be subject to
special forfeiture restrictions and deferral arrangements.
The MOU provides that an additional 530,223 shares of PHCR common stock
will be reserved for issuance of stock options pursuant to a stock option plan
for the benefit of members of senior management of Pinnacle. The division of
such new options among such members of senior management shall reasonably be
determined by Mr. Alanis, consistent with industry standards and subject to
the approval of PHCR. Except in the case of Messrs. Hubbard and Finnigan,
shares issued or issuable under the terms outlined in this paragraph are
subject to a right of repurchase by PHCR, pursuant to the Stockholders
Agreement. Any new options granted to each of Messrs. Alanis, Allen, Ostrow
and Kortman shall vest 20% on each of the first five anniversaries of the
Closing subject to certain exceptions.
The MOU provides that any PHCR stock or options issued under the MOU shall
be subject to the Stockholders Agreement.
Each of the Management Stockholders will also enter into a noncompetition
agreement with Pinnacle under which such Management Stockholder will agree not
to:
. engage in owning, operating and developing casinos, hotels or race track
interests associated or materially competitive with casinos, hotels or
race track interests owned directly or indirectly by PHCR (or where PHCR
has announced its present intention to develop such properties or
interests),
87
. solicit any employee, agent or consultant of Pinnacle to terminate such
person's relationship with Pinnacle or
. solicit any counterparty to any contract with the Company to terminate
such counterparty's contract or other relationship with Pinnacle.
With respect to Mr. Hubbard, these restrictions would only be effective
during the period he serves on the Board of PHCR and following the time he
ceases to be a director of PHCR, for a period of one year in the case of the
noncompetition provision and two years in the case of the nonsolicitation
provisions. In addition, such provisions shall not restrict Mr. Hubbard's
ownership, operation and development of casinos, hotels or race track
interests in New Mexico so long as PHCR or any of its affiliates does not own
any casinos, hotels or race track interests in New Mexico or in a market
outside of New Mexico that competes directly with the markets inside New
Mexico. If PHCR or its affiliates acquires a material interest in or otherwise
develops any casinos, hotels or race track interests in New Mexico or in a
market outside New Mexico that competes directly with the markets inside New
Mexico, Mr. Hubbard shall be permitted to continue to operate and develop
casinos, hotels or race track interests, located in New Mexico and owned or
operated in whole or in part by him on the date of such acquisition or
development or as to which Mr. Hubbard has announced a present intention to
acquire or develop. Mr. Finnigan shall only be subject to the noncompetition
provision during the period that he serves as an employee of Pinnacle. For
Management Stockholders other than Messrs. Hubbard and Finnigan, these
restrictions are effective during the period of employment and following the
termination of employment for a period of up to one year in the case of the
noncompetition provision and for two years in the case of the nonsolicitation
provisions.
Under the MOU, all existing employment agreements of the Management
Stockholders shall be assumed without modification except to the extent
necessary to reflect the subject transaction and the structure of Pinnacle and
its affiliates.
The MOU also covers certain corporate governance matters. Subject to
licensing and regulatory restrictions, and in accordance with the MOU and
agreements among the parties thereto, upon consummation of the Pinnacle
Merger, it is currently expected that the Board of Directors of PHCR will
include R. D. Hubbard, Chairman of the PHCR Board, as well as Thomas J.
Barrack, Jr. The PHCR Board of Directors also may include other nominees
determined by Colony III or otherwise in accordance with agreements among the
parties to the MOU. In accordance with the MOU and agreements among the
parties thereto, it is currently expected that Mr. Hubbard will be a member
of, and Mr. Barrack shall be designated as the Chairman of, the Executive
Committee of the PHCR Board. The PHCR Board will delegate to the Executive
Committee substantially all of its powers to govern the business and affairs
of Pinnacle. Affiliates of Colony III designated for the Board of Directors
(other than PHCR and its subsidiaries) shall also constitute a majority of the
compensation committee of the board, if any.
STOCKHOLDERS AGREEMENT
PHCR, Voteco, Colony III and the Management Stockholders have agreed to
enter into a Stockholders Agreement governing their relationship with respect
to one other following the closing of the transaction. For purposes of this
discussion, Voteco, Colony III and the Management Stockholders collectively
are referred to as the "PHCR Stockholders." All of the shares of PHCR common
stock to be issued to the PHCR Stockholders will be subject to the
Stockholders Agreement.
The proposed Stockholders Agreement will have terms substantially similar
to those summarized below. The following summary does not purport to be
complete and is qualified in its entirety by reference to the definitive
Stockholders Agreement to be entered into on the closing date of the
transaction. To the extent that any of the provisions of the Stockholders
Agreement are inconsistent with the terms of the MOU entered into among PHCR
and the Management Stockholders, the provisions of the MOU will govern and
control. See "Voting and Contribution Agreement; Memorandum of Understanding."
88
Restrictions on Transfer of PHCR Common Stock
The Stockholders Agreement will prohibit any PHCR Stockholder from directly
or indirectly selling, assigning, hypothecating or otherwise transferring any
shares of PHCR common stock owned by it, except following the closing of a
registered public offering of PHCR's common stock (an "IPO"), and except for
transfers expressly permitted by the Stockholders Agreement, without the
express written consent of Voteco, which consent may be granted or denied in
Voteco's sole and absolute discretion.
Transfers expressly permitted by the Stockholders Agreement include:
. the transfer of PHCR common stock by any Management Stockholder to PHCR,
Voteco, Colony III or their respective affiliates, provided that the
transferee has all necessary gaming approvals and agrees in writing to
be bound by the provisions of the Stockholders Agreement,
. the transfer by any PHCR Stockholder to its respective controlling
stockholder, 80% or more owned subsidiary or, in the case of an
individual stockholder, spouse or immediate family member, provided that
the transferee has all necessary gaming approvals, and
. any sale or other disposition by a Management Stockholder pursuant to
his or her tag-along rights described below. See "--Tag-along Rights of
Management Stockholders."
In addition, the Stockholders Agreement will prohibit a Management
Stockholder from transferring any of his or her shares of PHCR common stock
if, after giving effect to and as a result of that transfer, that Management
Stockholder would hold a different proportion of voting and non-voting PHCR
common stock.
Right of First Offer by Management Stockholders
Each time that a Management Stockholder proposes to transfer any shares of
PHCR common stock owned by him or her, that Management Stockholder must first
offer the shares of PHCR common stock he or she proposes to transfer (the
"Offered Shares") to PHCR. In the event that PHCR does not elect to purchase
any or all of the Offered Shares within the time period specified in the
Stockholders Agreement, the right to purchase the Offered Shares passes
automatically from PHCR to Voteco and Colony III. If all of the Offered Shares
are not purchased by PHCR, Voteco or Colony III within the time period
specified in the Stockholders Agreement, then such Management Stockholder has
the right, for a specified period of time, to sell or otherwise dispose of the
remaining Offered Shares at the price, and upon terms and conditions not
materially more favorable to the proposed purchaser in the aggregate than the
terms and conditions, at which the Offered Shares were offered to PHCR, Voteco
and Colony III.
The right of first offer does not apply to:
. any repurchase of equity securities by PHCR upon the retirement or
termination of a Management Stockholder except as described below, or
. any transfers by Management Stockholders expressly permitted by the
Stockholders Agreement.
The right of first offer provision terminates following the consummation of
an IPO.
Termination of Employment of Employee Stockholder
If a Management Stockholder ceases to be employed by PHCR and the
repurchase by PHCR of PHCR common stock owned by that Management Stockholder
is not governed by any other agreement between PHCR and that Management
Stockholder, then all of the shares of PHCR common stock owned by that
Management Stockholder become subject to the right of first offer described
above at a proposed offer price equal to the "fair market value" of such
shares on the date of termination of the Management Stockholder's employment
with PHCR. "Fair market value" means the closing sale price of such shares if
PHCR common stock of the same class is publicly traded or, if PHCR common
stock of the same class is not publicly traded, then fair market
89
value will be determined by negotiation between the PHCR Board of Directors
and the Management Stockholder or, in the event that the PHCR Board of
Directors and the Management Stockholder cannot agree, by arbitration.
The foregoing paragraph does not apply to Management Stockholders who are
employees of PHCR. The repurchase by PHCR of shares of PHCR common stock owned
by Management Stockholders who are employees of PHCR is governed by the MOU.
See "Voting and Contribution Agreement; Memorandum of Understanding."
Tag-along Rights of Employee Stockholders
If Voteco or Colony III proposes to offer a certain percentage of the
shares of PHCR common stock owned by Voteco or Colony III to any non-
affiliate, then each of the Management Stockholders has the right to elect to
include, at his or her sole option, in that offer the same relative percentage
of shares of PHCR common stock owned by such Management Stockholder; provided
that Voteco and Colony III will have the right to acquire any shares of PHCR
common stock which any Management Stockholder elects to include in the offer
on the same terms and at the same times as such shares would otherwise be sold
to the non-affiliate.
However, Management Stockholders (other than Messrs. Hubbard and Finnigan
as described below under "--Additional Rights of Messrs. Hubbard and
Finnigan") have no tag-along rights if:
. after the consummation of the offer Voteco, Colony III and their
respective affiliates will own in the aggregate at least 80% of the
outstanding common equity of PHCR, if on or before an IPO,
. after the consummation of the offer Voteco, Colony III and their
respective affiliates will own in the aggregate at least 50% of the
outstanding common equity of PHCR, if after an IPO, or
. if the number of shares of PHCR common stock to be offered by Voteco,
Colony III or any of their respective affiliates represents in the
aggregate no greater than 20% of the aggregate shares of PHCR common
stock held by Voteco or Colony III as of the date of the Stockholders
Agreement.
Sale of PHCR or Public Offering of PHCR Common Stock
If Voteco, Colony III or any of their respective affiliates proposes at any
time to sell to a non-affiliate shares of PHCR common stock representing 90%
or more of the outstanding common equity of PHCR or proposes to undertake an
IPO, the Management Stockholders agree to consent to and raise no objections
(including, without limitation, asserting appraisal or similar rights)
against:
. any sale by Voteco, Colony III or their respective affiliates to a non-
affiliate having all requisite gaming law approvals of shares of PHCR
common stock representing 90% or more of the outstanding common equity
of PHCR, or
. any IPO which Voteco, Colony III or any of their respective affiliates
proposes to undertake.
In addition, each of the Management Stockholders agrees to take additional
actions to facilitate such sale or IPO, including:
. voting all of the shares of PHCR common stock held by him or her, if a
vote of stockholders is required, to approve such sale,
. selling all of the shares of PHCR common stock held by him or her at the
price and on the terms and conditions upon which Voteco, Colony III or
their respective affiliates propose to sell or otherwise dispose of the
shares of PHCR common stock held by them,
. if requested by Voteco, Colony III or their respective affiliates,
consenting to and raising no objections to any recapitalization or
reclassification of the equity securities of PHCR, including any related
amendment to the certificate of incorporation of PHCR, required to
facilitate such sale or IPO, provided that with respect to each class of
PHCR common stock all shares of that class are treated identically in
the recapitalization, reclassification and amendment, as applicable, and
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. taking all other actions in his or her capacity as a stockholder that
Voteco, Colony III or their respective affiliates reasonably deem
necessary or desirable in connection with the consummation of such sale
or IPO.
Such actions include agreeing to be subject to "lock-up" restrictions in
the case of an IPO that are no more restrictive than those to which the other
Management Stockholders having commensurate job duties and responsibilities
are subject (or if such Management Stockholder is not employed by PHCR at such
time, then no more restrictive than those to which any other PHCR Stockholder
is subject) and in the case of a sale that are no more restrictive than those
to which any other PHCR Stockholder is subject.
Any lock-up restrictions to which Messrs. Hubbard and Finnigan are to be
subject will have additional limitations, as discussed below under "--
Additional Rights of Messrs. Hubbard and Finnigan."
Registration Rights
Holders of PHCR common stock will have incidental registration rights if,
after an IPO, PHCR proposes to register any of its common stock under the
Securities Act in connection with a public offering solely for cash, other
than by a registration in connection with an acquisition or in a manner which
would not permit registration of shares of PHCR common stock held by the PHCR
Stockholders.
In addition, Mr. Hubbard will have one demand registration right. See "--
Additional Rights of Messrs. Hubbard and Finnigan."
Additional Rights of Messrs. Hubbard and Finnigan
In connection with the Stockholders Agreement, Colony III will enter into
agreements with each of Mr. Hubbard and Mr. Finnigan. These agreements will
grant Messrs. Hubbard and Finnigan the following additional rights with
respect to their shares of PHCR common stock:
. the right to sell or dispose of shares pursuant to the tag-along rights
described above without giving effect to the provisions relating to the
percentage ownership of Colony III, Voteco and their respective
affiliates after the offer (see the second paragraph under "--Tag-along
Rights of Employee Stockholders" above),
. a "lock-up" restriction in the case of an IPO or a sale of PHCR that is
coextensive with that of Colony III (see "--Sale of PHCR or Public
Offering of PHCR Common Stock" above), and
. in the case of Mr. Hubbard, one demand registration right, subject to
customary terms and conditions and any lock-up required in connection
with an IPO.
In addition, so long as Mr. Hubbard beneficially owns at least 50% of the
outstanding shares of PHCR common stock owned by him immediately following the
effective time of the Pinnacle Merger (taking into account restricted stock
and stock options issued by PHCR), without Mr. Hubbard's approval, which
approval shall not be unreasonably withheld or delayed, Colony III shall not
consent to any waiver of the Stockholders Agreement or the MOU, or any of the
agreements contemplated by either of the Stockholders Agreement or the MOU,
that would materially adversely affect Mr. Hubbard's rights under the
Stockholders Agreement.
Termination of Stockholders Agreement
The Stockholders Agreement will terminate upon the earliest to occur of:
. termination by written agreement of Voteco, Colony III and the other
PHCR Stockholders party to the Stockholders Agreement,
. Management Stockholders or any of their respective controlling
stockholders, 80% or more owned subsidiaries or, in the case of an
individual Management Stockholder, spouses or immediate family members,
no longer beneficially own any shares of PHCR common stock (except if
the foregoing results from a transfer in violation of the Stockholders
Agreement), or
91
. Voteco, Colony III or their respective affiliates own shares of PHCR
common stock representing less than 25% of the outstanding common equity
of PHCR (except if the foregoing results from a transfer in violation of
the Stockholders Agreement).
In addition, a Management Stockholder will cease to be a party to or have
any rights under the Stockholders Agreement if and when that Management
Stockholder ceases to beneficially own any shares of PHCR common stock.
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COMMON STOCK MARKET PRICE AND DIVIDEND INFORMATION
Market Price Information
Pinnacle Common Stock is traded on the New York Stock Exchange under the
symbol "PNK." The table below sets forth the high and low closing sales prices
per share of Pinnacle Common Stock on the New York Stock Exchange for each
quarterly period for the two most recent fiscal years and for the current
fiscal year to date.
High Low
---- ---
First Quarter, Fiscal Year 1998.............................. $22.19 $ 11.75
Second Quarter, Fiscal Year 1998............................. $13.25 $ 11.00
Third Quarter, Fiscal Year 1998.............................. $12.38 $ 10.00
Fourth Quarter, Fiscal Year 1998............................. $10.56 $ 8.13
First Quarter, Fiscal Year 1999.............................. $10.44 $ 8.25
Second Quarter, Fiscal Year 1999............................. $17.00 $ 10.50
Third Quarter, Fiscal Year 1999.............................. $18.69 $ 14.75
Fourth Quarter, Fiscal Year 1999............................. $23.13 $ 15.13
First Quarter, Fiscal Year 2000.............................. $23.50 $16.625
On March 6, 2000, the second to last trading day prior to the public
announcement that the Company had received a proposal regarding the proposed
transaction, the high, low and closing sales prices per share of Pinnacle
Common Stock on the New York Stock Exchange were $17.375, $16.75 and $17.25,
respectively. On April 14, 2000, the last trading day before the announcement
of the signing of the definitive Merger Agreement, the high, low and closing
sales prices per share of Pinnacle Common Stock on the New York Stock Exchange
were $19.75, $19.0625 and $19.75, respectively. On , 2000, the last
trading day before the date of this Proxy Statement, the high, low and closing
sales prices per share of Pinnacle Common Stock on the New York Stock Exchange
were $ , $ and $ , respectively.
Dividend Information
No dividends have been paid during the past two years with respect to
Pinnacle Common Stock. In addition, the Company's bank credit agreement, and
the Indenture dated as of August 1, 1997, as amended by the First Supplemental
Indenture thereto dated February 5, 1999, relating to the Company's 9 1/2%
Senior Subordinated Notes due 2007 and the Indenture dated February 18, 1999
relating to the Company's 9 1/4% Senior Subordinated Notes due 2007 each
prohibits or limits the Company from declaring or paying any dividends on its
capital stock. Similarly, the Merger Agreement prohibits or limits the Company
from declaring, setting aside or paying any dividends on its capital stock
during the term of the Merger Agreement. See "Merger Agreement--Conduct of
Business Pending the Pinnacle Merger."
COMMON STOCK PURCHASE INFORMATION
Purchases by the Company
During the third quarter of 1998, the Company purchased 500,000 shares of
Pinnacle Common Stock. The purchase price of such shares ranged from $10.0625
to $11.75. The weighted average purchase price during such period was
$11.0625. Except as described below, the Company made no other purchases of
Pinnacle Common Stock during the past two years.
From time to time, the Company purchases shares of Pinnacle Common Stock
for directors' accounts under the Amended and Restated Directors Deferred
Compensation Plan. See "Proposal 2: Election of Directors--Amended and
Restated Directors Deferred Compensation Plan." During the past two years, the
Company purchased an aggregate of 39,329 shares of Pinnacle Common Stock for
the directors' accounts.
93
Purchases by Management Stockholders
During the third quarter of 1998, Paul Alanis purchased 300,000 shares of
Pinnacle Common Stock for prices ranging from $10.00 to $10.875 (with a
weighted average purchase price of $10.6875).
During the third quarter of 1999, Bruce Hinckley purchased 5,000 shares of
Pinnacle Common Stock for prices ranging from $14.625 to $14.75 (with a
weighted average purchase price of $14.75).
During the fourth quarter of 1999, G. Michael Finnigan exercised options to
purchase 30,000 shares of Pinnacle Common Stock for prices ranging from $17.00
to $17.125 (with a weighted average purchase price of $17.125). Mr. Finnigan
exercised such options on a cashless basis and immediately sold the shares he
so acquired.
Except as described above, no directors or executive officers of the
Company purchased shares of Pinnacle Common Stock during the past two years.
94
PROPOSAL 2:
ELECTION OF DIRECTORS
(Item No. 2 on Proxy Card)
At the Annual Meeting, holders of Pinnacle Common Stock will be asked to
vote on the election of nine directors who will constitute the full Board of
Directors of the Company. The nine nominees receiving the highest number of
votes from holders of shares of Pinnacle Common Stock represented and voting
at the Annual Meeting will be elected to the Board of Directors. Abstentions
and broker non-votes will not be counted as voting at the meeting and
therefore will not have an effect on the election of the nominees listed
below.
Each director elected will hold office until the earlier of the next annual
meeting of the Company (and until his successor is elected and qualified) or
the effective time of the Pinnacle Merger. If the Pinnacle Merger is
completed, all of the directors will be replaced at the effective time by the
Board of Directors of Pinnacle Acq Corp.
The nominees listed below constitute the entire current Board of Directors
of the Company.
General
Each proxy received will be voted for the election of the persons named
below, unless the stockholder signing such proxy withholds authority to vote
for one or more of these nominees in the manner described in the proxy.
Although it is not contemplated that any nominee named below will decline or
be unable to serve as a director, in the event any nominee declines or is
unable to serve as a director, the proxies will be voted by the proxy holders
as directed by the Board of Directors.
There are no family relationships between any director, nominee or
executive officer and any other director, nominee or executive officer of the
Company. Except as described below, there are no arrangements or
understandings between any director, nominee or executive officer and any
other person pursuant to which he has been or will be selected as a director
and/or executive officer of the Company. See "--Information Regarding the
Directors of the Company."
THE BOARD OF DIRECTORS RECOMMENDS A VOTE "FOR" ELECTION OF ALL OF THE
NOMINEES LISTED BELOW.
Information Regarding the Directors of the Company
The following table lists the persons nominated by the Board of Directors
for election as directors of the Company and provides their ages and current
positions with the Company. Biographical information for each nominee is
provided below.
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), 67 Director
(b)....................
Marlin Torguson......... 55 Director
- --------
(a) Member of Executive Committee
(b) Member of Compensation Committee
(c) Member of Audit Committee
95
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. (gaming operations), 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, with a business
address of 150 S. Los Robles Avenue, Suite 880, Pasadena, California 91101;
President, KII-Pasadena, Inc. since December 1988 (real estate and casino
consulting), with a business address of 150 S. Los Robles Avenue, Suite 410,
Pasadena, California 91101; and President, Koar International, Inc. from 1991
to 1995 (real estate and casino consulting), with a business address of 150 S.
Los Robles Avenue, Suite 410, Pasadena, California 91101.
Mr. Manfuso has been a Director of the Company since 1991; Director,
Hollywood Park Operating Company from February 1991 to January 1992; Partner,
Manfuso Brothers Investments (personal investments) since 1980, with a
business address of 2730 University Boulevard West, Suite 430, Wheaton,
Maryland 20902; 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. (auto glass corporation) 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, with a business address of 7900 Xerxes Avenue, Suite #1800, Minneapolis,
Minnesota 58431; Director, Northstar Photonics (telecommunications business)
since December 1998, with a business address of 3750 Annapolis Lane North,
#135, Plymouth, Minnesota 55447; Chairman, Genesis Portfolio Partners, LLC,
(start-up company development) since August 1998, with a business address of
3889 Central Avenue NE, #536, Columbia Heights, Minnesota 55421; 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 (golf management) since 1993, with a
business address of 301 Commerce, Suite 1470, Fort Worth, Texas 76102;
President, Cumberland Capital Corporation (personal investments) since 1990,
with a business address of 301 Commerce, Suite 1470, Fort Worth, Texas 76102;
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 stockholder 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; Consultant
to the Company from November 1998 to present; Chairman of the Board and Chief
Executive Officer, Boomtown, Inc. (gaming operations) from September 1992 to
October 1998, with a business address of Interstate 80 and Boomtown Road,
96
Verdi, Nevada, 89439; 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. 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.
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,
Herman 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. See "--Certain Relationships and Related
Transactions."
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 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
97
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.
All directors hold office until the next annual meeting of stockholders and
until their successors are duly elected and qualified, or until his earlier
death, retirement, resignation or removal from office. 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 Pinnacle Stock Options per year. 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 Pinnacle 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 (who resigned from the Board of Directors in
March 2000) and Torguson was granted a non-qualified stock option to purchase
2,000 shares of Pinnacle 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.
In connection with the Pinnacle Merger, the options held by Messrs.
Martineu, Miller, Ornest, Parrott, Reitnouer, Sarkowsky and Torguson will be
treated in the same manner as Pinnacle Stock Options held by persons who are
not members of the Board of Directors. See "Merger Agreement--Conversion of
Pinnacle Shares and Stock Options; Contingent Payment Rights" and "Special
Factors--Certain Effects of the Pinnacle Merger."
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 Pinnacle 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 Pinnacle 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
98
price of Pinnacle Common Stock on the principal stock exchange on which
Pinnacle 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 Pinnacle 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 Pinnacle 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 Pinnacle 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 Pinnacle Common Stock on such date, by
the closing price of Pinnacle Common Stock on the principal stock exchange on
which Pinnacle 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 Pinnacle 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 Pinnacle Common Stock which such shares would
have been entitled to if such shares had been shares of issued and outstanding
Pinnacle Common Stock on the record date for such stock dividend(s).
Participating directors do not have any interest in the cash and/or
Pinnacle 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 Pinnacle 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 Pinnacle 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 Pinnacle Common Stock to meet the needs of the Directors Plan. The
shares of Pinnacle 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).
Upon consummation of the Pinnacle Merger, any and all shares of Pinnacle
Common Stock held in directors' deferred compensation accounts will be
converted into the right to receive the Pinnacle Merger Consideration
(including any adjustment for the Contingent Payment) in the same manner as
shares of Pinnacle Common Stock held by stockholders other than members of the
Board of Directors. It is expected that the right to receive the merger
consideration held in such deferred compensation accounts will mature, and
that such consideration will be distributed, in accordance with the Directors
Plan.
99
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.
Executive Officers
Executive officers serve at the discretion of the Board of Directors,
subject to rights, if any, under contracts of employment. See "--Executive
Compensation." The current executive officers of the Company are as follows:
Name Age Position
---- --- --------
R.D. Hubbard........................ 64 Chairman of the Board of Directors
and Chief Executive Officer
Paul R. Alanis...................... 51 President and Chief Operating Officer
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
Biographical information for Mr. Hubbard and Mr. Alanis is provided above.
See "--Information Regarding Directors of the Company."
Mr. Allen has served as the Company's Senior Vice President and Chief
Operating Officer, Gaming Operations, since January 1999; Chief Operating
Officer, Horseshoe Gaming, Inc. (gaming operations) from October 1, 1995 to
December 31, 1998, with a business address of 4024 Industrial Road, Las Vegas,
NV 89103, and, prior to that, General Manager, Horseshoe Casino Center (gaming
operations) from May 1994 to October 1995, with a business address of Robinson
Property Group, L.P. dba Horseshoe Casino & Hotel, 1021 Casino Center Drive,
Robinsonville, MS; 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.
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. (movie simulation theaters) from September 1996 to
February 1999, with a business address of 4540 W. Valerio, Burbank, CA;
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, with a
business address of 1801 Century Park East, Los Angeles, CA 90067. Mr.
Hinckley is a certified public accountant.
100
Executive Compensation
The following tables summarize the annual and long-term compensation of,
and Pinnacle 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 $100,000 in total during the fiscal year ended
December 31, 1999 (collectively, the "Named Officers"). None of the Named
Officers held stock appreciation rights during the years reported in the
tables.
Summary Compensation Table
Long Term
Compensation
------------
Annual
Compensation Awards
----------------- Securities
Name and Principal Salary Bonus Other Annual Underlying All Other
Position Year ($) ($) Compensation Options 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)
Officer
Paul R. Alanis.......... 1999 $600,000 $400,000 $ 0 0 $ 1,735(c)
President and Chief 1998 0 0 0 400,000
Operating Officer 1997 0 0 0 0
J. Michael Allen........ 1999 $389,657 $125,000 $ 0 0 $ 1,735(d)
Senior Vice President 1998 0 0 0 200,000
and Chief Operating 1997 0 0 0 0
Officer of 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)
Realty 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
Chief Financial Officer 1997 0 0 0 0
and 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 Hollywood Park matching contributions under the Hollywood Park
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
Hollywood Park'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 March 15, 2000, the Company adopted the First Amendment to 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, bonuses, and cash payments received upon a change in control (as
defined in the Executive Plan) in consideration of the cancellation of stock
options held by such persons ("Option Cancellation Payment"). The Executive
101
Plan is administered by the Compensation Committee of the Board of Directors
and 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 Compensation Committee. A participating employee may
elect to defer up to 75% of his or her base annual salary, up to 100% of his
or her bonus per year and up to 100% of his or her Option Cancellation
Payment. 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 Compensation 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 Compensation Committee's approval, to
receive a lump sum distribution; provided, however, that if such termination,
retirement, disability or death occurs within 18 months of a change in control
(as defined in the Executive Plan), then the employee's deferral contribution
account balance shall be paid in the form of one lump sum payment not later
than 30 days after the termination, retirement, disability or death.
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 Compensation
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 10% of the total
account balance and temporary suspension of the employee's participation in
the Executive Plan.
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 Pinnacle Common Stock
102
upon exercise of the Pinnacle Stock Options, respectively. Except for the
provisions governing the number of shares issuable 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, Pinnacle Stock Options alone or coupled with stock appreciation rights
may be granted to selected key employees, directors, consultants and advisors
of the Company. Pinnacle Stock 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 Pinnacle Stock 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 Pinnacle Common Stock at the date of grant.
As of December 31, 1999, the 1996 Stock Option Plan was the only plan with
Pinnacle 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,
Pinnacle Stock Options to purchase 554,449 had been granted. In addition,
721,077 and 256,136 shares of Pinnacle Common Stock were issuable upon
exercise of Pinnacle Stock 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 SEC covering an
aggregate of 3,505,332 shares of Pinnacle Common Stock issuable upon exercise
of Pinnacle Stock Options granted under the Stock Option Plans, Boomtown's
stock option plans and Casino Magic's stock option plans.
All of the Company's stock option plans will terminate as of the effective
time of the Pinnacle Merger. Immediately following such effective time, no
holder of a Pinnacle Stock Option or any participant in any of the Company's
stock option plans will have any right thereunder to acquire any capital stock
of the Company, Pinnacle Acq Corp or PHCR pursuant to such options or such
plans. See "Merger Agreement--Conversion of Pinnacle Shares and Stock Options;
Contingent Payment."
Options Grants in Last Fiscal Year
The following table summarizes the Pinnacle Stock 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
- --------------------------------------------------------------
Potential
Realizable Value at
Assumed Annual
Number of Percent of Rates of Stock
Securities Total Options Price Appreciation
Underlying Granted to Exercise Or for Option Term
Options Employees in Base Price Expiration -------------------
Name Granted (#) Fiscal Year ($/Sh) Date 5% ($) 10% ($)
---- ----------- ------------- ----------- ------------- -------- ----------
R.D.
Hubbard 100,000 36% $9.625 Mar. 29, 2009 $605,000 $1,534,000
G.
Michael
Finnigan 40,000 15% 9.625 Mar. 29, 2009 242,000 614,000
Bruce C.
Hinckley 25,000 9% 9.6875 Mar. 17, 2009 151,000 386,000
103
Aggregated Options Exercises in Last Fiscal Year and Fiscal Year-End Options
Values
The following table sets forth information with respect to the exercise of
Pinnacle Stock Options during the year ended December 31, 1999, and the final
year end value of unexercised Pinnacle Stock Options. None of the Named
Officers held stock appreciation rights during the year ended December 31,
1999.
Number of
Securities
Underlying
Unexercised
Shares Options At
Acquired Fiscal Year-End Value of Unexercised
On Value (#) In-the-Money Options
Exercise Realized Exercisable/ At Fiscal Year-End ($)
Name (#) ($) Unexercisable Exercisable/Unexercisable
- ---- -------- -------- --------------- -------------------------
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
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 Pinnacle Stock Option grants.
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 Pinnacle
Stock Option grants.
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 Pinnacle Stock Options.
Each of the employment agreements described above will be assumed by PHCR
or its subsidiaries in connection with the Pinnacle Merger. See "Voting and
Contribution Agreement; Memorandum of Understanding."
104
Compensation Committee Report on Executive Compensation
The Compensation Committee of the Board of Directors, which is composed
entirely of independent outside directors, is responsible for making
recommendations to the Board regarding the annual salaries and other
compensation of the officers of the Company and providing assistance and
recommendations with respect to compensation plans.
In order to attract and retain well-qualified executives, which the
Compensation Committee believes is crucial to the Company's success, the
Compensation Committee's general approach to compensating executives is to pay
cash salaries which are commensurate with the executives' experience and
expertise and, where relevant, are competitive with the salaries paid to
executives in the Company's main industries and primary geographic locations,
which are currently land based, dockside and riverboat casinos in Nevada,
Louisiana, Mississippi, and other jurisdictions, and a thoroughbred horse
racing track in Arizona. In addition, to align its executives' compensation
with the Company's business strategies, values and management initiatives,
both short and long term, the Compensation Committee may, with the Board's
approval, authorize the payment of discretionary bonuses based upon an
assessment of each executive's contributions to the Company. In general, the
Compensation Committee believes that these discretionary bonuses should be
related to the Company's and the executive's performance, although specific
performance criteria have not been established.
The Compensation Committee also believes that stock ownership by key
executives provides a valuable incentive for such executives and helps align
executives' and stockholders' interests. To facilitate these objectives, the
Company adopted Stock Option Plans in 1993 and 1996, pursuant to which the
Company may grant stock options to executives (as well as other employees and
directors) to purchase up to 625,000 shares and 900,000 shares, respectively,
of Pinnacle Common Stock. The Compensation Committee believes that the key
officers of the Company have provided excellent services and been diligent in
their commitment to the Company. The Compensation Committee believes that
stock ownership by such officers provides an important incentive for their
continued efforts and diligence. On March 29, 1999, Pinnacle Stock Options of
100,000 and 40,000 shares were granted to Messrs. Hubbard and Finnigan,
respectively, at an exercise price of $9.625 per share.
In December, the Compensation Committee, in accordance with each executive
officer's employment agreement, and based upon the excellent services that
such executive officer performed during 1999, approved bonus awards, which
were paid in February 2000, as follows: Paul R. Alanis, $400,000; G. Michael
Finnigan, $500,000; J. Michael Allen, $125,000; and Bruce C. Hinckley,
$75,000.
Mr. Hubbard's annual salary was $500,000 for 1999. The Compensation
Committee based Mr. Hubbard's annual salary on the following factors: (a) the
Company's expansion into the casino gaming business; (b) the annual salaries
of the Company's Named Officers; and (c) the prominence of Mr. Hubbard in the
business community. In December, the Compensation Committee determined to pay
Mr. Hubbard a bonus, which was paid in February 2000, in the amount of
$700,000 based upon the following factors: (a) the Company's success in
entering into transactions to sell certain of the Company's significant
assets; (b) the performance of the Company and its subsidiaries during 1999;
(c) the level and value of the contributions that the Compensation Committee
believes that Mr. Hubbard has made to the Company in 1999; and (d) the fact
that Mr. Hubbard is willing to accept an annual salary substantially lower
than the Compensation Committee believes Mr. Hubbard could command based on
his business experience and expertise.
On December 23, 1999, the Compensation Committee approved the establishment
of a Deferred Compensation Plan benefiting certain highly compensated
employees of the Company and its subsidiaries (including executive officers).
Pursuant to the Plan, the Company does not make contributions to the Plan for
the benefit of such employees.
December 31, 1999 Compensation Committee
Lynn P. Reitnouer (Chairman)
Robert T. Manfuso
James L. Martineau
105
Performance Graph
Set forth below is a graph comparing the cumulative total stockholder return
for the Company's Pinnacle Common Stock with the cumulative total returns for
the Dow Jones Industry Group CNO--Casinos & Gambling ("Peer Group Index") and
the New York Stock Exchange Market Index ("NYSE Market Index"). Also included
in the graph is the cumulative total return for a designated peer group index
("Custom Index"), which the Company historically included in the performance
graph in its proxy statement but which the Company intends to replace with the
Peer Group Index. The total cumulative return calculations are for the period
commencing December 31, 1994 and ending December 31, 1999, and include the
reinvestment of dividends.
The Custom Index consists of publicly-traded multi-jurisdictional gaming
companies with small or mid-sized stock market capitalizations. As a result of
mergers, consolidations and other similar transactions by many of the companies
in the Custom Index, the Custom Index is currently comprised of only the
following publicly-traded gaming companies: Ameristar Casinos, Inc.; Argosy
Gaming Company; Lady Luck Gaming Corporation; and Players International, Inc.
By contrast, the Peer Group Index includes a larger number and broader range of
companies and consists of approximately thirty publicly-traded gaming
companies. The Company believes that the Peer Group Index is a more appropriate
benchmark against which to measure its stock return performance than the Custom
Index.
COMPARISON OF CUMULATIVE TOTAL RETURN* AMONG
THE COMPANY, NYSE MARKET INDEX,
PEER GROUP INDEX & CUSTOM INDEX
PERFORMANCE GRAPH APPEARS HERE
PINNACLE NYSE PEER
Measurement Period ENTERTAINMENT, MARKET GROUP CUSTOM
(Fiscal Year Covered) INC. INDEX 500 INDEX INDEX
- --------------------- --------------- ---------- --------- -------
Measurement Pt-1994 $100.00 $100.00 $100.00 $100.00
FYE 1995 $ 91.48 $129.66 $116.39 $ 75.56
FYE 1996 $136.36 $156.20 $124.97 $ 48.78
FYE 1997 $200.00 $205.49 $113.29 $ 34.52
FYE 1998 $ 75.57 $244.52 $ 81.90 $ 34.45
FYE 1999 $204.00 $267.75 $130.34 $ 84.47
The above graph shows historical stock price performance (including
reinvestment of dividends) and is not necessarily indicative of future
performance.
- --------
* Assumes $100 invested on January 1, 1994 in Pinnacle Common Stock, Peer Group
Index, NYSE Market Index and the Custom Index. Total return assumes
reinvestment of dividends. Values are as of December 31 of each year.
106
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
Pinnacle 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 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 Pinnacle 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 Pinnacle Stock Options to acquire Pinnacle Common
Stock as of the October 15, 1998 acquisition of Casino Magic, priced at the
closing price of Pinnacle 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.
For certain matters related to the Pinnacle Merger, see "Special Factors,"
" The Pinnacle Merger," "Merger Agreement," "Voting and Contribution
Agreement; Memorandum of Understanding" and "Stockholders Agreement."
Section 16(a) Beneficial Ownership Reporting Compliance
Based solely upon a review of reports furnished to the Company during or
with respect to the year ended December 31, 1999 pursuant to Rule 16a-3(e) of
the Exchange Act, all required reports on Form 3, Form 4 and Form 5 were
timely filed by the Company's directors, officers and 10% stockholders, except
that Mr. Torguson failed to file on a timely basis one Form 4 which reported a
series of acquisitions on a single trading day of shares of Pinnacle Common
Stock and Mr. Ornest failed to file on a timely basis one Form 4 which
reported one disposition of shares of Pinnacle Common Stock of which he had
indirect beneficial ownership.
107
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 Pinnacle
Common Stock), number of shares and percent of the outstanding Pinnacle Common
Stock beneficially owned as of May 19, 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 Pinnacle
Common Stock, each Director, each Named Officer, and all current Directors and
Executive Officers as a group.
Name and Address of Beneficial Shares Beneficially Percent of Shares
Owner Owned Outstanding(a)
- ------------------------------ ------------------- -----------------
Legg Mason, Inc............................................... 2,883,104(b) 11.0%
111 South Calvert Street
Baltimore, Maryland 21202
R.D. Hubbard.................................................. 2,817,820(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............................................ 366,339(e) 1.4%
Michael Ornest................................................ 301,166(f) 1.1%
Marlin Torguson............................................... 103,830(g) *
Lynn P. Reitnouer............................................. 64,000(h) *
Robert T. Manfuso............................................. 42,333(i) *
James L. Martineau............................................ 6,858(j) *
Gary G. Miller................................................ 3,667(k) *
G. Michael Finnigan........................................... 122,082(l) *
J. Michael Allen.............................................. 100,000(m) *
Bruce C. Hinckley............................................. 13,333(n) *
Current Directors and Executive Officers as a group
(13 persons)................................................. 4,441,427(o) 16.3%
- --------
* 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 Pinnacle Common Stock. Based on
26,304,929 shares outstanding as of May 19, 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 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 198,000 shares of Pinnacle Common Stock, which Mr. Hubbard has
the right to acquire upon the exercise of options, which are exercisable
within 60 days of May 19, 2000. These shares also include 249,990 shares
of Pinnacle Common Stock owned by the R.D. and Joan Dale Hubbard
Foundation, a non-profit organization; Mr. Hubbard may be deemed to have
beneficial ownership of such shares.
108
(d) Includes 300,000 shares of Pinnacle Common Stock held by MBJJP, Ltd., a
family limited partnership for which Mr. Alanis and his wife Allison
Alanis act as general partners. Also includes 200,000 shares of Pinnacle
Common Stock, which Mr. Alanis has the right to acquire upon the exercise
of options, which are exercisable within 60 days of May 19, 2000.
(e) Includes 237,278 shares of Pinnacle Common Stock which Mr. Parrott has the
right to acquire upon exercise of options which are exercisable within 60
days of May 19, 2000, including 235,278 options assumed by the Company in
connection with the Boomtown merger.
(f) Includes 2,000 shares of Pinnacle Common Stock, which Mr. Ornest has the
right to acquire upon the exercise of options, which are exercisable
within 60 days of May 19, 2000.
(g) Includes 13,730 shares of Pinnacle Common Stock, which Mr. Torguson has
the right to acquire upon the exercise of options, which are exercisable
within 60 days of May 19, 2000, including 11,730 shares covered by options
assumed by the Company in connection with the Casino Magic merger.
(h) Includes 14,000 shares of Pinnacle Common Stock, which Mr. Reitnouer has
the right to acquire upon the exercise of options, which are exercisable
within 60 days of May 19, 2000.
(i) Includes 14,000 shares of Pinnacle Common Stock, which Mr. Manfuso has the
right to acquire upon the exercise of options, which are exercisable
within 60 days of May 19, 2000.
(j) Includes 6,191 shares of Pinnacle Common Stock owned by Mr. Martineau's
wife, beneficial ownership of which is disclaimed by Mr. Martineau, and
667 shares of Pinnacle Common Stock which Mr. Martineau has the right to
acquire upon the exercise of options, which are exercisable within 60 days
of May 19, 2000.
(k) Includes 667 shares of Pinnacle Common Stock, which Mr. Miller has the
right to acquire upon the exercise of options, which are exercisable
within 60 days of May 19, 2000.
(l) Includes 96,667 shares of Pinnacle Common Stock, which Mr. Finnigan has
the right to acquire upon the exercise of options, which are exercisable
within 60 days of May 19, 2000.
(m) Includes 100,000 shares of Pinnacle Common Stock, which Mr. Allen has the
right to acquire upon the exercise of options, which are exercisable
within 60 days of May 19, 2000.
(n) Includes 8,333 shares of Pinnacle Common Stock, which Mr. Hinckley has the
right to acquire upon the exercise of options, which are exercisable
within 60 days of May 19, 2000.
(o) Includes 885,341 of Pinnacle Common Stock of which the Directors and
Executive Officers may be deemed to have beneficial ownership following
the exercise of options to purchase Pinnacle Common Stock, which are
exercisable within 60 days of May 19, 2000. Excluding such shares, the
Directors and Executive Officers of the Company have beneficial ownership
of 3,556,086 shares of Pinnacle Common Stock, which represents 13.5% of
the shares of Pinnacle Common Stock outstanding as of May 19, 2000.
No director or officer of the Company has engaged in any transaction in
Pinnacle Common Stock during the past 60 days, except that Mr. Parrott sold
43,710 shares of Pinnacle Common Stock with an aggregate market value of
$885,128 (average of $20.25 per share) in brokers' transactions between May 3,
2000 and May 8, 2000.
109
INDEPENDENT PUBLIC ACCOUNTANTS
The consolidated financial position of the Company as of December 31, 1999
and December 31, 1998, and the results of operations and cash flows for each
of the three years ended in the period ended December 31, 1999 have been
audited by Arthur Andersen LLP as stated in their report, which is included in
this Proxy Statement on page F-20. The firm of Arthur Andersen LLP served as
the Company's independent public accountants for the fiscal year ended
December 31, 1999. Representatives of Arthur Andersen LLP are expected to be
present at the Annual Meeting and will be available to respond to appropriate
questions and to make a statement if they so desire.
STOCKHOLDER PROPOSALS FOR THE NEXT ANNUAL MEETING
If the Pinnacle Merger is completed, the Company will not have any public
stockholders and, therefore, there will be no public participation in any
future stockholder meetings. However, if the Pinnacle Merger is not completed,
the Company's public stockholders will continue to be entitled to attend and
participate in meetings of the Company's stockholders.
If the Pinnacle Merger is not completed, under the Company's By-Laws,
stockholders who wish to present proposals for action, or to nominate
directors, at the next annual meeting of stockholders of the Company (that is,
the next annual meeting following the Annual Meeting to which this Proxy
Statement relates) must give written notice thereof to the Secretary of the
Company at the address set forth on the cover page of this Proxy Statement in
accordance with the then current provisions of the Company's By-Laws. The By-
Laws currently require that such notice be given not more than 120 days nor
less than 90 days prior to the first anniversary of this year's Annual
Meeting. If, however, the Company advances the date of the next annual meeting
by more than thirty days or delays such date by more than sixty days, notice
by the stockholder must be given not earlier than 120 days and not later than
90 days in advance of such meeting or, if later, the tenth day following the
first public announcement of the date of such meeting. Stockholder notices
must contain the information required by Section 1 of Article I of the
Company's By-Laws.
In order to be eligible for inclusion in the Company's proxy statement and
proxy card for the next annual meeting pursuant to Rule 14a-8 under the
Exchange Act, stockholder proposals would have to be received by the Secretary
of the Company no later than , 2000 if the next annual meeting were held
on or near , 2001. In the event that the Company elects to hold its next
annual meeting at a different time of year than the time of year of this
Annual Meeting, such stockholder proposals would have to be received by the
Company a reasonable time before the Company's solicitation is made. If the
Company does not have notice of a matter to come before the next annual
meeting by , 2001 (or, in the event the next annual meeting is held at a
different time of year as described in the preceding paragraph, then by the
date described in the preceding paragraph), the Company's proxy for such
meeting will confer discretionary authority to vote for such matter. Further,
in order for such stockholder proposals to be eligible to be brought before
the stockholders at the next annual meeting, the stockholder submitting such
proposals must also comply with the procedures, including the deadlines,
required by the Company's then current By-Laws, as referenced in the preceding
paragraph. Stockholder nominations of directors are not stockholder proposals
within the meaning of Rule 14a-8 and are not eligible for inclusion in the
Company's proxy statement.
ANNUAL REPORT TO STOCKHOLDERS AND FORM 10-K
The Company will provide without charge a copy of its Annual Report to
Stockholders for 1999 and its annual report on Form 10-K, including the
financial statements and the financial statement schedules, filed with the SEC
for fiscal year 1999 to any beneficial owner of Pinnacle Common Stock as of
the Record Date upon written request to Pinnacle Entertainment, Inc., 330
North Brand Boulevard, Suite 1100, Glendale, California 91203, Attention:
Stockholder Relations. The Company will furnish a beneficial owner with any
exhibit not contained therein upon payment of a reasonable fee.
110
WHERE TO FIND ADDITIONAL INFORMATION
The SEC allows the Company to "incorporate by reference" information into
this Proxy Statement, which means that the Company can disclose important
information by referring you to another document filed separately with the SEC.
The following documents previously filed by the Company with the SEC are
incorporated by reference in this Proxy Statement and are deemed to be a part
hereof:
(1) The Company's Annual Report on Form 10-K for the fiscal year ended
December 31, 1999;
(2) The Company's Quarterly Report on Form 10-Q for the fiscal quarter
ended March 31, 2000;
(3) The Company's Current Report on Form 8-K filed on April 18, 2000;
and
(4) The Company's Current Report on Form 8-K filed on May 1, 2000.
Any statement contained in a document incorporated by reference herein shall
be deemed to be modified or superseded for all purposes to the extent that a
statement contained in this Proxy Statement modifies or replaces such
statement.
All documents filed by the Company pursuant to Section 13(a), 13(c), 14 or
15(d) of the Exchange Act after the date of this Proxy Statement and prior to
the date of the Annual Meeting shall be deemed to be incorporated by reference
in this Proxy Statement and to be a part of this Proxy Statement from the date
of filing of such documents.
The Company undertakes to provide by first class mail, without charge upon
receipt of any written or oral request, to any person to whom a copy of this
Proxy Statement has been delivered, a copy of any or all of the documents
referred to above which have been incorporated by reference in this Proxy
Statement, other than exhibits to such documents (unless such exhibits are
specifically incorporated by reference therein). Requests for such copies
should be directed to Pinnacle Entertainment, Inc., 330 North Brand Boulevard,
Suite 1100, Glendale, California 91203, Attention: Stockholder Relations.
111
AVAILABLE INFORMATION
No person is authorized to give any information or to make any
representations, other than as contained in this Proxy Statement, in
connection with the Merger Agreement or the merger, and, if given or made,
such information or representations may not be relied upon as having been
authorized by the Company, PHCR, Pinnacle Acq Corp or Harveys Casino Resorts.
The delivery of this Proxy Statement shall not, under any circumstances,
create any implication that there has been no change in the information set
forth herein or in the affairs of the Company since the date hereof.
Because the Pinnacle Merger may be considered a "going private"
transaction, the Company and certain of the Management Stockholders that may
be considered affiliates of the Company (each of which affiliate Management
Stockholders is also a director and/or executive officer of the Company) have
filed with the SEC a Schedule 13E-3 under the Exchange Act with respect to the
Pinnacle Merger. This Proxy Statement does not contain all of the information
set forth in the Schedule 13E-3 and the exhibits thereto. Copies of the
Schedule 13E-3 and the exhibits thereto are available for inspection and
copying at the principal executive offices of the Company during regular
business hours by any interested stockholder of the Company, or a
representative who has been so designated in writing, and may be inspected and
copied, or obtained by mail, by written request directed to Pinnacle
Entertainment, Inc., 330 North Brand Boulevard, Suite 1100, Glendale,
California 91203, Attention: Stockholder Relations, or from the SEC as
described below.
The Company is currently subject to the information requirements of the
Exchange Act and in accordance therewith files periodic reports, proxy
statements and other information with the SEC relating to its business,
financial and other matters. Copies of such reports, proxy statements and
other information, as well as the Schedule 13E-3 and the exhibits thereto, may
be copied (at prescribed rates) at the public reference facilities maintained
by the SEC at Room 1024, 450 Fifth Street, N.W., Judiciary Plaza, Washington,
D.C. 20549 and at the following Regional Offices of the SEC: 500 West Madison
Street, Suite 1400, Chicago, Illinois 60661; and Seven World Trade Center,
Suite 1300, New York, New York 10048. For further information concerning the
SEC's public reference rooms, you may call the SEC at 1-800-SEC-0330. Some of
this information may also be accessed on the World Wide Web through the SEC's
Internet address at "http://www.sec.gov." The Pinnacle Common Stock is listed
on the New York Stock Exchange (ticker symbol: PNK), and materials may also be
inspected at the office of the New York Stock Exchange located at 20 Broad
Street, Seventh Floor, New York, New York 10005.
R.D. Hubbard
Chairman of the Board and Chief
Executive Officer
Pinnacle Entertainment, Inc.
, 2000
112
PINNACLE ENTERTAINMENT, INC.
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Unaudited
Consolidated Balance Sheets as of March 31, 2000 and December 31, 1999... F-2
Consolidated Statements of Operations for the three months ended March
31, 2000 and 1999....................................................... F-3
Condensed Consolidated Statements of Cash Flows for the three months
ended March 31, 2000 and 1999........................................... F-4
Condensed Notes to Consolidated Financial Statements..................... F-5
Calculation of Earnings per Share........................................ F-19
Audited
Report of Independent Public Accountants
Report of Arthur Andersen LLP........................................... F-20
Consolidated Balance Sheets as of December 31, 1999 and 1998............. F-21
Consolidated Statements of Operations for the years ended December 31,
1999, 1998 and 1997..................................................... F-22
Consolidated Statements of Changes in Stockholders' Equity for the years
ended December 31, 1999, 1998 and 1997.................................. F-23
Consolidated Statements of Cash Flows for the years ended December 31,
1999, 1998 and 1997..................................................... F-24
Notes to Consolidated Financial Statements............................... F-25
Calculation of Earnings per Share........................................ F-50
F-1
PINNACLE ENTERTAINMENT, INC.
CONSOLIDATED BALANCE SHEETS
(in thousands, except share data)
March 31, December 31,
2000 1999
----------- ------------
(unaudited)
ASSETS
------
Current Assets:
Cash and cash equivalents........................... $ 227,815 $ 123,362
Short term investments.............................. 0 123,428
Receivables, net.................................... 16,278 17,132
Prepaid expenses and other assets................... 13,912 13,118
Assets held for sale................................ 153,206 154,649
Current portion of notes receivable................. 5,785 5,785
---------- ----------
Total current assets.............................. 416,996 437,474
Notes receivable...................................... 8,632 8,912
Net property, plant and equipment..................... 473,365 437,715
Goodwill, net of amortization......................... 86,681 87,481
Gaming licenses, net of amortization.................. 40,848 41,485
Debt issuance costs, net of amortization.............. 21,691 22,813
Other assets.......................................... 10,659 9,528
---------- ----------
$1,058,872 $1,045,408
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
Current Liabilities:
Accounts payable.................................... $ 21,122 $ 21,096
Accrued interest.................................... 9,594 26,080
Other accrued liabilities........................... 35,595 36,796
Accrued compensation................................ 16,962 16,073
Liabilities to be assumed by buyers of assets held
for sale........................................... 9,593 9,866
Federal and state income taxes...................... 37,615 28,315
Current portion of notes payable.................... 6,527 6,782
---------- ----------
Total current liabilities......................... 137,008 145,008
Notes payable, less current maturities................ 617,549 618,698
Deferred income taxes................................. 826 826
Stockholders' Equity:
Capital stock--
Preferred--$1.00 par value, authorized 250,000
shares; none issued and outstanding in 2000 and
1999.............................................. 0 0
Common--$0.10 par value, authorized 40,000,000
shares; 26,282,862 and 26,234,699 shares issued
and outstanding in 2000 and 1999.................. 2,629 2,624
Capital in excess of par value...................... 225,350 224,654
Retained earnings................................... 75,510 53,598
---------- ----------
Total stockholders' equity........................ 303,489 280,876
---------- ----------
$1,058,872 $1,045,408
========== ==========
See accompanying condensed notes to consolidated financial statements.
F-2
PINNACLE ENTERTAINMENT, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
For the three
months ended
March 31,
------------------
2000 1999
-------- --------
(in thousands,
except per share
data--unaudited)
Revenues:
Gaming.................................................... $133,153 $140,391
Racing.................................................... 6,143 9,779
Food and beverage......................................... 8,251 9,671
Hotel and recreational vehicle park....................... 2,814 2,668
Truck stop and service station............................ 4,076 2,988
Other income.............................................. 8,160 6,501
-------- --------
162,597 171,998
-------- --------
Expenses:
Gaming.................................................... 74,245 77,378
Racing.................................................... 2,658 5,355
Food and beverage......................................... 9,177 11,655
Hotel and recreational vehicle park....................... 1,540 1,340
Truck stop and service station............................ 3,764 2,758
General and administrative................................ 30,713 35,146
Depreciation and amortization............................. 12,591 13,367
Pre-opening costs, Belterra Resort and Casino............. 1,743 707
Gain on disposition of assets, net........................ (23,854) 0
Proposed merger costs..................................... 625 0
Other..................................................... 2,364 2,454
-------- --------
115,566 150,160
-------- --------
Operating income............................................ 47,031 21,838
Interest expense, net..................................... 12,880 14,491
-------- --------
Income before minority interests and income taxes........... 34,151 7,347
Minority interests........................................ 0 458
Income tax expense........................................ 12,239 2,756
-------- --------
Net income.................................................. $ 21,912 $ 4,133
======== ========
Net income per common share:
Net income--basic......................................... $ 0.83 $ 0.16
Net income--diluted....................................... $ 0.80 $ 0.16
Number of shares--basic..................................... 26,260 25,800
Number of shares--diluted................................... 27,307 25,800
See accompanying condensed notes to consolidated financial statements.
F-3
PINNACLE ENTERTAINMENT, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
For the three
months ended March
31,
-------------------
2000 1999
-------- ---------
(in thousands--
unaudited)
Cash flows from operating activities:
Net income................................................ $ 21,912 $ 4,133
Adjustments to reconcile net income to net cash provided
by (used in) operating activities:
Depreciation and amortization........................... 12,591 13,367
Gain on disposition of assets........................... (23,854) 0
Decrease in other receivables........................... 613 2,499
Increase in prepaid expenses and other assets........... (1,880) (1,040)
Decrease in accrued interest............................ (16,486) (5,540)
Decrease in other accrued liabilities................... (3,494) (1,945)
Increase in federal and state income taxes.............. 9,300 0
All other, net.......................................... 420 (2,624)
-------- ---------
Net cash (used in) provided by operating activities... (878) 8,850
-------- ---------
Cash flows from investing activities:
Additions to property, plant and equipment................ (42,392) (11,281)
Receipts from sale of property, plant and equipment....... 24,353 37
Principal collected on notes receivable................... 280 254
Proceeds from sale of short term investments.............. 123,428 0
-------- ---------
Net cash provided by (used in) investing activities... 105,669 (10,990)
-------- ---------
Cash flows from financing activities:
Proceeds from secured Bank Credit Facility................ 0 17,000
Payment of secured Bank Credit Facility................... 0 (287,000)
Payment on notes payable.................................. (935) (2,006)
Proceeds from issuance of 9.25% Notes..................... 0 350,000
Common stock options excercised........................... 597 0
Increase in debt issuance costs........................... 0 (15,309)
-------- ---------
Net cash (used in) provided by financing activities... (338) 62,685
-------- ---------
Increase in cash and cash equivalents................... 104,453 60,545
Cash and cash equivalents at beginning of the period...... 123,362 44,234
-------- ---------
Cash and cash equivalents at the end of the period........ $227,815 $ 104,779
======== =========
See accompanying condensed notes to consolidated financial statements.
F-4
PINNACLE ENTERTAINMENT, INC.
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 1--Summary of Significant Accounting Policies
Company Name Change. 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).
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) 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); riverboat gaming operations 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).
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 subleased to an unaffiliated third party operator (see Note
3). 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 disposition of the Hollywood Park Race Track in Inglewood, California to
Churchill Downs (see Note 3). 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). 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). In April
2000, the Company entered into a definitive agreement with respect to the
Proposed Merger whereby, if consummated, all the shares of the Company would
be acquired for cash (see Note 2).
The financial information included herein has been prepared in conformity
with generally accepted accounting principles as reflected in the Company's
consolidated Annual Report on Form 10-K, as filed with the Securities and
Exchange Commission, for the year ended December 31, 1999. This Quarterly
Report on Form 10-Q does not include certain footnotes and financial
presentations normally presented annually and should be read in conjunction
with the Company's 1999 Annual Report on Form 10-K.
The information furnished herein is unaudited; however, in the opinion of
management it reflects all normal and recurring adjustments necessary to
present a fair statement of the financial results for the interim periods. It
should be understood that accounting measurements at interim dates inherently
involve greater reliance on estimates than at year end. The interim results of
operations are not indicative of the results for the full year, due to the
seasonality of the Company's racing business, the sale of significant
operating assets in 1999 and pending asset sales at March 31, 2000 which are
expected to close within the next twelve months.
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
F-5
PINNACLE ENTERTAINMENT, INC.
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
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.
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. 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 $659,000 and $356,000 for the three
months ended March 31, 2000 and 1999, 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
$803,000 and $756,000 for the three months ended March 31, 2000 and 1999,
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 consisted 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 three months ended March 31, 2000 and 1999 was
$11,506,000 and $11,436,000, 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 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 $777,000 and
$711,000 for the three months ended March 31, 2000 and 1999, respectively.
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 1999
amounts to be consistent with the year 2000 financial statement presentation.
F-6
PINNACLE ENTERTAINMENT, INC.
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Note 2--Proposed Merger
On March 8, 2000, the Company announced it had received a proposal pursuant
to which an affiliate of Harveys Casino Resorts ("Harveys") would acquire all
of the outstanding shares of common stock of Pinnacle Entertainment. The
Company's Board of Directors formed a special committee (which committee
excluded certain management board members) (the "Special Committee") to
evaluate and negotiate the proposal. Harveys is an affiliate of Colony
Capital, Inc., a private investment firm.
On April 17, 2000, the Company entered into a definitive agreement with PH
Casino Resorts ("PHCR"), a newly formed subsidiary of Harveys, and Pinnacle
Acquisition Corporation ("Pinnacle Acq. Corp."), a newly formed subsidiary of
PHCR, pursuant to which PHCR would acquire by merger all of the outstanding
capital stock of Pinnacle Entertainment (the "PHCR Merger Agreement"). The
proposed merger received the unanimous approval of both the Special Committee
and the Board of Directors of the Company (the "Proposed Merger"). In the
Proposed Merger, Pinnacle Acq. Corp. would merge into Pinnacle Entertainment.
In addition, in connection with the Proposed Merger, Harveys (like the
Company) would become a wholly owned subsidiary of PHCR.
Upon closing of the Proposed Merger, PHCR will acquire all of the
outstanding stock of Pinnacle Entertainment for $24 per fully diluted share in
cash, plus up to an additional $1 per fully diluted share in cash, which
amount is contingent upon the sale of the Company's 97 acres of surplus land
in Inglewood, California for net after tax proceeds of at least $40,750,000 by
December 31, 2001 (see Note 4).
In the event the 97 acres are sold prior to December 31, 2001 for after tax
proceeds of less than $40,750,000 but more than $13,054,000, the $1 per fully
diluted share will be reduced proportionately. In the event the 97 acres are
not sold by December 31, 2001, or have been sold, but at a price less than or
equal to $13,054,000, then Pinnacle Entertainment stockholders would not be
entitled to any additional payment. PHCR's obligation to pay the contingent
portion of the merger consideration will be secured by an irrevocable letter
of credit in the maximum amount of the obligation. As described in Note 4, the
Company has signed an agreement to sell the 97 acres at a price which
management believes will entitle shareholders to the additional $1 payment per
share. There can be no assurances, however, that such sale of the 97 acres
will be completed.
Consummation of the merger is subject to, among other things, (a) senior
management contributing $50,000,000 of Pinnacle Entertainment equity to PHCR
and maintaining an on-going role within PHCR; (b) regulatory approvals in the
various jurisdictions in which the Company and Harveys conduct gaming
operations; (c) approval by a majority of the Company's stockholders; (d)
completion of PHCR's financing for the transaction (which customary bank
commitment and high yield "highly confident" letters have been received by
PHCR); and (e) satisfaction of other conditions precedent, including
completion of the Company's pending casino and race track assets sales (see
Note 4) and the opening of the Belterra Resort and Casino (currently under
construction--see Note 6) substantially in accordance with its current budget
not later than September 15, 2000. The Proposed Merger is expected to close in
the fourth quarter of 2000.
As of March 31, 2000, the Company incurred professional fees of $625,000 in
connection with the Special Committee and Board of Directors' evaluation of
the Proposed Merger. Additional fees have been and will continue to be
incurred after March 31, 2000 relating to the Proposed Merger. In the event
the Proposed Merger is terminated, under certain circumstances a termination
fee of $25,000,000 may be payable by the Company to Pinnacle Acq. Corp., which
circumstances are defined in the PHCR Merger Agreement previously filed with
the Securities and Exchange Commission.
F-7
PINNACLE ENTERTAINMENT, INC.
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Note 3--Assets Sold
On March 24, 2000, the Company announced it had completed the sale of
approximately 42 acres of surplus land in Inglewood, California to Home Depot,
Inc. for $24,200,000 in cash. The 42 acres of surplus land was included in
"Assets held for sale" as of December 31, 1999. The after tax cash proceeds
from this sale is expected to be $15,300,000. The 42 acres of raw land did not
materially contribute to the historical results of operations.
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.
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. 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 and will be
paid in the second quarter 2000.
Due to the disposition of the Hollywood Park Race Track and Hollywood Park-
Casino in September 1999, there are no results of operations for the quarter
ended March 31, 2000 for these facilities (as discussed above, effective with
the disposition of the Hollywood Park-Casino, the Company receives only lease
income from the operator of the facility).
The condensed results of operations for the Hollywood Park Race Track and
Hollywood Park-Casino for the three months ended March 31, 1999 were:
For the three
months ended
March 31, 1999
---------------
(in thousands--
unaudited)
Revenues..................................................... $19,490
Expenses..................................................... 21,165
-------
Operating income............................................. (1,675)
Interest expense(a).......................................... 0
-------
Income before income taxes................................... $(1,675)
=======
- --------
(a) No interest expense was specifically identified for these operations.
F-8
PINNACLE ENTERTAINMENT, INC.
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Note 4--Assets Held For Sale
Assets held for sale at March 31, 2000 and December 31, 1999 consisted of
the following, and excluded the related goodwill and deferred income taxes
associated with such assets:
At March 31, 2000
-----------------------------
Net Property
Plant &
Equipment Other Total
------------ ------- --------
(in thousands--unaudited)
Casino Magic Bay St. Louis & Boomtown Biloxi
Casinos.................................... $114,483 $ 6,017 $120,500
Turf Paradise Race Track.................... 10,720 4,284 15,004
Other (primarily undeveloped land in
California)................................ 17,702 0 17,702
-------- ------- --------
$142,905 $10,301 $153,206
======== ======= ========
At December 31, 1999
-----------------------------
Net Property
Plant &
Equipment Other Total
------------ ------- --------
(in thousands)
Casino Magic Bay St. Louis & Boomtown Biloxi
Casinos.................................... $115,731 $ 5,876 $121,607
Turf Paradise Race Track.................... 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 March 31, 2000 and December 31, 1999. There are
no assurances these transactions will close. Until the sales transactions are
completed, the Company continues to operate the casinos and race track 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 March 31, 2000 and December 31, 1999
includes approximately $13,245,000 and $13,331,000, respectively, related to
the pending casino and race track 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 conditions, including, but not
limited to, approval by the Mississippi Gaming Commission (which approval Penn
National received in April 2000), and Penn National completing the necessary
financing. The Company estimates the transactions will close in the second
quarter of 2000.
Race Track in Arizona. On February 28, 2000, the Company announced the
signing of a definitive agreement under which the Company will sell its Turf
Paradise horse racing facility located in Phoenix, Arizona to a private
investor for $53,000,000 in cash. The agreement includes the horse racing
operations and all 275 acres at the Phoenix, Arizona property. The Company
anticipates closing the transaction in the second quarter of 2000.
F-9
PINNACLE ENTERTAINMENT, INC.
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Other. On April 18, 2000, the Company announced it had entered into an
agreement with Casden Properties Inc. for the sale of the remaining 97 acres
of surplus land in Inglewood, California for $63,050,000 in cash. The sale of
the 97 acres is subject to a number of conditions, including the receipt by
Casden Properties Inc. of certain entitlements to develop the property. The
sale is expected to take six to twelve months to close and is expected to
generate after tax net cash proceeds in excess of $41,000,000.
The Company owns other land parcels in Missouri, which it is 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
three months ended March 31, 2000 and 1999 are as follows:
For the three
months ended
March 31,
---------------
2000 1999
------- -------
(in thousands--
unaudited)
Revenues(a)................................................. $48,438 $47,548
Expenses.................................................... 38,722 37,770
------- -------
Operating income............................................ 9,716 9,778
Interest expense, net....................................... 18 75
------- -------
Income before income taxes.................................. $ 9,698 $ 9,703
======= =======
- --------
(a) Year 2000 revenues Include proceeds from the settlement of a 1998 business
interruption claim of approximately $1,204,000.
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.
Note 6--Expansion and Development
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.
The Company plans to spend approximately $200,000,000 ($70,322,000 of which
has been spent as of March 31, 2000) in total costs (including land, 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.
F-10
PINNACLE ENTERTAINMENT, INC.
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
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 (the
"District") to lease 225 acres of unimproved land from the District upon which
such resort complex would be constructed. The initial lease option was for a
six-month period which ended in January 2000, with three six-month renewal
options (the first of which the Company has exercised), 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
At March 31, 2000, the Company did not hold any short term investments.
However, included in "Cash and cash equivalents" on the Consolidated Balance
Sheet at March 31, 2000 is $166,240,000 of commercial paper and other cash
equivalents with original maturities of less than 90 days.
At 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 amortized cost which approximates market value.
Interest income for the three months ended March 31, 2000 and 1999 was
$3,221,000 and $898,000, respectively.
Note 8--Property, Plant and Equipment
Property, plant and equipment held at March 31, 2000 and December 31, 1999
consisted of the following:
March 31, December 31,
2000(a) 1999(a)
----------- ------------
(unaudited)
(in thousands)
Land and land improvements.......................... $ 72,191 $ 71,052
Buildings........................................... 253,474 253,126
Equipment........................................... 136,558 134,701
Vessel and barges................................... 66,107 65,580
Construction in progress............................ 72,396 32,813
-------- --------
600,726 557,272
Less accumulated depreciation....................... 127,361 119,557
-------- --------
$473,365 $437,715
======== ========
- --------
(a) Excludes $214,631,000 of assets and $71,726,000 of accumulated
depreciation at March 31, 2000 and $213,992,000 of assets and $69,578,000
of accumulated depreciation at December 31, 1999, related to assets
classified as held for sale (see Note 4).
F-11
PINNACLE ENTERTAINMENT, INC.
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Note 9--Secured and Unsecured Notes Payable
Notes payable at March 31, 2000 and December 31, 1999 consisted of the
following:
March 31, December 31,
2000 1999
----------- ------------
(unaudited)
(in thousands)
Unsecured 9.25% Notes............................... $350,000 $350,000
Unsecured 9.5% Notes................................ 125,000 125,000
Casino Magic 13% Notes(a)........................... 119,346 119,814
Hollywood Park-Casino debt obligation............... 22,126 22,566
Other secured notes payable......................... 5,284 5,785
Other unsecured notes payable....................... 2,320 2,315
-------- --------
624,076 625,480
Less current maturities............................. 6,527 6,782
-------- --------
$617,549 $618,698
======== ========
- --------
(a) Includes a write up to fair market value (net of amortization), as of the
October 15, 1998 acquisition of Casino Magic, of $6,471,000 and
$6,939,000, as of March 31, 2000 and December 31, 1999, 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 "Bank
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 Bank Credit Facility also provides for letters of credit up to $30,000,000
and swing line loans of up to $10,000,000.
In February 1999, the Company repaid all amounts outstanding under the Bank
Credit Facility with proceeds from the issuance of the 9.25% Notes (see
below). Since February 1999, the Bank Credit Facility has remained unused and
therefore, at March 31, 2000, and December 31, 1999, there was no outstanding
balance under the Bank Credit Facility.
Interest rates on borrowings under the Bank Credit Facility are determined
by adding a margin, which is based upon the Company's debt to cash flow ratio
(as defined in the Bank 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 Bank Credit Facility. The Bank 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 Bank
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 Bank Credit Facility. The
Company paid a consent fee of $50.00 per $1,000 principal amount of the 9.5%
Notes,
F-12
PINNACLE ENTERTAINMENT, INC.
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
which, combined with other transactional expenses, is being amortized over the
remaining term of the 9.5% Notes.
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 Bank 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.
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).
F-13
PINNACLE ENTERTAINMENT, INC.
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Note 10--Litigation
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 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,
F-14
PINNACLE ENTERTAINMENT, INC.
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
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. At trial of the matter in March 2000,
the judge granted the Company's motion to dismiss the case. On April 26, 2000,
plaintiff appealed the court's dismissal to the Mississippi Supreme Court.
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 Casino Resorts, a majority owned company
of Colony Capital, Inc. (see Note 2). 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 process for evaluating the Company's worth
and eliciting bids from third parties, and that the price for the stock is
inadequate. The Company intends to vigorously defend these actions and
believes that the plaintiffs' claims are without merit.
Casino Magic Bay St. Louis Wrongful Death Litigation. On February 18, 2000,
three Casino Magic Bay St. Louis patrons, after leaving the casino property,
were involved in a vehicular accident which resulted in the death of two of
the individuals and injury to the third. On April 13, 2000, a lawsuit was
filed on behalf of the injured individual and one of the deceased individuals
against Casino Magic Bay St. Louis seeking compensatory damages in the amount
of $2,000,000 and punitive damages in the amount of $10,000,000. The suit
alleges, among other things, that Casino Magic Bay St. Louis employees
negligently served alcoholic beverages to the three individuals and the acts
and omissions of the Casino Magic Bay St. Louis employees were the proximate
cause of the accident. While the Company cannot predict the outcome of this
action, it believes that the plaintiffs' claims are without merit and intends
to vigorously defend this action.
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.
F-15
PINNACLE ENTERTAINMENT, INC.
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Note 11--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
For the three months ended March 31, 2000 and 1999 and balance sheets as of
March 31, 2000 and December 31, 1999
(in thousands--unaudited)
(a) (b)
Consolidating Pinnacle
Pinnacle Wholly Owned Wholly Owned and Entertainment,
Entertainment, Guarantor Non-Guarantor Eliminating Inc.
Inc. Subsidiaries Subsidiaries Entries Consolidated
-------------- ------------ ------------- ------------- --------------
As of and for the three
months ended
March 31, 2000
Balance Sheet
Current assets.......... $199,255 $185,601 $ 32,140 $ 0 $ 416,996
Property, plant and
equipment, net......... 42,839 342,043 88,483 0 473,365
Other non-current
assets................. 27,501 41,181 43,736 56,093 168,511
Investment in
subsidiaries........... 397,470 104,726 0 (502,196) 0
Inter-company........... 219,565 167,917 31,481 (418,963) 0
-------- -------- -------- --------- ----------
$886,630 $841,468 $195,840 $(865,066) $1,058,872
======== ======== ======== ========= ==========
Current liabilities..... $ 73,318 $ 51,362 $ 12,328 $ 0 $ 137,008
Notes payable, long
term................... 501,488 3,192 112,869 0 617,549
Other non-current
liabilities............ (7,165) 83 20,114 (12,206) 826
Inter-company........... 15,500 378,025 25,440 (418,965) 0
Equity.................. 303,489 408,806 25,089 (433,895) 303,489
-------- -------- -------- --------- ----------
$886,630 $841,468 $195,840 $(865,066) $1,058,872
======== ======== ======== ========= ==========
Statement of Operations
Revenues:
Gaming................. $ 0 $ 90,557 $ 42,596 $ 0 $ 133,153
Racing................. 0 6,143 0 0 6,143
Food and beverage...... 0 7,242 1,009 0 8,251
Equity in
subsidiaries.......... 24,158 5,375 0 (29,533) 0
Other.................. 1,500 12,639 911 0 15,050
-------- -------- -------- --------- ----------
25,658 121,956 44,516 (29,533) 162,597
-------- -------- -------- --------- ----------
Expenses:
Gaming................. 0 50,150 24,095 0 74,245
Racing................. 0 2,658 0 0 2,658
Food and beverage...... 0 8,130 1,047 0 9,177
Administrative and
other................. 5,139 29,164 6,446 0 40,749
Gain on disposition of
assets................ (23,854) 0 0 0 (23,854)
Depreciation and
amortization.......... 715 9,007 2,500 369 12,591
-------- -------- -------- --------- ----------
(18,000) 99,109 34,088 369 115,566
-------- -------- -------- --------- ----------
Operating income
(loss)................. 43,658 22,847 10,428 (29,902) 47,031
Interest expense, net... 9,729 (1,311) 4,462 0 12,880
-------- -------- -------- --------- ----------
Income (loss) before
minority interests and
taxes.................. 33,929 24,158 5,966 (29,902) 34,151
Income tax expense...... 11,648 0 591 0 12,239
-------- -------- -------- --------- ----------
Net income (loss)....... $ 22,281 $ 24,158 $ 5,375 $ (29,902) $ 21,912
======== ======== ======== ========= ==========
Statement of Cash Flows
Net cash provided by
(used in) operating
activities............. $(40,917) $ 35,230 $ 4,440 $ 369 $ (878)
Net cash provided by
(used in) investing
activities............. 140,691 (34,556) (466) 0 105,669
Net cash provided by
(used in) financing
activities............. 597 (622) (313) 0 (338)
F-16
PINNACLE ENTERTAINMENT, INC.
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Pinnacle Entertainment, Inc.
Consolidating Condensed Financial Information
For the three months ended March 31, 2000 and 1999 and balance sheets as of
March 31, 2000 and December 31, 1999
(in thousands--unaudited)
(a) (b) (c)
Hollywood Park
Pinnacle Operating Co.
Entertainment, (Co-Obligor Wholly Owned Non Wholly Consolidating Pinnacle
Inc. Guarantor 9.5% Notes/ Wholly Owned Non- Owned Non- and Entertainment,
(Parent Guarantor Guarantor Guarantor Guarantor Eliminating Inc.
Obligor) 9.25% Notes) Subsidiaries Subsidiaries Subsidiaries Entries Consolidated
-------------- -------------- ------------ ------------ ------------ ------------- --------------
For the three months
ended March 31,
1999
Statement of
Operations
Revenues:
Gaming................ $ 11,856 $ 0 $ 91,219 $32,398 $4,918 $ 0 $140,391
Racing................ 0 3,842 5,937 0 0 0 9,779
Food and
beverage............. 1,226 0 7,457 648 340 0 9,671
Equity in
subsidiaries......... 14,865 (138) 22,112 0 0 (36,839) 0
Other................. 1,294 915 9,073 806 69 0 12,157
-------- ------- -------- ------- ------ -------- --------
29,241 4,619 135,798 33,852 5,327 (36,839) 171,998
-------- ------- -------- ------- ------ -------- --------
Expenses:
Gaming................ 6,500 0 49,419 20,059 1,400 0 77,378
Racing................ 0 2,892 2,463 0 0 0 5,355
Food and beverage..... 2,429 0 8,188 736 302 0 11,655
Administrative
and other............ 5,904 3,505 26,861 4,682 1,453 0 42,405
Depreciation and
amortization......... 1,121 1,030 8,584 1,889 372 371 13,367
-------- ------- -------- ------- ------ -------- --------
15,954 7,427 95,515 27,366 3,527 371 150,160
-------- ------- -------- ------- ------ -------- --------
Operating income
(loss)................ 13,287 (2,808) 40,283 6,486 1,800 (37,210) 21,838
Interest expense....... 6,882 3,252 (231) 4,588 0 0 14,491
-------- ------- -------- ------- ------ -------- --------
Income (loss) before
minority interests
and taxes............. 6,405 (6,060) 40,514 1,898 1,800 (37,210) 7,347
Minority interests..... 0 0 0 0 0 458 458
Income tax expense..... 2,243 0 10 0 503 0 2,756
-------- ------- -------- ------- ------ -------- --------
Net income (loss)...... $ 4,162 $(6,060) $ 40,504 $ 1,898 $1,297 $(37,668) $ 4,133
======== ======= ======== ======= ====== ======== ========
Statement of Cash
Flows
Net cash provided by
(used in) operating
activities............ $(15,507) $ 7,208 $ 5,857 $10,227 $ 680 $ 385 $ 8,850
Net cash provided by
(used in) investing
activities............ (486) (193) (9,253) (915) (143) 0 (10,990)
Net cash provided by
(used in) financing
activities............ 70,423 (5,726) 6,249 (8,261) 0 0 62,685
F-17
PINNACLE ENTERTAINMENT, INC.
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Pinnacle Entertainment, Inc.
Consolidating Condensed Financial Information
For the three months ended March 31, 2000 and 1999 and balance sheets as of
March 31, 2000 and December 31, 1999
(in thousands--unaudited)
(a) (b)
Wholly Owned Consolidating Pinnacle
Pinnacle Wholly Owned Non- and Entertainment,
Entertainment, Guarantor Guarantor Eliminating Inc.
Inc. Subsidiaries Subsidiaries Entries Consolidated
-------------- ------------ ------------ ------------- --------------
As of December 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
======== ======== ======== ========= ==========
- --------
(a) The following subsidiaries are treated as guarantors on both the 9.5%
Notes and 9.25% Notes 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 are 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 are 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.
F-18
PINNACLE ENTERTAINMENT, INC.
CALCULATION OF EARNINGS PER SHARE
For the three months ended
March 31,
-----------------------------
Basic Diluted(a)
-------------- --------------
2000 1999 2000 1999
------- ------ ------- ------
(in thousands, except per
share data--unaudited)
Average number of common shares outstanding.... 26,260 25,800 26,260 25,800
Average common shares due to assumed conversion
of stock options.............................. 0 0 1,047 (405)
------- ------ ------- ------
Total shares................................... 26,260 25,800 27,307 25,395
======= ====== ======= ======
Net income allocated to shareholders........... $21,912 $4,133 $21,912 $4,133
======= ====== ======= ======
Net income per share........................... $ 0.83 $ 0.16 $ 0.80 $ 0.16
======= ====== ======= ======
- --------
(a) When the computed diluted values are anti-dilutive, the basic per share
values are presented on the face of the consolidated statements of
operations.
F-19
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)
F-20
PINNACLE ENTERTAINMENT, INC.
CONSOLIDATED BALANCE SHEETS
December 31, December 31,
1999 1998
------------ ------------
(in thousands, except
share data)
ASSETS
------
Current Assets:
Cash and cash equivalents.......................... $ 123,362 $ 44,234
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 in asset sales........... 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.
F-21
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.
F-22
PINNACLE ENTERTAINMENT, INC.
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
For the years ended December 31, 1999, 1998 and 1997
Capital
in Retained
Excess Earnings Total
Preferred Common of Par (Accumulated Stockholders'
Stock Stock 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.
F-23
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.
F-24
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 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.
F-25
PINNACLE ENTERTAINMENT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
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 lives. This evaluation consists of comparing asset carrying values
to the Company's projection of the undiscounted cash
F-26
PINNACLE ENTERTAINMENT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
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 Rack 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
F-27
PINNACLE ENTERTAINMENT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
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). 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 sale 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
F-28
PINNACLE ENTERTAINMENT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
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.
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.
F-29
PINNACLE ENTERTAINMENT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
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.
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.
F-30
PINNACLE ENTERTAINMENT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
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.
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.
F-31
PINNACLE ENTERTAINMENT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
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.
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.
F-32
PINNACLE ENTERTAINMENT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
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)
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.
F-33
PINNACLE ENTERTAINMENT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
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.
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
F-34
PINNACLE ENTERTAINMENT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
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).
Annual Maturities. As of December 31, 1999, annual maturities of secured
and unsecured notes payable are as follows:
(in thousands)
--------------
Year ending December 31:
2000.................................................... $ 6,782
2001.................................................... 5,338
2002.................................................... 5,655
2003.................................................... 116,667
2004.................................................... 2,329
Thereafter.............................................. 488,709
--------
$625,480
========
F-35
PINNACLE ENTERTAINMENT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
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
======= ======= ======
F-36
PINNACLE ENTERTAINMENT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
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
F-37
PINNACLE ENTERTAINMENT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
$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.
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.
F-38
PINNACLE ENTERTAINMENT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
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.
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
F-39
PINNACLE ENTERTAINMENT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
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 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.
F-40
PINNACLE ENTERTAINMENT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
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.
The following table summarizes information related to shares under option
and shares available for grant under the Company's 1993 and 1996 Plans:
Number
of Weighted Average
Shares Exercise 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 Exercise Shares Exercise
Exercise Price at 12/31/99 Price at 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.
F-41
PINNACLE ENTERTAINMENT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
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 Expected Expected
Interest 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
The following table summarizes information about stock options under the
1993 and 1996 Plans outstanding as of December 31, 1999:
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
F-42
PINNACLE ENTERTAINMENT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
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 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
F-43
PINNACLE ENTERTAINMENT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
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.
F-44
PINNACLE ENTERTAINMENT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
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.
F-45
PINNACLE ENTERTAINMENT, INC.
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
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
(a) (b)
Consolidating Pinnacle
Pinnacle Wholly Owned Wholly Owned and Entertainment,
Entertainment, Guarantor Non-Guarantor Eliminating Inc.
Inc. Subsidiaries Subsidiaries Entries Consolidated
-------------- ------------ ------------- ------------- --------------
(in thousands)
As of and for the year
ended December 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
activities............. $ 592 $ 56,861 $ 19,632 $ (1,762) $ 75,323
Net cash provided by
(used in) investing
activities............. 897 (49,100) (2,860) 0 (51,063)
Net cash provided by
(used in) financing
activities............. 66,941 (3,149) (8,924) 0 54,868
F-46
PINNACLE ENTERTAINMENT, INC.
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Pinnacle Entertainment, Inc.
Consolidating Condensed Financial Information
As of and for the year ended December 31, 1998
(a) (b) (c)
Pinnacle Hollywood Park
Entertainment, Operating Co. Wholly Non Wholly Consolidating Pinnacle
Inc. Guarantor (Co-Obligor 9.5% Wholly Owned Owned Owned and Entertainment,
(Parent Notes/Guarantor Guarantor Non-Guarantor Non-Guarantor Eliminating Inc.
Obligor) 9.25% Notes) Subsidiaries Subsidiaries Subsidiaries Entries Consolidated
-------------- ---------------- ------------ ------------- ------------- ------------- --------------
(in thousands)
As of and for the
year ended
December 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
F-47
PINNACLE ENTERTAINMENT, INC.
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Pinnacle Entertainment, Inc.
Consolidating Condensed Financial Information
As of and for the year ended December 31, 1997
(a) (b) (c)
Pinnacle Hollywood Park
Entertainment, Operating Co. Wholly Non Wholly Consolidating Pinnacle
Inc. Guarantor (Co-Obligor 9.5% Wholly Owned Owned Owned and Entertainment,
(Parent Notes/Guarantor Guarantor Non-Guarantor Non-Guarantor Eliminating Inc.
Obligor) 9.25% Notes) Subsidiaries Subsidiaries Subsidiaries Entries Consolidated
-------------- ---------------- ------------ ------------- ------------- ------------- --------------
(in thousands)
As of and for the
year ended December
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
F-48
- --------
(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.
F-49
PINNACLE ENTERTAINMENT, INC.
CALCULATION OF EARNINGS PER SHARE
For the three months ended December 31,
-----------------------------------------
Basic Diluted
-------------------- --------------------
1999 1998 1997 1999 1998 1997
------ ------ ------ ------ ------ ------
(in thousands, except per share data--
unaudited)
Average number of common shares
outstanding......................... 26,145 25,800 26,209 26,145 25,800 26,705
Average common shares due to assumed
conversion of convertible preferred
shares(b)........................... 0 0 0 0 0 0
Average common shares due to assumed
conversion of stock options......... 0 0 0 854 0 0
------ ------ ------ ------ ------ ------
Total shares......................... 26,145 25,800 26,209 26,999 25,800 26,705
====== ====== ====== ====== ====== ======
Net income........................... $3,971 $4,302 $1,551 $3,971 $4,302 $1,551
Less dividend requirements on
convertible preferred shares........ 0 0 0 0 0 0
------ ------ ------ ------ ------ ------
Net income available to common
shareholders........................ $3,971 $4,302 $1,551 $3,971 $4,302 $1,551
====== ====== ====== ====== ====== ======
Net income per share................. $ 0.15 $ 0.17 $ 0.06 $ 0.15 $ 0.17 $ 0.06
====== ====== ====== ====== ====== ======
For the years ended December 31,
---------------------------------------------
Basic Diluted(a)
---------------------- ----------------------
1999 1998 1997 1999 1998 1997
------- ------- ------ ------- ------- ------
(in thousands, except per share data)
Average number of common shares
outstanding..................... 25,966 26,115 22,010 25,966 26,115 22,340
Average common shares due to
assumed conversion of
convertible preferred
shares(b)....................... 0 0 0 0 0 0
Average common shares due to
assumed conversion of stock
options......................... 0 0 0 363 0 0
------- ------- ------ ------- ------- ------
Total shares..................... 25,966 26,115 22,010 26,329 26,115 22,340
======= ======= ====== ======= ======= ======
Net income....................... $44,047 $13,169 $8,670 $44,047 $13,169 $8,670
Less dividend requirements on
convertible preferred shares.... 0 0 1,520 0 0 1,520
------- ------- ------ ------- ------- ------
Net income (loss) available to
(allocated to) common
shareholders.................... $44,047 $13,169 $7,150 $44,047 $13,169 $7,150
======= ======= ====== ======= ======= ======
Net income per share............. $ 1.70 $ 0.50 $ 0.33 $ 1.67 $ 0.50 $ 0.32
======= ======= ====== ======= ======= ======
- --------
(a) When the computed diluted values are anti-dilutive, the basic per share
values are presented on the face of the consolidated statements of
operations.
(b) As of August 28, 1997, the Company's 2,749,000 outstanding depositary
shares were converted into 2,291,492 shares of the Company's common stock.
F-50
ANNEX A
AGREEMENT AND PLAN OF MERGER
Dated as of April 17, 2000
among
PH CASINO RESORTS, INC.
PINNACLE ENTERTAINMENT, INC.
and
PINNACLE ACQUISITION CORPORATION
TABLE OF CONTENTS
Page
----
ARTICLE I--DEFINITIONS.................................................. 1
ARTICLE II--THE PINNACLE MERGER......................................... 8
Section 2.1 The Pinnacle Merger.................................... 8
Section 2.2 Closing................................................ 8
Section 2.3 Effective Time......................................... 9
Section 2.4 Effects of the Pinnacle Merger......................... 9
Section 2.5 Corporate Governance Documents......................... 9
Section 2.6 Directors.............................................. 9
Section 2.7 Officers............................................... 9
Section 2.8 Further Actions........................................ 9
ARTICLE III--CONVERSION OF SHARES....................................... 9
Effect on Capital Stock of Pinnacle and Pinnacle Acq
Section 3.1 Corp.................................................. 9
Section 3.2 Exchange of Certificates............................... 10
ARTICLE IV--REPRESENTATIONS AND WARRANTIES OF PINNACLE.................. 11
Section 4.1 Organization, Standing and Corporate Power............. 12
Section 4.2 Subsidiaries........................................... 12
Section 4.3 Capital Structure...................................... 12
Section 4.4 Authority; Noncontravention............................ 13
Section 4.5 Opinion of Financial Advisor........................... 13
Section 4.6 SEC Documents; Financial Statements.................... 14
Section 4.7 Absence of Certain Changes or Events................... 14
Section 4.8 Litigation............................................. 15
Section 4.9 Absence of Changes in Benefit Plans.................... 15
Section 4.10 Employee Benefits; ERISA............................... 15
Section 4.11 Taxes.................................................. 17
Section 4.12 Environmental Matters.................................. 17
Section 4.13 Permits; Compliance with Laws.......................... 18
Section 4.14 State Takeover Statutes................................ 19
Section 4.15 Brokers................................................ 20
Section 4.16 Trademarks, etc........................................ 20
Section 4.17 Title to Properties.................................... 20
Section 4.18 Insurance.............................................. 21
Section 4.19 Contracts; Debt Instruments............................ 22
Section 4.20 Board Consent and Recommendation....................... 22
Section 4.21 Accounting Controls.................................... 23
Section 4.22 Affiliate Transactions................................. 23
Section 4.23 Vote Required.......................................... 23
Section 4.24 Material Subsidiaries.................................. 23
ARTICLE V--REPRESENTATIONS AND WARRANTIES OF HOLDING AND
PINNACLE ACQ CORP...................................................... 23
Section 5.1 Organization, Standing and Corporate Power............. 23
Section 5.2 Authority; Noncontravention............................ 23
Section 5.3 Interim Operations of Pinnacle Acq Corp................ 24
Section 5.4 Licensing Matters...................................... 24
Section 5.5 Litigation............................................. 25
Section 5.6 Financing.............................................. 25
Section 5.7 No Other Agreements.................................... 25
Section 5.8 Harveys Merger......................................... 25
i
Page
----
ARTICLE VI--COVENANTS RELATING TO CONDUCT OF BUSINESS................... 25
Section 6.1 Conduct of Business................................... 25
Section 6.2 Advice of Changes..................................... 28
Section 6.3 No Solicitation....................................... 28
ARTICLE VII--ADDITIONAL AGREEMENTS...................................... 30
Section 7.1 Stockholders Meeting.................................. 30
Section 7.2 Proxy Statement and Other Filings; Auditor's Letter... 30
Section 7.3 Access to Information; Confidentiality................ 31
Section 7.4 Reasonable Efforts; Notification...................... 32
Section 7.5 Stock Option Plans; Change of Control Plan............ 33
Section 7.6 Indemnification and Insurance......................... 33
Section 7.7 Fees.................................................. 34
Section 7.8 Public Announcement................................... 34
Section 7.9 Title Insurance, Surveys.............................. 34
Section 7.10 Transfer Taxes........................................ 35
Section 7.11 Financing............................................. 36
Section 7.12 Tax Treatment......................................... 36
Section 7.13 Tender Offer and Consent Solicitations................ 36
Section 7.14 Termination of Voting Agreement....................... 36
Section 7.15 Compliance Committees................................. 36
Section 7.16 Atlantic Land Warrant................................. 36
Section 7.17 Filing of Corporate Gaming License Applications....... 37
ARTICLE VIII--CONDITIONS PRECEDENT...................................... 37
Conditions to Each Party's Obligation to Effect the
Section 8.1 Pinnacle Merger...................................... 37
Section 8.2 Conditions to Obligations of Pinnacle Acq Corp........ 37
Section 8.3 Conditions to Obligations of Pinnacle................. 39
ARTICLE IX--TERMINATION, AMENDMENT AND WAIVER........................... 39
Section 9.1 Termination........................................... 39
Section 9.2 Effect of Termination................................. 40
Section 9.3 Amendment............................................. 41
Section 9.4 Extension; Waiver..................................... 41
Procedure for Termination, Amendment, Extension or
Section 9.5 Waiver............................................... 41
ARTICLE X--GENERAL PROVISIONS........................................... 41
Section 10.1 Nonsurvival of Representations........................ 41
Section 10.2 Representations and Warranties........................ 41
Section 10.3 Notices............................................... 41
Section 10.4 Interpretation........................................ 42
Section 10.5 Counterparts.......................................... 43
Section 10.6 Entire Agreement; No Third-Party Beneficiaries........ 43
Section 10.7 Governing Law......................................... 43
Section 10.8 Gaming Laws........................................... 43
Section 10.9 Assignment............................................ 43
Section 10.10 Enforcement........................................... 43
Section 10.11 Inglewood Sale; CPRs.................................. 43
ii
SCHEDULES
EXHIBITS
Exhibit A Material Terms of the Financing
iii
AGREEMENT AND PLAN OF MERGER dated as of 12:01 A.M. on April 17, 2000 (this
"Agreement"), among PH CASINO RESORTS, INC., a Delaware corporation ("PHCR"),
PINNACLE ENTERTAINMENT, INC., a Delaware corporation ("Pinnacle"), and
PINNACLE ACQUISITION CORPORATION, a Delaware corporation ("Pinnacle Acq
Corp").
W I T N E S S E T H
WHEREAS, Pinnacle Acq Corp is a direct wholly owned subsidiary of PHCR and
an indirect wholly owned subsidiary of Harveys Casino Resorts, a Nevada
corporation ("Harveys"), and Harveys is majority owned by Colony Investors
III, L.P., a Delaware limited partnership ("Colony III");
WHEREAS, the respective Boards of Directors of Pinnacle and Pinnacle Acq
Corp have determined that the merger of Pinnacle Acq Corp with and into
Pinnacle (the "Pinnacle Merger"), upon the terms and subject to the conditions
set forth in this Agreement, is advisable and in the best interests of their
respective corporations and stockholders, and have approved this Agreement;
WHEREAS, PHCR has formed a wholly owned subsidiary, Harveys Acquisition
Corporation, a Nevada corporation ("Harveys Acq Corp"), which will,
simultaneously with the Pinnacle Merger, merge with and into Harveys (the
"Harveys Merger") so that, following the Pinnacle Merger and the Harveys
Merger, the Pinnacle Surviving Corporation (as defined below) and the Harveys
Surviving Corporation (as defined below) will each be wholly owned
subsidiaries of PHCR;
WHEREAS, for Federal income tax purposes, the parties intend that the
Pinnacle Merger, the Harveys Merger and the contribution pursuant to the
Voting Agreement (as defined below) qualify as exchanges under section 351 of
the Internal Revenue Code of 1986, as amended (the "Code");
WHEREAS, as a condition for PHCR and Pinnacle Acq Corp to enter into this
Agreement, those stockholders of Pinnacle listed on the signature pages to the
Voting Agreement, as defined below (the "Group"), have entered into the Voting
and Contribution Agreement as of the date hereof with Pinnacle, Pinnacle Acq
Corp and PHCR, which provides, among other things, that, subject to the terms
and conditions thereof, (a) each member of the Group will vote its shares of
Pinnacle Common Stock (as defined below) in favor of the Pinnacle Merger and
the approval and adoption of this Agreement and (b) each member of the Group
will contribute certain securities of Pinnacle to PHCR in exchange for
securities of PHCR;
WHEREAS, the Board of Directors of Pinnacle has approved the terms of this
Agreement and the transactions contemplated hereby;
WHEREAS, the parties hereto desire to make certain representations,
warranties, covenants and agreements in connection with the Pinnacle Merger
and also to prescribe various conditions to the Pinnacle Merger.
NOW, THEREFORE, in consideration of the mutual representations, warranties,
covenants and agreements contained in this Agreement and for other good and
valuable consideration, the receipt and sufficiency of which are hereby
acknowledged, the parties hereto, intending to be legally bound, agree as
follows:
ARTICLE I
DEFINITIONS
Capitalized and certain other terms used in this Agreement and not
otherwise defined have the meanings set forth below. Unless the context
otherwise requires, such terms shall include the singular and plural and the
conjunctive and disjunctive forms of the terms defined.
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"Affiliate" of any Person means another Person that directly or indirectly,
through one or more intermediaries, controls, is controlled by, or is under
common control with, such first Person.
"Agreement" has the meaning set forth in the recitals hereof.
"Asset Dispositions" has the meaning set forth in Section 6.1(c).
"Asset Disposition Agreements" has the meaning set forth in Section 6.1(c).
"Atlantic Land Warrant" means that certain warrant to purchase shares of
Pinnacle Common Stock held by Atlantic Land Corporation and originally issued
by Casino Magic Corporation.
"Audit" means any audit, assessment of Taxes, other examination by any Tax
Authority, proceeding or appeal of such proceeding relating to Taxes.
"Bank Credit Facility" means the Amended and Restated Reducing Revolving
Loan Agreement, dated as of October 14, 1998, and amended as of June 2, 1999
and September 30, 1999, 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).
"Base Balance Sheet" has the meaning set forth in Section 4.6.
"Budget" has the meaning set forth in Section 6.1(a)(v).
"Business Day" means any day excluding: Saturday, Sunday and any day which
is in the City of New York a legal holiday or a day upon which banking
institutions in the City of New York are required or authorized by law or
other governmental action to close.
"Certificate of Merger" has the meaning set forth in Section 2.1.
"Closing" has the meaning set forth in Section 2.2.
"Closing Date" has the meaning set forth in Section 2.2.
"Code" has the meaning set forth in the recitals hereto.
"Colony" has the meaning set forth in Section 5.4.
"Colony LP" has the meaning set forth in Section 5.4.
"Colony III" has the meaning set forth in the recitals hereof.
"Commitments" has the meaning set forth in Section 7.9(a).
"Competitive Proposal" means, other than the transactions contemplated by
this Agreement, (a) any proposal or offer from any Person relating to any
direct or indirect acquisition or purchase of assets of Pinnacle or any of its
Material Subsidiaries comprising 50% or more of Pinnacle's consolidated assets
or over 50% of any class of equity securities of Pinnacle or any of its
Material Subsidiaries or (b) any tender offer or exchange offer that, if
consummated, would result in any Person beneficially owning 50% or more of any
class of equity securities of Pinnacle or any of its Material Subsidiaries or
(c) any merger, consolidation, business combination, liquidation, dissolution
or similar transaction involving Pinnacle with a third party; provided, that
the Board of Directors of Pinnacle determines in its good faith judgment that
(i) the value of the consideration (based on the opinion, with only customary
qualifications, of an independent financial advisor of good national
reputation in such matters) of such proposal exceeds the value of each of the
Pinnacle Merger Consideration and any
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alternative proposal presented by Pinnacle Acq Corp or any of its Affiliates
and (ii) such proposal is more favorable to Pinnacle's stockholders than the
Pinnacle Merger and any alternative proposal presented by Pinnacle Acq Corp or
any of its Affiliates. Notwithstanding the foregoing, the consummation of (i)
the Principal Asset Dispositions (other than the sale of the Inglewood
Property), substantially on the terms and subject to the conditions contained
in the applicable Asset Disposition Agreement in effect as of the date hereof
(or as amended or modified in accordance with this Agreement), and (ii) the
sale of the Inglewood Property and the Other Asset Dispositions on terms
approved by Pinnacle's Board of Directors, in good faith, shall not be deemed
to constitute a Competitive Proposal.
"Confidential Information" has the meaning set forth in Section 7.3.
"Contract" means any mortgage, indenture, note, debenture, agreement,
lease, license, permit, franchise or other instrument or obligation, whether
written or oral.
"Covered Person" has the meaning set forth in Section 6.3(a).
"Current SEC Documents" has the meaning set forth in Section 4.6.
"DGCL" means the Delaware General Corporation Law, as amended from time to
time.
"Effective Time" has the meaning set forth in Section 2.3.
"Environmental Claim" has the meaning set forth in Section 4.12(c).
"Environmental Laws" has the meaning set forth in Section 4.12(a).
"ERISA" means the Employee Retirement Income Security Act of 1974, as
amended.
"ERISA Affiliate" has the meaning set forth in Section 4.10(a).
"ERISA Plans" has the meaning set forth in Section 4.10(a).
"Exchange Act" means the Securities Exchange Act of 1934, as amended, and
the rules and regulations promulgated thereunder.
"Exchange Funds" has the meaning set forth in Section 3.2(a).
"Existing Leases" has the meaning set forth in Section 4.17(b).
"Fairness Opinion" has the meaning set forth in Section 4.5.
"Financing" means debt financing on terms not less favorable to the
borrower than those set forth in Exhibit A hereto which, together with any
indebtedness of Pinnacle assumed in the Merger, is in an amount sufficient to
enable the payment, in full of (i) the Pinnacle Merger Consideration, (ii) all
payments in connection with the cancellation of the Pinnacle Stock Options,
(iii) all other related payments in connection with the Pinnacle Merger and
the Harveys Merger (including any related consent payments to holders of and
any related repurchase of outstanding indebtedness of Pinnacle and Harveys set
forth on Exhibit A), and (iv) the related fees and expenses, estimates of
which are set forth on Exhibit A.
"Gaming Approvals" has the meaning set forth in Section 8.2(d).
"Gaming Authority" means any governmental authority or agency with
regulatory control or jurisdiction over the conduct of lawful gaming or
gambling, including, without limitation, the Arizona Racing Commission, the
California Attorney General, the California Gambling Control Commission, the
Colorado Division of Gaming, the Colorado Limited Gaming Control Commission,
the Indiana Gaming Commission, the City of Inglewood, the Iowa Racing and
Gaming Commission, the Louisiana Gaming Control Board, the Mississippi Gaming
Commission, the Mississippi State Tax Commission, the Provincial Government of
Neuquen, the Nevada State Gaming Control Board, the National Indian Gaming
Commission, the Nevada Gaming Commission, the Washington State Gaming
Commission, the Washoe County Board of Commissioners, Nevada Gaming Commission
and the Yakima Tribal Gaming Commission.
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"Gaming Laws" means any Federal, state, local or foreign statute,
ordinance, rule, regulation, permit, consent, approval, registration, finding
of suitability, license, judgment, order, decree, injunction or other
authorization governing or relating to the current or, in the case of Pinnacle
and its Subsidiaries, contemplated manufacturing, distribution, casino
gambling and gaming activities and operations of Pinnacle and Harveys,
including, without limitation, the California Gambling Control Act and the
rules and regulations promulgated thereunder, the Colorado Limited Gaming Act
and the rules and regulations promulgated thereunder, the Indian Gaming
Regulatory Act and the rules and regulations promulgated thereunder, the
Indiana Riverboat Gambling Act (as set forth at Indiana Code 4-33) and the
rules and regulations promulgated thereunder, chapters 99D and F of the Code
of Iowa and the rules and regulations promulgated thereunder, the Louisiana
Riverboat Economic Development and Gaming Control Act and the rules and
regulations promulgated thereunder, the Mississippi Gaming Control Act and the
rules and regulations promulgated thereunder, and the Nevada Gaming Control
Act and the rules and regulations promulgated thereunder and all applicable
local rules and ordinances.
"Governmental Entity" means any Federal, state or local government or any
court, administrative or regulatory agency or commission or other governmental
authority or agency, domestic or foreign, including any Gaming Authority.
"Group" has the meaning set forth in the recitals hereof.
"Harveys" has the meaning set forth in the recitals hereof.
"Harveys Acq Corp" has the meaning set forth in the recitals hereof.
"Harveys Merger" has the meaning set forth in the recitals hereof.
"Harveys Surviving Corporation" means the surviving corporation of the
Harveys Merger.
"HSR Act" means the Hart-Scott-Rodino Antitrust Improvements Act of 1976,
as amended.
"indebtedness" means, with respect to any Person, without duplication, (a)
all obligations of such Person for borrowed money, or with respect to deposits
or advances of any kind, (b) all obligations of such Person evidenced by
bonds, debentures, notes or similar instruments, (c) all obligations of such
Person upon which interest charges are customarily paid (other than trade
payables incurred in the Ordinary Course of Business), (d) all obligations of
such Person under conditional sale or other title retention agreements
relating to property purchased by such Person, (e) all obligations of such
Person issued or assumed as the deferred purchase price of property or
services or for trade or barter arrangements (excluding obligations of such
Person to creditors for raw materials, inventory, services and supplies
incurred in the ordinary course of such Person's business), (f) all lease
obligations of such Person capitalized on the books and records of such
Person, (g) all obligations of others secured by any Lien on property or
assets owned or acquired by such Person, whether or not the obligations
secured thereby have been assumed, (h) all obligations of such Person under
interest rate, or currency or commodity hedging, swap or similar derivative
transactions (valued at the termination value thereof), (i) all letters of
credit issued for the account of such Person (excluding letters of credit
issued for the benefit of suppliers or lessors to support accounts payable to
suppliers incurred in the Ordinary Course of Business) and (j) all guarantees
and arrangements having the economic effect of a guarantee by such Person of
any other Person.
"In the Money Option" has the meaning set forth in Section 10.11.
"Indemnified Parties" has the meaning set forth in Section 7.6(a).
"Indiana Project" has the meaning set forth in Section 4.6.
"Inglewood Property" means the 97 acres of vacant land in Inglewood which
was the subject of the agreement announced on November 4, 1999 (and
subsequently terminated), with the Hovnanian Companies of California, the
legal description of which is contained in Schedule 1.0 hereto.
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"Intellectual Property Rights" has the meaning set forth in Section 4.16.
"knowledge" of any Person means the actual knowledge of the executive
officers of such Person after due inquiry.
"Law" means any law, statute, ordinance, regulation or rule or any
judgment, decree, order, regulation or rule of any court or governmental
authority or body.
"Leased Properties" has the meaning set forth in Section 4.17(a).
"Licensed Persons" has the meaning set forth in Section 5.4.
"Lien" means any mortgage, pledge, assessment, security interest, lease,
sublease, lien, adverse claim, levy, charge, option, right of others or
restriction (whether on voting, sale, transfer, disposition or otherwise) or
other encumbrance of any kind, whether imposed by agreement, understanding,
law or equity, or any conditional sale contract, title retention contract or
other contract to give or to refrain from giving any of the foregoing;
provided that other than with respect to Section 4.17 hereof, workers',
mechanics', suppliers', carriers', materialmen's, landlords' statutory,
warehousemen's liens, liens for taxes, assessments or government charges that
are not yet delinquent or that are being contested in good faith and for which
adequate reserves have been provided in accordance with generally accepted
accounting principles (to the extent required thereunder), or other similar
liens arising in the Ordinary Course of Business, shall not constitute a
"Lien."
"material adverse change" or "material adverse effect" with respect to any
Person means any change or effect that is individually or in the aggregate
materially adverse to the business, prospects, properties, assets or financial
condition or results of operations of such Person and its Subsidiaries, taken
as a whole; provided, however, that in no event shall the following, either
individually or in the aggregate, in and of itself be deemed to constitute a
"material adverse change" or a "material adverse effect" (i) the effects of
changes that are applicable to the national financial, banking, currency or
capital markets in general, individually or in the aggregate, solely in and of
itself be deemed to constitute a "material adverse change" or a "material
adverse effect;" (ii) the failure by Pinnacle to meet independent, third party
analysts' projections of earnings, revenue or other financial performance
measures solely in and of itself be deemed to constitute a "material adverse
change" or a "material adverse effect;" provided, however, that the underlying
facts, circumstances, operating results or prospects which cause Pinnacle to
fail to meet such projections may be considered in determining whether a
"material adverse change" or a "material adverse effect" has occurred or (iii)
the effects of any event or circumstances (including the actual occurrence of
any proposed action) listed on Schedule 1.1 hereto.
"Materials of Environmental Concern" has the meaning set forth in Section
4.12(a).
"Material Subsidiary" shall mean each of: Boomtown Hotel & Casino, Inc., a
Nevada corporation; Louisiana--I Gaming, a Louisiana Partnership in Commendam;
Biloxi Casino Corp., a Mississippi corporation; Casino Magic of Louisiana,
Corp., a Louisiana corporation; and Belterra Resort (Indiana), LLC, an Indiana
limited liability company.
"Notice of Competitive Proposal" has the meaning set forth in Section
6.3(b).
"NYSE" means the New York Stock Exchange, Inc., or any successor entity.
"Ordinary Course of Business" means (unless otherwise indicated) (i) with
respect to representations and warranties contained in Article IV or V hereof,
transactions in the ordinary course of business, and (ii) with respect to
covenants and agreements contained in Article VI or VII hereof, transactions
in the ordinary course of business consistent with past practice.
"Other Asset Dispositions" has the meaning set forth in Section 6.1(c).
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"Other Filings" has the meaning set forth in Section 7.2(b).
"Owned Properties" has the meaning set forth in Section 4.17(a).
"Paying Agent" has the meaning set forth in Section 3.2(a).
"PBGC" has the meaning set forth in Section 4.10(c).
"Permits" has the meaning set forth in Section 4.13(a).
"Permitted Liens" means (i) Liens described on Schedule 4.17(b), other than
the Liens arising under the Bank Credit Facility, (ii) Liens for current taxes
not yet due and payable or being contested in good faith by appropriate
proceedings and for which adequate reserves have been provided in accordance
with generally accepted accounting principles (to the extent required
thereunder), or (iii) such Liens, encumbrances, restrictions, leases, option
to purchase, options to lease, conditions, covenants, assessments, defects,
claims or exceptions which could not reasonably be expected to, either
individually or in the aggregate, materially impair the current use,
occupancy, value, financeability, or marketability of title to the parcels of
Real Property on a project-by-project basis or as would not reasonably be
expected to have a material adverse effect on Pinnacle or any of its Material
Subsidiaries.
"Person" means any natural person, corporation, general partnership,
limited partnership, limited liability company, limited liability partnership,
proprietorship, trust, union, association, court, tribunal, agency,
government, department, commission, self-regulatory organization, arbitrator,
board, bureau, instrumentality or other entity, enterprise, authority or
business organization.
"Pinnacle" has the meaning set forth in the recitals hereof.
"Pinnacle Acq Corp" has the meaning set forth in the recitals hereof.
"Pinnacle Certificates" has the meaning set forth in Section 3.2(b).
"Pinnacle Common Stock" means the Common Stock of Pinnacle, par value $.10
per share.
"Pinnacle Dissenting Shares" has the meaning set forth in Section 3.2(f).
"Pinnacle Merger" has the meaning set forth in the recitals hereof.
"Pinnacle Merger Consideration" means $24.00 in cash, subject to adjustment
as described in Section 10.11.
"Pinnacle Preferred Stock" means the Preferred Stock of Pinnacle, par value
$1.00 per share.
"Pinnacle Stockholders Meeting" has the meaning set forth in Section 7.1.
"Pinnacle Stock Option" has the meaning set forth in Section 7.5(a).
"Pinnacle Stock Option Plans" has the meaning set forth in Section 7.5(a).
"Pinnacle Surviving Corporation" has the meaning set forth in Section 2.1.
"Pinnacle Surviving Corporation Common Stock" means the Common Stock of the
Pinnacle Surviving Corporation, par value $.01.
"Plans" has the meaning set forth in Section 4.10(a).
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"Principal Asset Dispositions" has the meaning set forth in Section 6.1(c).
"Proxy Statement" has the meaning set forth in Section 7.2(a).
"Real Properties" has the meaning set forth in Section 4.17(a).
"Requisite Vote" has the meaning set forth in Section 4.24.
"Schedule 13E-3" has the meaning set forth in Section 7.2(a).
"SEC" means the Securities and Exchange Commission.
"SEC Documents" has the meaning set forth in Section 4.6.
"Securities Act" means the Securities Act of 1933, as amended, and the
rules and regulations promulgated thereunder.
"Significant Takeover Proposal" means (other than the transactions
contemplated by this Agreement) (a) any proposal or offer from any Person
relating to any direct or indirect acquisition or purchase of assets
(including capital stock of any Subsidiaries) of Pinnacle or any of its
Subsidiaries comprising 20% or more of Pinnacle's consolidated assets or of
over 20% of any class of equity securities of Pinnacle or any of its Material
Subsidiaries or (b) any tender offer or exchange offer that if consummated
would result in any Person beneficially owning 20% or more of any class of
equity securities of Pinnacle or any of its Material Subsidiaries or which
would require approval under any Gaming Law, or (c) any merger, consolidation,
business combination, recapitalization, liquidation, dissolution or similar
transaction involving Pinnacle (or any of its Material Subsidiaries) and a
third party. Notwithstanding the foregoing, consummation of (i) the Principal
Asset Dispositions substantially on the terms and subject to the conditions
contained in the applicable Asset Disposition Agreement in effect as of the
date hereof (or as amended or modified in accordance with this Agreement) (ii)
the sale of the Inglewood Property and the Other Asset Dispositions on terms
approved by Pinnacle's Board of Directors, in good faith, shall not be deemed
to constitute a Significant Takeover Proposal and (iii) any transaction which
would otherwise constitute a Significant Takeover Proposal but which is
consented to by PHCR in writing prior to the initiation of any substantive
negotiations or discussions with respect thereto, shall not be deemed to
constitute a Significant Takeover Proposal.
"SPD" has the meaning set forth in Section 4.10(b)(iv).
"Special Committee" has the meaning set forth in Section 4.5.
"Subsidiary" means, with respect to any Person, (a) any corporation with
respect to which such Person, directly or indirectly through one or more
Subsidiaries, (i) owns more than 50% of the outstanding shares of capital
stock having generally the right to vote in the election of directors or (ii)
has the power, under ordinary circumstances, to elect, or to direct the
election of, a majority of the board of directors of such corporation, (b) any
partnership with respect to which (i) such Person or a Subsidiary of such
Person is a general partner, (ii) such Person and its Subsidiaries together
own more than 50% of the interests therein, or (iii) such Person and its
Subsidiaries have the right to appoint or elect or direct the appointment or
election of a majority of the directors or other Person or body responsible
for the governance or management thereof, (c) any limited liability company
with respect to which (i) such Person or a Subsidiary of such Person is the
manager or managing member, (ii) such Person and its Subsidiaries together own
more than 50% of the interests therein, or (iii) such Person and its
Subsidiaries have the right to appoint or elect or direct the appointment or
election of a majority of the directors or other Person or body responsible
for the governance or management thereof, or (d) any other entity in which
such Person has, and/or one or more of its Subsidiaries have, directly or
indirectly, (i) at least a 50% ownership interest or (ii) the power to appoint
or elect or direct the appointment or election of a majority of
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the directors or other Person or body responsible for the governance or
management thereof. For purposes of this Agreement, the term "Subsidiary"
shall not include Sunflower Racing, Inc.
"Surveys" has the meaning set forth in Section 7.9(b).
"Takeover Proposal" means (other than the transactions contemplated by this
Agreement) (a) any proposal or offer from any Person relating to any direct or
indirect acquisition or purchase of assets (including capital stock of any
Subsidiaries) of Pinnacle or any of its Subsidiaries comprising 10% or more of
Pinnacle's consolidated assets or of over 10% of any class of equity
securities of Pinnacle or any of its Material Subsidiaries or (b) any tender
offer or exchange offer that if consummated would result in any Person
beneficially owning 10% or more of any class of equity securities of Pinnacle
or any of its Material Subsidiaries or which would require approval under any
Gaming Law, or (c) any merger, consolidation, business combination,
recapitalization, liquidation, dissolution or similar transaction involving
Pinnacle (or any of its Material Subsidiaries) and a third party.
Notwithstanding the foregoing, consummation of (i) the Principal Asset
Dispositions substantially on the terms and subject to the conditions
contained in the applicable Asset Disposition Agreement in effect as of the
date hereof (or as amended or modified in accordance with this Agreement) and
(ii) the sale of the Inglewood Property and the Other Asset Dispositions on
terms approved by Pinnacle's Board of Directors, in good faith, and (iii) any
transaction which would otherwise constitute a Takeover Proposal but which is
consented to by PHCR in writing prior to the initiation of any substantive
negotiations or discussions with respect thereto, shall not be deemed to
constitute a Takeover Proposal.
"Tax" or "Taxes" means all Federal, state, local and foreign taxes and
other assessments and governmental charges of a similar nature, including any
property Tax (whether imposed directly or through withholdings), including any
interest, penalties and additions to Tax applicable thereto.
"Tax Authority" means the Internal Revenue Service and any other domestic
or foreign governmental authority responsible for the administration or
collection of any Taxes.
"Tax Returns" means all Federal, state, local and foreign returns,
declarations, statements, reports, schedules, forms and information returns
relating to Taxes, and all amendments thereto.
"Termination Fee" has the meaning set forth in Section 7.7(b).
"Title Insurer" has the meaning set forth in Section 7.9(a).
"Title Policies" has the meaning set forth in Section 7.9(a).
"Transaction Documents" shall mean the Voting Agreement and the exhibits
thereto.
"Voting Agreement" means that certain Voting and Contribution Agreement,
dated the date hereof, among PHCR and the stockholders of Pinnacle listed on
the signature pages thereto, together with the exhibits thereto.
ARTICLE II
THE PINNACLE MERGER
Section 2.1 The Pinnacle Merger. Upon the terms and subject to the
conditions set forth in this Agreement and the certificate of merger or other
appropriate documents (in any such case, the "Certificate of Merger"), and in
accordance with the applicable provisions of the DGCL, Pinnacle Acq Corp shall
be merged with and into Pinnacle. Following the Pinnacle Merger, Pinnacle
shall continue as the surviving corporation (the "Pinnacle Surviving
Corporation") and the separate existence of Pinnacle Acq Corp will cease.
Section 2.2 Closing. The closing (the "Closing") of the Pinnacle Merger and
the contribution pursuant to the Voting Agreement will take place at 10:00
a.m., Los Angeles time, on a date (the "Closing Date") to be
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specified by PHCR, which may be on, but shall be no later than the third
business day after, the day on which there shall have been satisfaction or
waiver of the conditions set forth in Article VIII, at the offices of Skadden,
Arps, Slate, Meagher & Flom LLP, 300 South Grand Avenue, Los Angeles,
California 90071, unless another time date or place is agreed to in writing by
the parties hereto.
Section 2.3 Effective Time. On or before the Closing Date the parties shall
file the Certificate of Merger with the Secretary of State of the State of
Delaware in accordance with the provisions of DGCL Section 251 and make all
other filings or recordings required by law in connection with the Pinnacle
Merger. The Pinnacle Merger shall become effective at such time as the
Certificate of Merger is duly filed with the Secretary of State of the State
of Delaware, or at such other later time as the parties shall agree and
specify in the Certificate of Merger (the time the Pinnacle Merger becomes
effective being the "Effective Time").
Section 2.4 Effects of the Pinnacle Merger. The Pinnacle Merger shall have
the effects set forth in the DGCL. Without limiting the generality of the
foregoing, and subject thereto, at the Effective Time, all the properties,
rights, privileges, powers and franchises of Pinnacle and Pinnacle Acq Corp
shall vest in the Pinnacle Surviving Corporation, and all debts, liabilities
and duties of Pinnacle and Pinnacle Acq Corp shall become the debts,
liabilities and duties of the Pinnacle Surviving Corporation.
Section 2.5 Corporate Governance Documents. The Certificate of
Incorporation of Pinnacle Acq Corp, as in effect immediately prior to the
Effective Time of the Pinnacle Merger, shall become the Certificate of
Incorporation of the Pinnacle Surviving Corporation after the Effective Time,
except that such Certificate of Incorporation shall be amended to provide that
the name of the Pinnacle Surviving Corporation shall be a name selected by
Pinnacle Acq Corp prior to the Effective Date, and thereafter may be amended
in accordance with its terms and as provided by law. The By-laws of Pinnacle
Acq Corp as in effect on the Effective Time shall become the By-laws of the
Pinnacle Surviving Corporation and thereafter may be amended in accordance
with its terms and as provided by law.
Section 2.6 Directors. The directors of Pinnacle Acq Corp immediately prior
to the Effective Time shall become the directors of the Pinnacle Surviving
Corporation, and shall serve in such capacity until the earlier of their
resignation or removal or until their respective successors are duly elected
and qualified, as the case may be.
Section 2.7 Officers. The officers of Pinnacle Acq Corp immediately prior
to the Effective Time shall become the officers of the Pinnacle Surviving
Corporation, and shall serve in such capacity until the earlier of their
resignation or removal or until their respective successors are duly elected
and qualified, as the case may be.
Section 2.8 Further Actions. At and after the Effective Time, the Pinnacle
Surviving Corporation shall take all action as shall be required in connection
with the Pinnacle Merger, including, but not limited to, the execution and
delivery of any further deeds, assignments, instruments or documentation as
are necessary or desirable to carry out the provisions of this Agreement.
ARTICLE III
CONVERSION OF SHARES
Section 3.1 Effect on Capital Stock of Pinnacle and Pinnacle Acq Corp. As
of the Effective Time, by virtue of the Pinnacle Merger and without any action
on the part of the holder of any shares of Pinnacle Common Stock or any shares
of capital stock of Pinnacle Acq Corp:
(a) Capital Stock of Pinnacle. Each issued and outstanding share of
Pinnacle Common Stock (other than (i) shares to be canceled in accordance with
Section 3.1(c) and Pinnacle Dissenting Shares, (ii) shares to be
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redeemed in accordance with Section 6.1(d) of this Agreement but only to the
extent so redeemed immediately prior to the Effective Time, and (iii) the
Shares Contributed (as defined in the Voting Agreement)) shall be converted
into the right to receive from the Pinnacle Surviving Corporation the Pinnacle
Merger Consideration, without interest. The Paying Agent shall withhold or
deduct for Taxes as required under applicable law. As of the Effective Time,
all shares of Pinnacle Common Stock upon which the Pinnacle Merger
Consideration is payable pursuant to this Section 3.1(a) shall no longer be
outstanding and shall automatically be canceled and retired and shall cease to
exist, and each holder of a certificate representing any such shares of
Pinnacle Common Stock shall cease to have any rights with respect thereto,
except the right to receive the Pinnacle Merger Consideration.
(b) Capital Stock of Pinnacle Acq Corp. Each share of the Pinnacle Acq Corp
Common Stock issued and outstanding immediately prior to the Effective Time
shall be converted into and become one fully paid and nonassessable share of
Pinnacle Surviving Corporation Common Stock.
(c) Cancellation of Treasury Stock and Pinnacle Acq Corp Owned Stock. Each
share of Pinnacle Common Stock that is owned by PHCR, Pinnacle or by any
Subsidiary of Pinnacle and each share of Pinnacle Common Stock that is owned
by Pinnacle Acq Corp shall automatically be canceled and retired and shall
cease to exist.
Section 3.2 Exchange of Certificates.
(a) Paying Agent. Immediately prior to the Effective Time, Pinnacle Acq
Corp shall designate a bank or trust reasonably satisfactory to Pinnacle to
act as paying agent in the Pinnacle Merger (the "Paying Agent"), and, on or
prior to the Effective Time, Pinnacle Acq Corp shall deposit with the Paying
Agent immediately available funds (the "Exchange Funds") in an amount
necessary for the payment of the Pinnacle Merger Consideration upon surrender
of certificates representing Pinnacle Common Stock as part of the Pinnacle
Merger pursuant to Section 3.1, it being understood that any and all interest
earned on the Exchange Fund shall be turned over to the Pinnacle Surviving
Corporation.
(b) Exchange Procedure. As soon as reasonably practicable after the
Effective Time, the Pinnacle Surviving Corporation shall cause the Paying
Agent to mail to each holder of record of a certificate or certificates which
immediately prior to the Effective Time represented outstanding shares of
Pinnacle Common Stock (the "Pinnacle Certificates") whose shares were
converted into the right to receive the Pinnacle Merger Consideration pursuant
to Section 3.1, (i) a letter of transmittal (which shall specify that delivery
shall be effected, and risk of loss and title to the Pinnacle Certificates
shall pass, only upon delivery of the Pinnacle Certificates to the Paying
Agent and shall be in such form and have such other customary provisions as
the Pinnacle Surviving Corporation may reasonably specify) and (ii)
instructions for use in effecting the surrender of the Pinnacle Certificates
in exchange for the Pinnacle Merger Consideration. Upon surrender of a
Pinnacle Certificate for cancellation to the Paying Agent or to such other
agent or agents as may be appointed by the Pinnacle Surviving Corporation,
together with such letter of transmittal, duly executed, and such other
documents as may reasonably be required by the Paying Agent, the holder of
such Pinnacle Certificate shall be entitled to receive in exchange therefor
the Pinnacle Merger Consideration into which the shares of capital stock
theretofore represented by such Pinnacle Certificate shall have been converted
pursuant to Section 3.1, and the Pinnacle Certificate so surrendered shall
forthwith be cancelled. The Exchange Agent shall accept such Pinnacle
Certificates upon compliance with such reasonable terms and conditions as the
Exchange Agent may impose to effect an orderly exchange thereof in accordance
with normal exchange practices. In the event of a transfer of ownership of
such capital stock which is not registered in the transfer records of
Pinnacle, payment may be made to a Person other than the Person in whose name
the Pinnacle Certificate so surrendered is registered, if such Pinnacle
Certificate shall be properly endorsed or otherwise be in proper form for
transfer and the Person requesting such payment shall pay any transfer or
other taxes required by reason of the payment to a Person other than the
registered holder of such Pinnacle Certificate or establish to the
satisfaction of the Pinnacle Surviving Corporation that such tax has been paid
or is not applicable. Until surrendered as contemplated by this Section
3.2(b), each Pinnacle Certificate shall be deemed at any time after the
Effective Time to represent only the right to receive upon such surrender the
Pinnacle Merger Consideration, without interest, into which the
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shares of capital stock theretofore represented by such Pinnacle Certificate
shall have been converted pursuant to Sections 3.1. No interest will be paid
or will accrue on the consideration payable upon the surrender of any Pinnacle
Certificate. The Paying Agent shall withhold or deduct for Taxes as required
under applicable law.
(c) No Further Ownership Rights in Capital Stock. All consideration paid
upon the surrender of Pinnacle Certificates in accordance with the terms of
this Article III shall be deemed to have been paid in full satisfaction of all
rights pertaining to the shares of capital stock theretofore represented by
such Pinnacle Certificates, and there shall be no further registration of
transfers on the stock transfer books of the Pinnacle Surviving Corporation of
the shares of capital stock which were outstanding immediately prior to the
Effective Time. If, after the Effective Time, the Pinnacle Certificates are
presented to the Pinnacle Surviving Corporation or the Paying Agent for any
reason, they shall be cancelled and exchanged as provided in this Article III,
except as otherwise provided by law.
(d) Termination of Exchange Funds. Any portion of the Exchange Funds which
remains undistributed to the holders of the Pinnacle Certificates for twelve
months after the Effective Time shall be delivered to an entity identified in
writing to the Paying Agent by the Pinnacle Surviving Corporation, upon
demand, and any holders of the Pinnacle Certificates who have not theretofore
complied with this Article III shall thereafter look only to the Pinnacle
Surviving Corporation for payment of their claim for the Pinnacle Merger
Consideration, and any cash or dividends or distributions payable to such
holders pursuant to this Article III.
(e) No Liability. None of PHCR, Pinnacle Acq Corp, Pinnacle, the Pinnacle
Surviving Corporation or the Paying Agent shall be liable to any Person in
respect of any cash delivered to a public official pursuant to any applicable
abandoned property, escheat or similar law.
(f) Pinnacle Dissenting Shares. Notwithstanding Section 3.1, shares of
Pinnacle Common Stock which are issued and outstanding immediately prior to
the Effective Time and which are held by a holder who has not voted such
shares in favor of the Pinnacle Merger and who has delivered a written demand
for relief as a dissenting stockholder in the manner provided by the DGCL and
who, as of the Effective Time, shall not have effectively withdrawn or lost
such right to relief as a dissenting stockholder ("Pinnacle Dissenting
Shares") shall not be converted into a right to receive the Pinnacle Merger
Consideration. The holders of such Pinnacle Dissenting Shares shall be
entitled only to such rights as are granted by Section 262 of the DGCL. Each
holder of Pinnacle Dissenting Shares who becomes entitled to payment for such
shares pursuant to Section 262 of the DGCL shall receive payment therefor from
the Surviving Corporation in accordance with the DGCL; provided, however, that
if any such holder of Pinnacle Dissenting Shares (i) shall have failed to
establish his entitlement to relief as a dissenting stockholder as provided in
Section 262 of the DGCL, (ii) shall have effectively withdrawn his demand for
relief as a dissenting stockholder with respect to such Pinnacle Dissenting
Shares or lost his right to relief as a dissenting stockholder and payment for
his Pinnacle Dissenting Shares under Section 262 of the DGCL, or (iii) shall
have failed to file a complaint with the appropriate court seeking relief as
to determination of the value of all Pinnacle Dissenting Shares within the
time provided in Section 262 of the DGCL, such holder shall forfeit the right
to relief as a dissenting stockholder with respect to such shares of Pinnacle
Common Stock and each such share shall be converted into the right to receive
the Pinnacle Merger Consideration without interest thereon, from the Pinnacle
Surviving Corporation as provided in Section 3.1. Pinnacle shall give Pinnacle
Acq Corp prompt written notice of any demands received by Pinnacle for relief
as a dissenting stockholder and Pinnacle Acq Corp shall have the right to
participate in all negotiations and proceedings with respect to such demands.
Pinnacle shall not, except with the prior written consent of Pinnacle Acq
Corp, make any payment with respect to, or settle or offer to settle, any such
demands.
ARTICLE IV
REPRESENTATIONS AND WARRANTIES OF PINNACLE
Except as set forth in the corresponding numbered sections of the
disclosure schedules delivered by Pinnacle to Pinnacle Acq Corp concurrently
with the execution of this Agreement or referenced in the particular section
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of this Article IV to which exception is being taken, Pinnacle represents and
warrants to Pinnacle Acq Corp as follows:
Section 4.1 Organization, Standing and Corporate Power. Each of Pinnacle
and its Subsidiaries is a corporation, partnership or limited liability
company duly formed or organized, validly existing and in good standing under
the laws of the jurisdiction in which it is formed or organized and has the
requisite corporate, partnership or limited liability company power and
authority to carry on its business as now being conducted. Each of Pinnacle
and its Subsidiaries is duly qualified or licensed to do business and is in
good standing in each jurisdiction in which the nature of its business or the
ownership or leasing of its properties makes such qualification or licensing
necessary, other than in such jurisdictions where the failure to be so
qualified or licensed (individually or in the aggregate) would not have a
material adverse effect on Pinnacle or any Material Subsidiary of Pinnacle.
Pinnacle has made available to Pinnacle Acq Corp complete and correct copies
of the Certificate of Incorporation and By-laws of Pinnacle and the comparable
charter and organizational documents of each of its Subsidiaries, in each case
as amended to the date of this Agreement. The respective certificates of
incorporation and by-laws or other organizational documents of the
Subsidiaries of Pinnacle do not contain any provision limiting or otherwise
restricting the ability of Pinnacle to control such Subsidiaries.
Section 4.2 Subsidiaries. Pinnacle's Subsidiaries identified on Schedule
4.2(a) own or lease all of the material assets, hold all material Permits and
conduct all of the material business and operations of Pinnacle and its
Subsidiaries, taken as a whole (including, without limitation, all business
and operations associated with Pinnacle's Argentina; Bossier City and Harvey,
Louisiana; Bay St. Louis and Biloxi, Mississippi; and Verdi, Nevada casino
resorts and related facilities, Los Angeles card clubs (which Pinnacle owns or
subleases but does not operate), Phoenix, Arizona horse racing facility, the
project in development in Vevay, Indiana and the potential project based in
Lake Charles, Louisiana in which Pinnacle has an option to lease, and the
lending of funds to the Yakima Tribal Gaming Corporation. Each Subsidiary of
Pinnacle is identified on Schedule 4.2(a). All the outstanding equity
interests of each Subsidiary are owned by Pinnacle, by another wholly owned
Subsidiary of Pinnacle or by Pinnacle and another wholly owned Subsidiary of
Pinnacle, free and clear of all Liens, except as set forth on Schedule 4.2(b).
There are no proxies with respect to any shares of any such Subsidiary. There
are no outstanding obligations of Pinnacle or any of its Subsidiaries to
repurchase, redeem or otherwise acquire any outstanding securities of any of
Pinnacle's Subsidiaries or to provide funds to or make any investment (in the
form of a loan, capital contribution or otherwise) in Pinnacle or any of its
Subsidiaries or other Person.
Section 4.3 Capital Structure. The authorized capital stock of Pinnacle
consists of 40,000,000 shares of Pinnacle Common Stock and 250,000 shares of
Pinnacle Preferred Stock. As of April 16, 2000, (a) 26,297,652 shares of
Pinnacle Common Stock and no shares of Pinnacle Preferred Stock were issued
and outstanding, (b) no shares of Pinnacle Common Stock were held by Pinnacle
in its treasury, and (c) 2,556,667 shares of Pinnacle Common Stock were
reserved for issuance upon exercise of outstanding Pinnacle Stock Options. No
other shares of capital stock or other voting securities of Pinnacle are
authorized, issued or outstanding. There are no outstanding stock appreciation
rights, restricted stock grants or contingent stock grants and there are no
other outstanding contractual rights to which Pinnacle is a party, the value
of which is derived from the value of shares of Pinnacle Common Stock. All
outstanding shares of capital stock of Pinnacle are, and all shares which may
be issued upon exercise or conversion of any security issued by Pinnacle (or
any entity in which Pinnacle owns a direct or indirect interest) will be, when
issued, duly authorized, validly issued, fully paid and nonassessable and not
subject to preemptive rights. There are no bonds, debentures, notes or other
indebtedness of Pinnacle having the right to vote (or convertible into, or
exchangeable for, securities having the right to vote) on any matters on which
stockholders of Pinnacle may vote. Except as set forth above, as of the date
of this Agreement, there are no outstanding securities, options, warrants,
calls, rights, commitments, agreements, arrangements or undertakings of any
kind to which Pinnacle or any of its Subsidiaries is a party, or by which any
of them is bound, obligating Pinnacle or any of its Subsidiaries to issue,
deliver or sell, or cause to be issued, delivered or sold, shares of capital
stock or other voting securities of Pinnacle or of
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any of its Subsidiaries or obligating Pinnacle or any of its Subsidiaries to
issue, grant, extend or enter into any such security, option, warrant, call,
right, commitment, agreement, arrangement or undertaking.
Section 4.4 Authority; Noncontravention. Pinnacle has the requisite
corporate power and authority to enter into this Agreement and, subject to
approval of this Agreement by the Requisite Vote of the outstanding shares of
Pinnacle Common Stock, to consummate the transactions contemplated by this
Agreement. The execution and delivery of this Agreement by Pinnacle and the
consummation by Pinnacle of the transactions contemplated by this Agreement
have been duly authorized by all necessary corporate action on the part of
Pinnacle, subject, in the case of this Agreement, to approval of this
Agreement by the Requisite Vote of the outstanding shares of Pinnacle Common
Stock and the Pinnacle Compliance Committee. This Agreement has been duly
executed and delivered by Pinnacle and, assuming this Agreement constitutes
the valid and binding obligation of the other parties hereto, constitutes the
valid and binding obligation of Pinnacle, enforceable against Pinnacle in
accordance with its terms. The execution and delivery of this Agreement do
not, and the consummation of the transactions contemplated by this Agreement
and compliance with the provisions of this Agreement will not, require notice
or consent under, conflict with, or result in any violation of, or default
(with or without notice or lapse of time, or both) under, or give rise to a
right of termination, cancellation or acceleration of any obligation or to
loss of a material benefit under, or result in the creation of any Lien upon
any of the properties or assets of Pinnacle or any of its Subsidiaries under,
(a) the Certificate of Incorporation or By-laws of Pinnacle or the comparable
charter or organizational documents of any of its Subsidiaries, (b) other than
subject to the governmental filings and other matters referred to in the
following sentence and except as set forth on Schedule 4.4(a), (i) any loan or
credit agreement, note, bond, mortgage, indenture, lease or other agreement or
instrument or (ii) any permit, concession, franchise or license applicable to
Pinnacle or any of its Subsidiaries or their respective properties or assets
or (c) subject to the governmental filings and other matters referred to in
the following sentence, any judgment, order, decree, statute, law, ordinance,
rule or regulation applicable to Pinnacle or any of its Subsidiaries or their
respective properties or assets, other than, in the case of clauses (b) or
(c), any such conflicts, violations, defaults, rights or Liens that
individually or in the aggregate would not (i) have a material adverse effect
on Pinnacle or any of its Material Subsidiaries, (ii) impair in any material
respect the ability of Pinnacle to perform its obligations under this
Agreement or (iii) prevent or impede in any material respect the consummation
of any of the transactions contemplated by this Agreement.
No consent, approval, order or authorization of, or registration,
declaration or filing with, any Governmental Entity is required by Pinnacle or
any of its Subsidiaries in connection with the execution and delivery of this
Agreement by Pinnacle or the consummation by Pinnacle of the transactions
contemplated by this Agreement, except for (A) the filing of a premerger
notification and report form by Pinnacle under the HSR Act, (B) the filing
with the SEC of such reports under Section 14(a) and Rule 13e-3 of the
Exchange Act as may be required in connection with this Agreement and the
transactions contemplated by this Agreement, (C) the filing of the Certificate
of Merger with the Delaware Secretary of State and appropriate documents with
the relevant authorities of other states in which Pinnacle is qualified to do
business, (D) the obtaining of all Gaming Approvals, each of which is set
forth in Schedule 4.4(b) hereto, (E) such filings as may be required by any
applicable state securities or "blue sky" laws, (F) the consents described on
Schedule 4.4(c) hereto and (G) such other consents, approvals, orders,
authorizations, registrations, declarations and filings the failure of which
to be obtained or made would not, individually or in the aggregate, (1) have a
material adverse effect on Pinnacle, (2) impair, in any material respect, the
ability of Pinnacle to perform its obligations under this Agreement or
(3) prevent or significantly delay the consummation of the transactions
contemplated by this Agreement.
Section 4.5 Opinion of Financial Advisor. The Board of Directors of
Pinnacle and a special committee of the Board of Directors of Pinnacle (the
"Special Committee") have received the opinion of Jefferies & Company, Inc.,
dated April 16, 2000 (the "Fairness Opinion"), to the effect that, as of such
date and subject to the assumptions and qualifications contained therein, the
Pinnacle Merger Consideration is fair to the stockholders of Pinnacle, from a
financial point of view. A copy of the Fairness Opinion has been delivered to
Pinnacle Acq Corp.
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Section 4.6 SEC Documents; Financial Statements. Pinnacle files and has
filed all required reports, proxy statements, forms, and other documents with
the SEC since January 1, 1996 (the "SEC Documents"). Schedule 4.6(a) hereto
sets forth a complete list of all the required reports, proxy statements,
registration statements, forms, and other documents filed with the SEC since
January 1, 1996 through the date hereof (the "Current SEC Documents"). True
and complete copies of all such SEC Documents have been delivered or made
available to Pinnacle Acq Corp. As of their respective dates, (a) the SEC
Documents complied in all material respects with the requirements of the
Securities Act or the Exchange Act, as the case may be, and the rules and
regulations of the SEC promulgated thereunder applicable to such SEC
Documents, and (b) except to the extent that information contained in any SEC
Document has been revised or superseded by a later filed SEC Document filed
and publicly available prior to the date of this Agreement, none of the SEC
Documents contained any untrue statement of a material fact or omitted to
state a material fact required to be stated therein or necessary in order to
make the statements therein, in light of the circumstances under which they
were made, not misleading. The financial statements of Pinnacle included in
the SEC Documents comply as to form in all material respects with applicable
accounting requirements and the published rules and regulations of the SEC
with respect thereto, have been prepared in accordance with generally accepted
accounting principles applied on a consistent basis during the periods
involved and fairly present the consolidated financial position of Pinnacle
and its consolidated Subsidiaries as of the dates thereof and the consolidated
results of their operations and cash flows for the periods then ended
(subject, in the case of unaudited statements, to normal year-end audit
adjustments). Except as set forth in the Current SEC Documents and in Schedule
4.6(b), and except for liabilities and obligations incurred in the Ordinary
Course of Business, and except for the Asset Dispositions and the transactions
occurring in connection with the construction of the Belterra Resort and
Casino and the riverboat at the site of the Belterra Resort and Casino (the
"Indiana Project") and except for transaction expenses incurred in connection
with the transactions contemplated by this Agreement, since the consolidated
balance sheet as of December 31, 1999 included in the Current SEC Documents
(the "Base Balance Sheet"), neither Pinnacle nor any of its Subsidiaries has
incurred any material liabilities or obligations of any nature (whether
accrued, absolute, contingent or otherwise) required by generally accepted
accounting principles to be set forth on a consolidated balance sheet of
Pinnacle and its consolidated Subsidiaries or in the notes thereto.
Section 4.7 Absence of Certain Changes or Events. Except as disclosed in
the Current SEC Documents, filed and publicly available between January 1,
1999 and April 16, 2000, since the date of the Base Balance Sheet, Pinnacle
and its Subsidiaries have conducted their respective businesses only in the
Ordinary Course of Business consistent with past practice, and, except as set
forth in Schedule 4.7, there has not been (a) any material adverse change in
Pinnacle, (b) any declaration, setting aside or payment of any dividend or
other distribution with respect to its capital stock, (c) any split,
combination or reclassification of any of its capital stock or any issuance or
the authorization of any issuance of any other securities in respect of, in
lieu of or in substitution for shares of its capital stock, (d)(i) any
granting by Pinnacle or any of its Subsidiaries to any employee or consultant
of Pinnacle or any of its Subsidiaries of any increase in compensation, except
in the Ordinary Course of Business consistent with past practice (including in
connection with promotions) or as was required under employment agreements in
effect as of the date of the Base Balance Sheet, (ii) any granting by Pinnacle
or any of its Subsidiaries to any of their respective employees or consultant
of any increase in severance or termination pay, except as part of a standard
employment package to any Person promoted or hired, or as was required under
employment, severance or termination agreements in effect as of the date of
the Base Balance Sheet or (iii) any entry by Pinnacle or any of its
Subsidiaries into any employment, severance or termination agreement with any
executive officer of Pinnacle or any of its Subsidiaries, (e) any damage,
destruction or loss affecting the businesses or assets of Pinnacle or any of
its Subsidiaries, whether or not covered by insurance, that has or reasonably
could be expected to have a material adverse effect on Pinnacle or any
Subsidiary, (f) any change in accounting methods, principles or practices by
Pinnacle affecting its assets, liabilities or business (g) entry into any
commitment or transaction material to Pinnacle and its Subsidiaries taken as a
whole (including, without limitation, any borrowing or sale of assets) except
in the Ordinary Course of Business, (h) any incurrence, assumption or
guarantee by Pinnacle or any of its Subsidiaries of any indebtedness in excess
of $1,000,000, other than in the Ordinary Course of Business and in amounts
and on terms consistent with past practices, (i) any creation or assumption by
Pinnacle or any of its Subsidiaries of any material Lien on any material asset
other
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than in the Ordinary Course of Business or (j) any making of any loan, advance
or capital contributions to or investment in excess of $500,000 in any Person,
other than loans, advances or capital contributions to or investments in
wholly owned Subsidiaries of Pinnacle (and Belterra Resorts Indiana, LLC) made
in the Ordinary Course of Business consistent with past practice.
Section 4.8 Litigation. Other than the suits, actions and proceedings set
forth on Schedule 4.8(b), Schedule 4.8(a) (Section 1) sets forth all material
suits, actions and proceedings pending or, to the knowledge of Pinnacle,
threatened against Pinnacle or any of its Material Subsidiaries, none of
which, individually or in the aggregate other than as set forth on Schedule
4.8(a) (Section 2), would reasonably be expected to have a material adverse
effect on Pinnacle or any of its Material Subsidiaries, including with respect
to its licenses, permits, registration or other gaming approvals under the
Gaming Laws. Schedule 4.8(b) sets forth all suits, actions and proceedings
pending or, to the knowledge of Pinnacle, threatened against Pinnacle or any
of its Subsidiaries in connection with the transactions contemplated by this
Agreement on the date hereof. Schedule 4.8(c) (Section 1) sets forth all
material judgments, decrees, injunctions, rules or orders (other than rules
and orders issued in the Ordinary Course of Business of Pinnacle or its
Material Subsidiaries which do not result from a violation of law) of any
Governmental Entity or arbitrator outstanding against Pinnacle or any of its
Subsidiaries, other than as set forth on Schedule 4.8(c) (Section 2), none of
which, individually or in the aggregate, would reasonably be expected to have
a material adverse effect on Pinnacle or any of its Subsidiaries, including
with respect to its licenses, permits, registration or other gaming approvals
under the Gaming Laws.
Section 4.9 Absence of Changes in Benefit Plans. Except as set forth in
Schedule 4.9 or as otherwise expressly permitted hereunder, there has not been
any adoption or amendment by Pinnacle or any of its Subsidiaries of any Plan
since the date of the Base Balance Sheet. All employment, consulting,
severance, termination or indemnification agreements, arrangements or
understandings between Pinnacle or any of its Subsidiaries which are required
to be disclosed in the Current SEC Documents have been fully and properly
disclosed therein.
Section 4.10 Employee Benefits; ERISA.
(a) Schedule 4.10(a) contains a true and complete list of each employment,
consulting, bonus, deferred compensation, incentive compensation, stock
purchase, stock option, stock appreciation right or other stock-based
incentive, severance, change-in-control or termination pay, hospitalization or
other medical, disability, life or other insurance, supplemental unemployment
benefits, profit-sharing, pension, or retirement plan, program, agreement or
arrangement, and each other employee benefit plan, program, agreement or
arrangement, sponsored, maintained or contributed to or required to be
contributed to by Pinnacle or any of its Subsidiaries, or by any trade or
business, whether or not incorporated, that together with Pinnacle or any of
its Subsidiaries would be deemed to comprise a controlled group or affiliated
service group or be deemed to be under common control or otherwise aggregated
for purposes of Sections 414(b), (c), (m) or (o) of the Code (an "ERISA
Affiliate"), for the benefit of any current or former employee or director of
Pinnacle, or any of its Subsidiaries or any ERISA Affiliate (the "Plans").
Schedule 4.10(a) identifies each of the Plans that is an "employee welfare
benefit plan," or "employee pension benefit plan" as such terms are defined in
Sections 3(1) and 3(2) of ERISA (such plans being hereinafter referred to
collectively as the "ERISA Plans"). None of the Plans is subject to Title IV
of ERISA. None of Pinnacle, any of its Subsidiaries nor any ERISA Affiliate
has any formal plan or commitment, whether legally binding or not, to create
any additional Plan or modify or change any existing Plan that would affect
any current or former employee or director of Pinnacle, any of its
Subsidiaries or any ERISA Affiliate.
(b) With respect to each of the Plans, Pinnacle has heretofore delivered or
as promptly as practicable after the date hereof shall deliver to Pinnacle Acq
Corp true and complete copies of each of the following documents, as
applicable:
(i) a copy of the Plan documents (including all amendments thereto) for
each written Plan or a written description of any Plan that is not
otherwise in writing;
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(ii) a copy of the annual report or Internal Revenue Service Form 5500
Series, if required under ERISA, with respect to each ERISA Plan for the
last three Plan years ending prior to the date of this Agreement for which
such a report was filed;
(iii) a copy of the actuarial report, if required under ERISA, with
respect to each ERISA Plan for the last three Plan years ending prior to
the date of this Agreement;
(iv) a copy of the most recent Summary Plan Description ("SPD"),
together with all Summaries of Material Modification issued with respect to
such SPD, if required under ERISA, with respect to each ERISA Plan, and all
other material employee communications relating to each ERISA Plan;
(v) if the Plan is funded through a trust or any other funding vehicle,
a copy of the trust or other funding agreement (including all amendments
thereto) and the latest financial statements thereof, if any;
(vi) all contracts relating to the Plans with respect to which Pinnacle,
any of its Subsidiaries or any ERISA Affiliate may have any liability,
including insurance contracts, investment management agreements,
subscription and participation agreements and record keeping agreements;
and
(vii) the most recent determination letter received from the IRS with
respect to each Plan that is intended to be qualified under Section 401(a)
of the Code.
(c) No liability under Title IV of ERISA has been incurred by Pinnacle, any
of its Subsidiaries or any ERISA Affiliate since the effective date of ERISA
that has not been satisfied in full, and no condition exists that presents a
material risk to Pinnacle, or any of its Subsidiaries or any ERISA Affiliate
of incurring any liability under such Title. To the extent this representation
applies to Sections 4064, 4069 or 4204 of Title IV of ERISA, it is made not
only with respect to the ERISA Plans but also with respect to any employee
benefit plan, program, agreement or arrangement subject to Title IV of ERISA
to which Pinnacle, any of its Subsidiaries or any ERISA Affiliate made, or was
required to make, contributions during the past six years. All such plans,
programs, agreements or arrangements are listed on Schedule 4.10(c).
(d) None of Pinnacle, any of its Subsidiaries, any ERISA Affiliate, any of
the ERISA Plans, any trust created thereunder, nor to Pinnacle's knowledge,
any trustee or administrator thereof has engaged in a transaction or has taken
or failed to take any action in connection with which Pinnacle, any of its
Subsidiaries, any ERISA Affiliate, any ERISA Plan or any such trust could be
subject to any material liability for either a civil penalty assessed pursuant
to Section 409 or 502(i) of ERISA or a tax imposed pursuant to Section 4975(a)
or (b), 4976 or 4980B of the Code.
(e) All contributions which Pinnacle, any of its Subsidiaries or any ERISA
Affiliate is required to pay under the terms of each of the ERISA Plans have
been timely paid in full or properly recorded on the financial statements or
records of Pinnacle or its Subsidiaries.
(f) Each of the Plans has been operated and administered in all material
respects in accordance with applicable Laws, including but not limited to
ERISA and the Code.
(g) There has been no material failure by any of the ERISA Plans that is
intended to be "qualified" within the meaning of Section 401(a) of the Code to
meet the requirements of such qualification. Except as disclosed on Schedule
4.10(g) hereto, Pinnacle has applied for and received a currently effective
determination letter from the IRS stating that it is so qualified, and no
event has occurred which would affect such qualified status.
(h) Except as disclosed on Schedule 4.10(h), no Plan provides benefits,
including without limitation death or medical benefits (whether or not
insured), with respect to current or former employees of Pinnacle, its
Subsidiaries or any ERISA Affiliate after retirement or other termination of
service (other than (i) coverage mandated by applicable Laws, (ii) death
benefits or retirement benefits under any "employee pension plan," as that
term is defined in Section 3(2) of ERISA, or (iii) benefits, the full direct
cost of which is borne by the current or former employee (or beneficiary
thereof)).
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(i) Except as disclosed on Schedule 4.10(i), the consummation of the
transactions contemplated by this Agreement will not (i) entitle any current
or former employee, officer or director of Pinnacle, any of its Subsidiaries
or any ERISA Affiliate to severance pay, unemployment compensation or any
other similar termination payment, or (ii) accelerate the time of payment or
vesting, or increase the amount of or otherwise enhance any benefit due, or
any option or other equity security held by, any such employee, officer or
director.
(j) There are no pending or, to Pinnacle's knowledge, threatened or
anticipated claims by or on behalf of any Plan, by any employee or beneficiary
under any such Plan or otherwise involving any such Plan (other than routine
claims for benefits).
Section 4.11 Taxes.
(a) Each of Pinnacle and its Subsidiaries has timely filed (or has had
timely filed on its behalf) or will file or cause to be timely filed, all
material Tax Returns required by applicable law to be filed by it prior to or
as of the Closing Date. All such Tax Returns and amendments thereto are, or
will be before the Closing Date, true, complete and correct in all material
respects, except to the extent reserved as set forth in Section 4.11(b).
(b) Each of Pinnacle and its Subsidiaries has paid (or has had paid on its
behalf), or has established (or has had established on its behalf and for its
sole benefit and recourse), or will establish or cause to be established on or
before the Closing Date, adequate reserves in accordance with generally
accepted accounting principles on the balance sheets that are included in the
Current SEC Documents for the payment of, all material Taxes due with respect
to any period ending prior to or as of the Closing Date.
(c) Except as set forth in Schedule 4.11(c), (i) no Audit by a Tax
Authority is pending or threatened with respect to any material Taxes due from
Pinnacle or any of its Subsidiaries, (ii) there are no outstanding waivers
extending the statutory period of limitation relating to the payment of
material Taxes due from Pinnacle or any of its Subsidiaries for any taxable
period ending prior to the Closing Date which are expected to be outstanding
as of the Closing Date, and (iii) no issue has been raised by any Tax
Authority in any Audit of Pinnacle or any of its Subsidiaries that if raised
with respect to any other period not so audited could be expected to result in
a material proposed deficiency for any period not so audited.
(d) Except as set forth on Schedule 4.11(d), no deficiency or adjustment
for any Taxes has been proposed, asserted or assessed against Pinnacle or any
of its Subsidiaries that has not been resolved or paid or for which an
adequate accrual has not been established in accordance with generally
accepted accounting principles which would reasonably be expected to have a
material adverse effect on Pinnacle. There are no Liens for Taxes upon the
assets of Pinnacle or any of its Subsidiaries, except Liens for current Taxes
not yet due and payable and for which adequate accruals have been established
in accordance with generally accepted accounting principles.
(e) Except as set forth on Schedule 4.11(e), all Tax sharing agreements,
Tax indemnity agreements and similar agreements to which Pinnacle or any of
its Subsidiaries is a party are disclosed in the Current SEC Documents.
Section 4.12 Environmental Matters.
(a) Each of Pinnacle and the Material Subsidiaries is in substantial
compliance with all applicable Federal, state, local and foreign laws and
regulations relating to pollution or protection of human health or the
environment, including, without limitation, ambient air, surface water, ground
water, land surface or subsurface strata, and natural resources (together
"Environmental Laws" and including, without limitation, laws and regulations
relating to emissions, discharges, releases or threatened releases of
chemicals, pollutants, contaminants, wastes, toxic or hazardous substances or
wastes, petroleum and petroleum products, polychlorinated biphenyls ("PCBs"),
or asbestos or asbestos-containing materials ("Materials of Environmental
Concern")), or otherwise relating to the manufacture, processing,
distribution, use, treatment, storage, disposal, transport or handling of
Materials of Environmental Concern, except for such non-compliance as would
not be
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reasonably likely to result in liability to Pinnacle or any Material
Subsidiary of more than $100,000 on an individual basis or more than $250,000
in the aggregate. Such compliance includes, but is not limited to, the
possession by Pinnacle and the Material Subsidiaries of all permits and other
governmental authorizations required under all applicable Environmental Laws,
and substantial compliance with the terms and conditions thereof, except for
such non-compliance as would not be reasonably likely to result in liability
to Pinnacle or any Material Subsidiary of more than $100,000 on an individual
basis or more than $250,000 in the aggregate.
(b) Neither Pinnacle nor any of its Material Subsidiaries has received any
communication (written or oral, in the case of oral, only such as would
reasonably be likely to result in a cause of action or written claim or
violation), whether from a governmental authority, citizens group, employee or
otherwise, that alleges that Pinnacle or any such Material Subsidiary is not
in substantial compliance with any Environmental Laws, and, to the knowledge
of Pinnacle, there are no circumstances that may prevent or interfere with
such compliance in the future, except for such non-compliance as would not be
reasonably likely to result in liability to Pinnacle or any Material
Subsidiary of more than $100,000 on an individual basis or more than $250,000
in the aggregate. To Pinnacle's knowledge after reasonable efforts, Pinnacle
has provided to Pinnacle Acq Corp all environmental site assessment reports
(such as "Phase I" or "Phase II" reports) and all reports regarding the
investigation or remediation of Materials of Environmental Concern in soil or
ground water, including documentation of soil or ground water sampling and
analysis (or portions of all of the foregoing as may exist in Pinnacle's
files), in Pinnacle's possession, except for such reports that do not reveal
any conditions not generally disclosed in reports previously provided to
Pinnacle Acq Corp or on Schedule 4.12 with respect to the Cypress
Fee/Inglewood Gas Plant Area and Boomtown, Verdi properties only, and except
for such reports that do not reveal new conditions that, individually or in
the aggregate, would be reasonably expected to result in liability to Pinnacle
or any Material Subsidiary of more than $25,000. Notwithstanding the
foregoing, Pinnacle will use its best efforts to timely provide all such
reports to Pinnacle Acq Corp.
(c) There is no claim, action, cause of action, notice of investigation or
other notice (written or oral, in the case of oral, only such as would
reasonably be likely to result in a cause of action or written claim or
violation) (together "Environmental Claim") that has been received by Pinnacle
or any Material Subsidiary by any Person or entity alleging potential
liability (including, without limitation, potential liability for
investigatory costs, cleanup costs, governmental response costs, natural
resources damages, property damages, personal injuries, or penalties) arising
out of, based on or resulting from (i) the presence, or release into the
environment, of any Material of Environmental Concern at any location, whether
or not owned or operated by Pinnacle or (ii) circumstances forming the basis
of any violation, or alleged violation, of any Environmental Law, that in
either case is pending or to Pinnacle's knowledge, threatened against Pinnacle
or any of its Material Subsidiaries or against any Person or entity whose
liability for any Environmental Claim Pinnacle or any of its Material
Subsidiaries has retained or assumed either contractually or by operation of
law, which matters referred to in clauses (i) and (ii) would be reasonably
likely to result in liability to Pinnacle or any Material Subsidiary of more
than $50,000 on an individual basis or more than $100,000 in the aggregate.
(d) To Pinnacle's knowledge, there are no past or present actions,
activities, circumstances, conditions, events or incidents, including, without
limitation, the release, emission, discharge, presence or disposal of any
Material of Environmental Concern, that would reasonably be expected to result
in liability to Pinnacle or any Material Subsidiary of more than $250,000 on
an individual basis or more than $500,000 in the aggregate.
(e) To Pinnacle's knowledge after reasonable efforts, all underground
storage tanks located on any property owned, leased, operated or controlled by
Pinnacle or any of its Subsidiaries are identified in Paragraph 7 of Schedule
4.12.
Section 4.13 Permits; Compliance with Laws.
(a) Since January 1, 1997, each of Pinnacle, its Subsidiaries and their
respective officers, directors and other personnel has in effect all Federal,
state, local and foreign governmental approvals, authorizations, certificates,
filings, franchises, orders, registrations, findings of suitability, licenses,
notices, permits, applications and rights,
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including all authorizations under any applicable Law, including, without
limitation, any applicable Gaming Laws ("Permits"), necessary for Pinnacle and
its Subsidiaries to own, lease or operate their properties and assets and to
carry on their business as now conducted, other than such Permits the absence
of which would not, individually or in the aggregate, have a material adverse
effect on Pinnacle or any of its Material Subsidiaries, and there has occurred
no default under any such Permit other than such defaults which, individually
or in the aggregate, would not have a material adverse effect on Pinnacle or
any of its Material Subsidiaries, result in a limitation or condition on any
Permit or result in the imposition of a fine or penalty in excess of $50,000
against Pinnacle or any of its Material Subsidiaries. To the knowledge of
Pinnacle, no event has occurred, and no facts or circumstances exist, which
would adversely affect the ability of Pinnacle to obtain all necessary Permits
to allow Pinnacle to conduct its business with respect to the Indiana Project,
in the manner Pinnacle proposes to conduct such business. To the knowledge of
Pinnacle, no event has occurred which permits, or upon the giving of notice or
passage of time or both would permit, revocation, non-renewal, modification,
suspension or termination of any Permit that currently is in effect the loss
of which either individually or in the aggregate would reasonably be expected
to have a material adverse effect on Pinnacle or any of its Material
Subsidiaries. Neither Pinnacle nor any of its Material Subsidiaries knows of
any facts, which, if known to any Gaming Authority, would reasonably be
expected to result in the revocation or suspension of a Permit under any
Gaming Laws or would reasonably be expected to disqualify it or them from
licensing under any Gaming Laws, except such revocations, suspensions or
disqualifications as could not be reasonably expected to have a material
adverse effect on Pinnacle or any of its Material Subsidiaries. All such
Permits are held only by Pinnacle or a Subsidiary of Pinnacle. Pinnacle, its
Subsidiaries and their respective officers, directors and other key personnel
are in compliance with all applicable statutes, laws, ordinances, rules,
orders and regulations of any Governmental Entity, except for possible
noncompliance which individually or in the aggregate would not have a material
adverse effect on Pinnacle or any of its Material Subsidiaries.
(b) Except as set forth on Schedule 4.13, each of Pinnacle, its
Subsidiaries and their respective officers, directors and other key personnel
is in compliance with all applicable Law, including any applicable Gaming
Laws, except for possible noncompliance which, individually or in the
aggregate, would not have a material adverse effect on Pinnacle or any of its
Material Subsidiaries, result in a limitation or condition on any Permit or
result in the imposition of a fine or penalty in excess of $50,000 against
Pinnacle or any of its Subsidiaries for which an accrual has not been
established under generally accepted accounting principles.
(c) Neither Pinnacle, any Subsidiary of Pinnacle nor any officer or
director of Pinnacle or any Subsidiary of Pinnacle has received any written
claim, demand, notice, complaint, court order or administrative order from any
Governmental Entity in the past three years, which remains unresolved on the
date hereof or which was not favorably disposed of, asserting that a material
Permit of it or them, as applicable, under any Laws, including any Gaming Laws
should be limited, revoked or suspended. No investigation or review by any
Governmental Entity with respect to Pinnacle or any of its Subsidiaries is
pending, or, to the best knowledge of Pinnacle, threatened, nor has any
Governmental Entity indicated to Pinnacle an intention to conduct the same,
other than those the outcome of which would not, individually or in the
aggregate, reasonably be expected to have a material adverse effect on
Pinnacle or any of its Material Subsidiaries.
Section 4.14 State Takeover Statutes. Assuming none of Pinnacle Acq Corp,
PHCR or Colony III has owned 15% or more of Pinnacle's capital stock at any
point during the last three years, Pinnacle and the Board of Directors of
Pinnacle, including the Special Committee, have each taken all action required
to be taken in order to exempt this Agreement (as it may be amended from time
to time), and the transactions contemplated hereby (excluding the Harveys
Merger) from, and this Agreement and the transactions contemplated hereby
(excluding the Harveys Merger) are exempt from, the requirements of the
provisions of Section 203 of the DGCL and other antitakeover laws and
regulations of any U.S. state, including without limitation the State of
Delaware. Pinnacle has heretofore delivered to Pinnacle Acq Corp complete and
correct copies of a resolution of the Board of Directors of Pinnacle, and of
the Special Committee that Section 203 of the DGCL and all other antitakeover
laws and regulations of any U.S. state, including without limitation the State
of Delaware, are and shall be inapplicable to the Pinnacle Merger and the
transactions contemplated by this Agreement (excluding the Harveys Merger), as
this Agreement may be amended from time to time.
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Section 4.15 Brokers. Schedule 4.15 sets forth any broker's, finder's,
financial advisor's or other similar fee or commission payable in connection
with the transactions contemplated by this Agreement based upon arrangements
made by or on behalf of Pinnacle or any of its Subsidiaries. Pinnacle has
provided Pinnacle Acq Corp true and correct copies of all agreements between
Pinnacle and any Person listed on Schedule 4.15 hereto.
Section 4.16 Trademarks, etc. Except as disclosed on Schedule 4.16, the
material patents, trademarks (registered or unregistered), trade names,
service marks and copyrights and applications therefor owned, used or filed by
or licensed to Pinnacle and its Material Subsidiaries (collectively,
"Intellectual Property Rights") are sufficient to allow each of Pinnacle and
its Material Subsidiaries exclusive use thereof and to conduct, and continue
to conduct, its business as currently conducted or as Pinnacle proposes to
conduct such business. Each of Pinnacle and its Material Subsidiaries owns or
has unrestricted right to use the Intellectual Property Rights in order to
allow it to conduct, and continue to conduct, its business as currently
conducted or as Pinnacle proposes to conduct such business, and the
consummation of the transactions contemplated hereby will not alter or impair
such ability in any respect which individually or in the aggregate would be
reasonably likely to have a material adverse effect on Pinnacle. Neither
Pinnacle nor any of its Subsidiaries has received any written notice from any
other Person pertaining to or challenging the right of Pinnacle or any of its
Subsidiaries to use any of the Intellectual Property Rights, which challenge
or other assertion, if upheld or successful, individually or in the aggregate
would be reasonably likely to have a material adverse effect on Pinnacle.
Except as disclosed on Schedule 4.16, no claims are pending by any Person with
respect to the ownership, validity, enforceability or use of any such
Intellectual Property Rights challenging or questioning the validity or
effectiveness of any of the foregoing which claims would reasonably be
expected to have a material adverse effect on Pinnacle. Neither Pinnacle nor
any of its Subsidiaries has made any claim of a violation or infringement by
others of its rights to or in connection with the Intellectual Property Rights
in any such case where such claims (individually or in the aggregate) would
reasonably be expected to have a material adverse effect on Pinnacle.
Section 4.17 Title to Properties.
(a) Schedule 4.17(a) sets forth a complete list of all real property and
interests in real property owned in fee by Pinnacle or one of its Subsidiaries
(collectively, the "Owned Properties") and sets forth all real property and
interests in real property leases, licenses or similar interests held by
Pinnacle or any of its Subsidiaries (collectively, the "Leased Properties" and
together with the Owned Properties, the "Real Properties") as of the date
hereof.
(b) Except as disclosed in Schedule 4.17(b), each of Pinnacle and each of
its Subsidiaries has sufficiently good and valid title to the Owned
Properties, an adequate leasehold, license or similar interest in each of the
Leased Properties, and such Real Properties allow Pinnacle and each of its
Subsidiaries to conduct, and continue to conduct, its business as currently
conducted or, with respect to the Indiana Project, as Pinnacle proposes to
conduct such business. Each Real Property is sufficiently free of Liens to
allow each of Pinnacle and each of its Subsidiaries to conduct, and continue
to conduct, its business as currently conducted, or, with respect to the
Indiana Project, as Pinnacle proposes to conduct such business, and, subject
to obtaining the required consents, the consummation of the transactions
contemplated by this Agreement will not alter or impair such ability in any
respect which individually or in the aggregate would be reasonably likely to
have a material adverse effect on Pinnacle or any of its Material
Subsidiaries. Pinnacle and its Subsidiaries hold their respective interests in
each of the Real Properties subject only to the Permitted Liens and the Bank
Credit Facility. Each of Pinnacle and its Subsidiaries enjoys peaceful and
undisturbed possession of each of the Real Properties, except for such
breaches of the right to peaceful and undisturbed possession that do not
materially interfere with the ability of Pinnacle and its Subsidiaries to
conduct its business as currently conducted on such Real Property or, with
respect to the Indiana Project, as Pinnacle proposes to conduct such business.
Except as disclosed on Schedule 4.17(b), there is no pending or, to Pinnacle's
knowledge, contemplated condemnation, eminent domain or similar proceeding or
special assessment which would have a material adverse effect on any of the
Real Properties owned by Pinnacle or its Subsidiaries on a project-by-project
basis. Except as disclosed in Schedule 4.17(b), each Leased Property is
subject to a lease, license or other agreement (collectively, the "Existing
Leases") which is in full force and effect and has not been amended except as
disclosed in Schedule 4.17(a), and, to Pinnacle's knowledge, no party
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thereto is in default or breach under any such Existing Lease. To Pinnacle's
knowledge, no event has occurred which, with the passage of time or the giving
of notice or both, would cause a breach of or default under any of such
Existing Leases. With respect to each parcel of Real Property, (i) except as
set forth on Schedule 4.17(b), neither Pinnacle nor any of its Subsidiaries
has entered into any material outstanding contract for construction on any
such parcel other than the Indiana Project; (ii) all improvements, buildings
and systems (including, without limitation, heating, air conditioning,
electrical and plumbing) on any such parcel are in operating condition, normal
wear and tear excepted, except where such non-operational condition would not
have a material adverse effect on any of the Real Properties owned by Pinnacle
or its Subsidiaries (on a project-by-project basis), and to Pinnacle's
knowledge are safe for their current occupancy and use; (iii) except as
disclosed on the surveys previously delivered by Pinnacle to Pinnacle Acq Corp
and for minor encroachments, the buildings and improvements located on each
such parcel (A) are located within the boundary lines of such parcel and, to
Pinnacle's knowledge, are not in violation of applicable setback requirements,
local comprehensive plan provisions, zoning laws and ordinances, building code
requirements, permits, licenses or other forms of approval, regulation or
restrictions by any Governmental Entity, and (B) do not encroach on any
easement which may burden the land, except in each of (A) and (B), where such
violations or encroachments would not have a material adverse effect on any of
the Real Properties owned by Pinnacle or its Subsidiaries(on a project-by-
project basis); and (iv) neither Pinnacle nor its Subsidiaries has received
from any party or Governmental Entity any written notice of any material
violation of applicable setback requirements, local comprehensive plan
provisions, zoning laws and ordinances, or building code requirements, which
has not been remedied; (v) all facilities located on each parcel of the Real
Properties have received all material approvals of Governmental Entities
(including, without limitation, certificates of occupancy, licenses and
permits) required in connection with the ownership, operation or use thereof
and have been operated and maintained in accordance with applicable laws,
ordinances, rules and regulations or any violations thereof have been cured
except where non-compliance would not have a material adverse effect on any of
the Real Property (on a project-by-project basis); (vi) except as set forth on
Schedule 4.17(c), there are no leases, license or other agreements (other than
concession agreements and contracts with parties providing entertainment to
the patrons of the Real Properties) granting to any party or parties the right
of use or occupancy of any portion exceeding five percent (5%) of the gross
revenues of such Real Property on a project-by-project basis; (vii) except as
set forth on Schedule 4.17(d), there are no outstanding options or rights of
first refusal or similar rights to purchase any such parcel or any portion
thereof or interest therein; (viii) all facilities located on each parcel of
Real Property are connected to and supplied with utilities and other services
necessary for their ownership, operation or use, all of which services are
adequate to conduct business at each of the Real Properties as currently
conducted in accordance with all applicable laws, ordinances, rules and
regulations, except where non-compliance would not have a material adverse
effect on such Real Property; and (x) to Pinnacle's knowledge, no Real
Property has any physical defect or condition which would materially impair
the current use of such Real Property.
(c) The parcels constituting the Owned Properties are assessed separately
from all other adjacent property for purposes of real property taxes.
(d) There are no material commitments to or agreements between Pinnacle or
any of its Subsidiaries and any Governmental Entity affecting the Real
Property which are not listed in any schedule to this Agreement or described
in the SEC Documents.
(e) Except as disclosed in Schedule 4.17(e) or as shown in the policies of
title insurance, surveys or preliminary title reports (if more recent)
delivered previously to Pinnacle Acq Corp, there are no commitments,
agreements, understandings or other restrictions materially adversely
affecting the ability of Pinnacle or any of its Subsidiaries, as applicable,
to continue to utilize the Real Property as it is currently being utilized or,
with respect to the Indiana Project, to improve or develop such Real Property
in the manner currently contemplated.
Section 4.18 Insurance. To the knowledge of Pinnacle, Pinnacle and its
Subsidiaries have obtained and maintained in full force and effect insurance
with responsible and reputable insurance companies or associations in such
amounts, on such terms and covering such risks, including fire and other risks
insured against by extended coverage, as is customarily carried by Persons
conducting businesses similar to those of Pinnacle in the
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locations in which Pinnacle conducts its businesses and each has maintained in
full force and effect public liability insurance, insurance against claims for
personal injury or death or property damage occurring in connection with any
of the activities of Pinnacle or its Subsidiaries or any of any properties
owned, occupied or controlled by Pinnacle or its Subsidiaries, in such amount
as reasonably deemed necessary by Pinnacle or its Subsidiaries or as may be
required by a lender under any and all documents evidencing any loan or credit
facility to which Pinnacle or its Subsidiaries is a party or by a landlord
under any lease or similar arrangement to which Pinnacle or its Subsidiaries
is a party. Except as set forth on Schedule 4.18(a), there is no claim by
Pinnacle or any of its Subsidiaries pending under any of such policies or
bonds as to which coverage has been questioned, denied or disputed by the
underwriters of such policies or bonds, except such claims that, individually
and in the aggregate, are not having and could not reasonably be expected to
have a material adverse effect on Pinnacle. All premiums payable under all
such policies and bonds have been paid or financed by Pinnacle or one of
Pinnacle's Subsidiaries. Pinnacle does not know of any threatened termination
of, or premium increase with respect to, any of such policies or bonds, except
such terminations or premium increases that, individually and in the aggregate
could not reasonably be expected to have a material adverse effect on
Pinnacle. Except as set forth on Schedule 4.18(b), Pinnacle does not know of
any pending or threatened uninsured claims which individually or in the
aggregate could be reasonably excepted to have a material adverse effect on
Pinnacle.
Section 4.19 Contracts; Debt Instruments. Except as disclosed in the
Current SEC Documents or set forth in Schedule 4.19(a), there are no (a)
agreements of Pinnacle or any of its Subsidiaries containing an unexpired
covenant not to compete or similar restriction applying to Pinnacle or any of
its Subsidiaries, (b) interest rate, currency or commodity hedging, swap or
similar derivative transactions to which Pinnacle is a party, (c) other
material contracts or amendments thereto that would be required to be filed as
an exhibit to a Form 10-K filed by Pinnacle with the SEC on or prior to the
date of this Agreement and which have not been so filed, (d) written
agreements to which Pinnacle or any of its Material Subsidiaries is a party
which, by its terms, directly obligates any stockholder of Pinnacle with
respect to any of the obligations of Pinnacle or any of its Material
Subsidiaries under such agreement or (e) agreements, contracts, indentures or
other instruments (i) relating to any liabilities or obligations, contingent
or otherwise, of Pinnacle or any of its Material Subsidiaries, including those
(A) evidenced by bankers' acceptances or similar instruments issued or
accepted by banks, (B) relating to any capitalized lease obligations or (C)
evidenced by a letter of credit or a reimbursement obligation of such Person
with respect to any letter of credit, (ii) in respect of borrowed money, (iii)
evidenced by bonds, notes, debentures or similar instruments, (iv)
representing the balance deferred and unpaid of the purchase price of any
property or services, except (other than accounts payable or other obligations
to trade creditors which have remained unpaid for greater than 60 days past
their original due date) those incurred in the Ordinary Course of Business
that would constitute ordinarily a trade payable to trade creditors; (v) all
liabilities and obligations of others of the kind described in the preceding
clause (i), (ii), (iii) or (iv) that Pinnacle or any of its Material
Subsidiaries has guaranteed or that is otherwise their respective legal
liability or which are secured by any assets or property of Pinnacle or any of
its Material Subsidiaries. Each of the material agreements to which Pinnacle
or any of its Material Subsidiaries is a party is a valid and binding
obligation of Pinnacle or its Material Subsidiary, as the case may be, and, to
Pinnacle's knowledge, of each other party thereto, and each such agreement is
in full force and effect and is enforceable by Pinnacle or its Material
Subsidiary in accordance with its terms, except that (i) such enforcement may
be subject to bankruptcy, insolvency, reorganization, moratorium or other
similar laws now or hereafter in effect relating to creditors' rights
generally and (ii) the remedy of specific performance and injunctive relief
may be subject to equitable defenses and to the discretion of the court before
which any proceeding therefor may be brought. Except as set forth on Schedule
4.19(b), there are no existing defaults (or circumstances or events that, with
the giving of notice or lapse of time or both would become defaults) of
Pinnacle or any of its Material Subsidiaries (or, to the knowledge of
Pinnacle, any other party thereto) under any such agreements except for
defaults that have not and would not, individually or in the aggregate, have a
material adverse effect on Pinnacle or any Material Subsidiary.
Section 4.20 Board Consent and Recommendation. The Board of Directors of
Pinnacle has determined that the Pinnacle Merger, this Agreement and the
transactions contemplated by this Agreement are advisable and fair to and in
the best interests of the stockholders of Pinnacle and resolved to recommend
that the stockholders
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of Pinnacle approve the Pinnacle Merger, this Agreement and the transactions
contemplated by this Agreement. The Special Committee has, by unanimous vote,
recommended that the Board of Directors and the stockholders of Pinnacle
approve the Pinnacle Merger, this Agreement and the transactions contemplated
by this Agreement.
Section 4.21 Accounting Controls. Since January 1, 1997, Pinnacle and its
Subsidiaries have maintained a system of internal accounting controls
sufficient to provide reasonable assurance that (a) transactions are executed
in accordance with management's general or specific authorizations, (b)
transactions are recorded as necessary to permit preparation of financial
statements in conformity with generally accepted accounting principles and to
maintain asset accountability, (c) access to assets is permitted only in
accordance with management's general or specific authorization, and (d) the
recorded accountability for assets is compared with the existing assets at
reasonable intervals and appropriate action is taken with respect to any
differences.
Section 4.22 Affiliate Transactions. Except as disclosed in the Current SEC
Documents or as disclosed in Schedule 4.22, there are no contracts,
liabilities, transactions or relationships that would be required to be
disclosed by Pinnacle by Item 404 of Regulation S-K of the Securities Act and
Exchange Act.
Section 4.23 Vote Required. The affirmative vote of the holders of a
majority of the outstanding shares of Pinnacle Common Stock entitled to vote
thereon (the "Requisite Vote") is the only vote of the holders of any class or
series of Pinnacle's capital stock necessary to approve this Agreement and the
transactions contemplated hereby.
Section 4.24 Material Subsidiaries. Other than with respect to the
operations of the properties that are subject to the Principal Asset
Dispositions, the Material Subsidiaries conduct all of the material operations
relating to Pinnacle's gaming facilities in Nevada, Louisiana, Mississippi and
Indiana, and, other than with respect to the properties that are subject to
the Principal Asset Dispositions, no other entity in which Pinnacle owns a
direct or indirect interest owns any material assets, licenses, permits or
personnel, or performs any material services with respect to, such operations.
ARTICLE V
REPRESENTATIONS AND WARRANTIES OF
HOLDING AND PINNACLE ACQ CORP
Except as set forth in the corresponding numbered sections of the
disclosure schedules delivered by Pinnacle Acq Corp to Pinnacle concurrently
with the execution of this Agreement or referenced in the particular section
of this Article V to which exception is being taken, PHCR and Pinnacle Acq
Corp each represents and warrants to Pinnacle as follows:
Section 5.1 Organization, Standing and Corporate Power. Each of PHCR and
Pinnacle Acq Corp is a corporation duly organized, validly existing and in
good standing under the laws of the jurisdiction in which it is organized and
has the requisite corporate power and authority to carry on its business as
now being conducted. Each of PHCR and Pinnacle Acq Corp is duly qualified or
licensed to do business and is in good standing in each jurisdiction in which
the nature of its business or the ownership or leasing of its properties makes
such qualification or licensing necessary, other than in such jurisdictions
where the failure to be so qualified or licensed (individually or in the
aggregate) would not have a material adverse effect on PHCR or Pinnacle Acq
Corp. Each of PHCR and Pinnacle Acq Corp has made available to Pinnacle
complete and correct copies of its certificate of incorporation and by-laws in
effect on the date of this Agreement.
Section 5.2 Authority; Noncontravention. Each of PHCR and Pinnacle Acq Corp
has the requisite corporate power and authority to enter into this Agreement
and to consummate the transactions contemplated by this Agreement. The
execution and delivery of this Agreement by each of PHCR and Pinnacle Acq Corp
and the consummation by each of PHCR and Pinnacle Acq Corp of the transactions
contemplated by this Agreement have been duly authorized by all necessary
corporate action on the part of each of PHCR and Pinnacle Acq Corp,
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respectively, subject to approval of this Agreement and the transactions
contemplated hereby by the Harveys Casino Resorts Compliance Committee. This
Agreement has been duly executed and delivered by each of PHCR and Pinnacle
Acq Corp and, assuming this Agreement constitutes the valid and binding
obligation of Pinnacle, constitutes a valid and binding obligation of each of
PHCR and Pinnacle Acq Corp, enforceable against each of PHCR and Pinnacle Acq
Corp in accordance with its terms. Except as set forth on Schedule 5.2(a), the
execution and delivery of this Agreement do not, and the consummation of the
transactions contemplated by this Agreement and compliance with the provisions
of this Agreement will not, require notice or consent under, conflict with, or
result in any violation of, or default (with or without notice or lapse of
time, or both) under, or give rise to a right of termination, cancellation or
acceleration of any obligation or to loss of a material benefit under, or
result in the creation of any Lien upon any of the properties or assets of
PHCR or Pinnacle Acq Corp under, (a) the respective certificates of
incorporation or by-laws of PHCR or Pinnacle Acq Corp, (b) other than subject
to the governmental filings and other matters referred to in the following
sentence, (i) any loan or credit agreement, note, bond, mortgage, indenture,
lease or other agreement, instrument or (ii) any permit, concession, franchise
or license applicable to PHCR or Pinnacle Acq Corp or their respective
properties or assets or (c) subject to the governmental filings and other
matters referred to in the following sentence, any judgment, order, decree,
statute, law, ordinance, rule or regulation applicable to PHCR or Pinnacle Acq
Corp or their respective properties or assets, other than, in the case of
clauses (b) or (c), any such conflicts, violations, defaults, rights or Liens
that individually or in the aggregate would not (i) have a material adverse
effect on PHCR or Pinnacle Acq Corp, (ii) impair in any material respect the
ability of PHCR or Pinnacle Acq Corp to perform their respective obligations
under this Agreement or (iii) prevent or impede in any material respect the
consummation of any of the transactions contemplated by this Agreement.
No consent, approval, order or authorization of, or registration,
declaration or filing with, any Governmental Entity is required by PHCR or
Pinnacle Acq Corp in connection with the execution and delivery of this
Agreement by PHCR and Pinnacle Acq Corp or the consummation by PHCR and
Pinnacle Acq Corp of any of the transactions contemplated by this Agreement,
except for (A) the filing of a premerger notification and report form by PHCR
and Pinnacle Acq Corp under the HSR Act, (B) the filing with the SEC of such
reports under Section 14(a) and Rule 13e-3 of the Exchange Act as may be
required in connection with this Agreement and the transactions contemplated
by this Agreement, (C) the filing of the Certificate of Merger with the
Delaware Secretary of State and appropriate documents with the relevant
authorities of other states in which PHCR or Pinnacle Acq Corp is qualified to
do business, (D) the obtaining of all Gaming Approvals, each of which are set
forth in Schedule 5.2(b), (E) such filings as may be required by an applicable
state securities or "blue sky" laws, and (F) such other consents, approvals,
orders, authorizations, registrations, declarations and filings the failure of
which to be obtained or made would not, individually or in the aggregate, (1)
have a material adverse effect on PHCR or Pinnacle Acq Corp, (2) impair, in
any material respect, the ability of PHCR or Pinnacle Acq Corp to perform
their respective obligations under this Agreement or (3) prevent or
significantly delay the consummation of the transactions contemplated by this
Agreement.
Section 5.3 Interim Operations of Pinnacle Acq Corp. Each of PHCR and
Pinnacle Acq Corp was formed solely for the purpose of engaging in the
transactions contemplated hereby and has not engaged in any business
activities or conducted any operations other than in connection with the
transactions contemplated hereby.
Section 5.4 Licensing Matters. Subject to the last sentence of this Section
5.4, none of PHCR, Pinnacle Acq Corp or any of their respective Affiliates
knows of any facts, which, if known to the Gaming Authorities, would
reasonably be expected to disqualify any of them, any of their Subsidiaries or
any of their respective officers, directors and any other person required to
make any filings or required to be found suitable (the "Licensed Persons")
from being licensed under the Gaming Laws or which would prevent or materially
delay the grant of licenses or approvals necessary under the Gaming Laws
necessary for PHCR and Pinnacle Acq Corp to consummate the transactions
contemplated hereby. Notwithstanding the foregoing, (a) the term "Licensed
Persons" as used herein shall exclude any limited partner of any investment
vehicle used by Colony Capital, Inc. ("Colony") or Colony III in connection
with the transactions contemplated hereby (each a "Colony LP");
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(b) none of PHCR, Pinnacle Acq Corp or any of their respective Affiliates
makes any representation or warranty herein regarding the likelihood of any
determination by a Gaming Authority or otherwise, that any Colony LP be
required to make any filings or be found suitable under the Gaming Laws in
connection with the transactions contemplated hereby, or the impact of any
such determination on the granting of the licenses or approvals necessary
under the Gaming Laws for PHCR and Pinnacle Acq Corp to consummate the
transactions contemplated hereby.
Section 5.5 Litigation. Except as described on Schedule 5.5, as of the date
of this Agreement, there is no action, suit or proceeding pending or, to the
knowledge of Pinnacle Acq Corp and PHCR, threatened against PHCR or any of its
Subsidiaries or affecting any of their respective properties or assets nor are
any Governmental Entity investigations or audits pending before any court or
governmental agency or body against PHCR or any of its Subsidiaries or
affecting any of their respective assets or properties which, individually or
in the aggregate would reasonably be expected to affect adversely the ability
of PHCR or Pinnacle Acq Corp to consummate the transactions contemplated by
this Agreement.
Section 5.6 Financing. Pinnacle Acq Corp has delivered to Pinnacle copies
of a written commitment letter with respect to $900 million aggregate
principal amount of senior debt facilities and one or more "highly confident"
letters with respect to $550 million aggregate principal amount of senior
subordinated debt (the commitment letter and the highly confident letters
being referred to herein as, the "Financing Letters"). As of the date hereof,
such letters are in full force and effect and have not been terminated.
Section 5.7 No Other Agreements. As of the date hereof, except for this
Agreement, the Voting Agreement and the transactions contemplated hereby and
thereby, none of Pinnacle Acq Corp, PHCR or any of their Affiliates has made
any other agreements or arrangements concerning the Pinnacle Merger or
Pinnacle or any of its Subsidiaries with (a) any director, officer, employee
or consultant of Pinnacle, or (b) any stockholder beneficially owning 5% or
more of the outstanding shares of Pinnacle Common Stock.
Section 5.8 Harveys Merger. Harveys shall be the surviving entity of the
Harveys Merger.
ARTICLE VI
COVENANTS RELATING TO CONDUCT OF BUSINESS
Section 6.1 Conduct of Business.
(a) During the term of this Agreement, except with the prior written
consent of Pinnacle Acq Corp (requests for which shall be considered in good
faith on a timely basis under the circumstances by Pinnacle Acq Corp) and
except as specifically required by this Agreement or permitted under
subsection (b) or (c) of this Section 6.1, Pinnacle shall and shall cause its
Subsidiaries to carry on their respective businesses in the Ordinary Course of
Business and use all reasonable efforts to preserve intact their current
business organizations, keep available the services of their current officers
and key employees and preserve their relationships consistent with past
practice with gaming customers, suppliers, licensors, licensees, distributors
and others having business dealings with them to the end that their goodwill
and ongoing businesses shall be unimpaired in all material respects at the
Effective Time. Except as expressly permitted or contemplated by the terms of
this Agreement, without limiting the generality of the foregoing, Pinnacle
shall not, and shall not permit any of its Subsidiaries to:
(i) (A) declare, set aside or pay any dividends on, or make any other
distributions in respect of, any of its capital stock, other than dividends
and distributions by any direct or indirect wholly owned Subsidiary of
Pinnacle to its Parent, (B) split, combine or reclassify any of its capital
stock or issue or authorize the issuance of any other securities in respect
of, in lieu of or in substitution for shares of its capital stock or (C)
except as shall be required under currently existing terms of any stock-
based benefit plan appearing on Schedule 4.10(a), purchase, redeem or
otherwise acquire or amend the terms of any shares of capital stock of
Pinnacle or any of its Subsidiaries or any other securities thereof or any
rights, warrants, options to
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acquire or any securities convertible into or exchangeable for any such
shares or other securities (other than, after notice to Pinnacle Acq Corp,
(1) redemptions, purchases or other acquisitions required by applicable
provisions under Gaming Laws and (2) issuances or redemptions of capital
stock of wholly owned Subsidiaries occurring between Pinnacle and any of
its wholly owned Subsidiaries or occurring between wholly owned
Subsidiaries of Pinnacle);
(ii) issue, deliver, sell, grant, pledge or otherwise encumber or amend
any shares of its capital stock, any other voting securities or any
securities convertible or exchangeable into, or any rights, warrants or
options to acquire, any such shares, voting securities or convertible or
exchangeable securities (other than the issuance of Pinnacle Common Stock
upon the exercise of employee stock options and contingent incentive plans
appearing on Schedule 4.10(a) (including with respect to contingent shares
of Pinnacle Common Stock) outstanding on the date of this Agreement in
accordance with their present terms);
(iii) amend its Certificate of Incorporation, By-laws or other
comparable charter or organizational documents;
(iv) except in connection with the transactions contemplated by this
Agreement, voluntarily take any action that would result in the failure to
maintain the listing of Pinnacle Common Stock on the NYSE;
(v) develop, acquire or agree to develop or acquire any projects, assets
or lines of business, including without limitation by merging or
consolidating with, or by purchasing all or a substantial portion of the
assets of, or by any other manner, any business or any corporation,
partnership, joint venture, association or other business organization or
division thereof, or any assets that are material, individually or in the
aggregate, to Pinnacle or any of its Material Subsidiaries, except (A)
purchases of inventory, furnishings and equipment in the Ordinary Course of
Business or (B) expenditures consistent with Pinnacle's current capital
budget, as set forth in Schedule 6.1(a)(v)(B) (the "Budget") or (C)
acquisitions or projects identified on Schedule 6.1(a)(v)(C);
(vi) except as set forth on Schedule 6.1(a)(vi), sell, lease, license,
swap, barter, transfer or otherwise convey, mortgage or otherwise encumber
or subject to any Lien or prevent from becoming subject to a Lien any of
its properties or assets that are material, individually or in the
aggregate, to Pinnacle or any of its Material Subsidiaries, except
transactions in the Ordinary Course of Business;
(vii) (A) other than (1) working capital borrowings in the Ordinary
Course of Business, (2) projects set forth in Schedule 6.1(a)(vii), (3)
specific projects at existing, operational facilities referred to and
consistent with that specified in the Budget and (4) other incurrences of
indebtedness which, in the aggregate, do not exceed $20.0 million, incur
any indebtedness, forgive any debt obligations of any Person to Pinnacle or
its Subsidiaries, issue or sell any debt securities or warrants or other
rights to acquire any debt securities of Pinnacle or any of its
Subsidiaries, guarantee any debt securities of another Person, enter into
any "keep well" or other agreement to maintain any financial statement
condition of another Person or enter into any arrangement having the
economic effect of any of the foregoing or (B) other than (1) to Pinnacle
or any direct or indirect Subsidiary of Pinnacle, (2) advances to
employees, suppliers or customers in the Ordinary Course of Business, (3)
projects set forth in Schedule 6.1(a)(vii), and (4) specific projects
referred to and consistent with that specified in the Budget, make any
loans, advances or capital contributions to, or investments in, any other
Person;
(viii) settle any Audit relating to material Taxes pending as of the
date hereof or arising on or after the date hereof, make any material Tax
election, or amend any material Tax Return in any respect;
(ix) pay, discharge, settle or satisfy any material claims, liabilities
or obligations (absolute, accrued, asserted or unasserted, contingent or
otherwise), other than the payment, discharge, settlement or satisfaction
in the Ordinary Course of Business or in accordance with their terms of
liabilities reflected or reserved against in the Base Balance Sheet or
incurred in the Ordinary Course of Business or the optional redemption of
the 13% First Mortgage Notes due 2003 issued by Casino Magic of Louisiana,
Corp. at prices, and on terms consistent with the Indenture governing such
debt, as in effect on the date hereof, or, except in the
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Ordinary Course of Business, waive the benefits of, or agree to modify in
any manner, any confidentiality, standstill or similar agreement to which
Pinnacle or any of its Subsidiaries is a party;
(x) make any change in the compensation payable or to become payable to
any of its officers, directors, employees, agents or consultants (other
than (i) general increases in wages to employees who are not officers,
directors or Affiliates in the Ordinary Course of Business and (ii) salary
increases and bonuses payable to Pinnacle officers pursuant to the terms of
any agreement existing as of the date hereof or disclosed on Schedule
6.1(a)(x)) or pursuant to regular annual reviews in the Ordinary Course of
Business or pursuant to or to Persons providing management services, enter
into or amend any Plan or make any loans to any of its officers, directors,
employees, Affiliates, agents or consultants or make any change in its
existing borrowing or lending arrangements for or on behalf of any of such
Persons pursuant to a Plan or otherwise;
(xi) pay or make any accrual or arrangement for payment of any pension,
retirement allowance or other employee benefit pursuant to any Plan, to any
officer, director, employee, consultant or Affiliate or pay or agree to pay
or make any accrual or arrangement for payment to any officers, directors,
employees, consultants or Affiliates of Pinnacle of any amount relating to
unused vacation days, except payments and accruals made in the Ordinary
Course of Business; adopt or pay, grant, issue, accelerate or accrue salary
or other payments or benefits pursuant to any Plan with or for the benefit
of any director, officer, employee, agent or consultant, whether past or
present, other than as required under applicable law or the current terms
of any Plan; or amend in any material respect any Plan in a manner
inconsistent with the foregoing;
(xii) except as required by Law, enter into any collective bargaining
agreement;
(xiii) except pursuant to agreements existing on the date hereof and
except as otherwise disclosed on Schedule 6.1(a)(xiii), make any payments
(other than regular compensation payable to officers and employees of
Pinnacle in the Ordinary Course of Business) or other distributions to, or
enter into any transaction, agreement or arrangement with, any of
Pinnacle's or any of its Subsidiaries' Affiliates, officers, directors,
stockholders or their Affiliates, associates or family members or do or
enter into any of the foregoing with respect to employees, agents or
consultants other than in the Ordinary Course of Business;
(xiv) except in the Ordinary Course of Business and except as otherwise
permitted by this Agreement modify or amend in a manner adverse to Pinnacle
or it Subsidiaries the material economic terms of any material contract or
agreement or terminate any material contract or agreement to which Pinnacle
or any Subsidiary is a party or waive, release or assign any material
rights or claims;
(xv) fail to make any scheduled principal or interest payment on
indebtedness evidenced by debt instruments to which Pinnacle or any of its
Subsidiaries is a party; or
(xvi) authorize any of, or commit or agree to take any of, the foregoing
actions except as otherwise permitted by this Agreement.
(b) Development Projects. Pinnacle, Pinnacle Acq Corp and PHCR agree that
Pinnacle, without the prior written consent of Pinnacle Acq Corp otherwise
required under Section 6.1(a), may expend amounts consistent with and in the
manner prescribed by the written budget, plans and policies previously
provided to Pinnacle Acq Corp related to the development opportunities and
activities for the Indiana Project, including, without limitation, the hiring
of employees and the entering into of employment agreements with senior
management personnel (to the extent contained therein).
(c) Asset Dispositions. Schedule 6.1(c) sets forth (i) certain asset sales
that are presently being undertaken by Pinnacle or its Subsidiaries (the
"Principal Asset Dispositions") and (ii) the estimate of Pinnacle's management
of the net (after tax and transaction expenses and determined substantially in
accordance with the methodology used in the financial model delivered to
Pinnacle on the date hereof) proceeds to be received by Pinnacle in connection
with each such sale. Schedule 6.1(c) also sets forth certain additional asset
sales which are presently being undertaken by Pinnacle or its Subsidiaries
(the "Other Asset Dispositions" and, together with the Principal Asset
Dispositions, the "Asset Dispositions"). Notwithstanding the foregoing clauses
(a) and (b),
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Pinnacle shall be permitted to consummate (i) the Principal Asset Dispositions
(other than the sale of the Inglewood Property), substantially on the terms
and subject to the conditions contained in the applicable Asset Disposition
Agreement in effect as of the date hereof (or as amended in accordance with
this Agreement), (ii) the sale of the Inglewood Property substantially in
accordance with the terms of the draft purchase agreement provided to Pinnacle
Acq Corp on April 14, 2000 (except with respect to price, which in no event
shall generate Net Proceeds of less than $13,054,000), and (iii) the Other
Asset Dispositions on terms approved by Pinnacle's Board of Directors, in good
faith. Except for amendments, waivers or modifications which would not
reasonably be expected to significantly delay the consummation of the
transactions contemplated by this Agreement, impair in any material respect
the ability of Pinnacle to perform its obligations under this Agreement and
which are not materially adverse to the original terms of such Principal Asset
Disposition, Pinnacle shall not amend, waive, or modify any of the terms or
conditions contained in the agreements (or in the case of the Inglewood
Property, the draft purchase agreement delivered to Pinnacle Acq Corp on April
14, 2000) relating to the Principal Asset Disposition (the "Asset Disposition
Agreements") without the prior written consent of Pinnacle Acq Corp.
(d) Redemption. Notwithstanding the foregoing provisions of this Section
6.1, immediately prior to the Effective Time, Pinnacle shall redeem the shares
of Pinnacle Common Stock owned by R.D. Hubbard on the date hereof that are not
being contributed to PHCR under the Voting Agreement for a price equal to the
Pinnacle Merger Consideration (including any Class A CPR that would be payable
at the Effective Time).
(e) Other Actions. Pinnacle shall not, and shall not permit any of its
Subsidiaries to, take any action that would result in any of its
representations and warranties set forth in this Agreement that are qualified
as to materiality becoming untrue and those not so qualified becoming untrue
in any material respect.
Section 6.2 Advice of Changes. PHCR, Pinnacle Acq Corp and Pinnacle shall
promptly advise the other party orally and in writing of:
(a) Any representation or warranty made by it contained in this Agreement
becoming untrue or inaccurate in any material respect;
(b) The failure by it to comply with or satisfy in any material respect any
covenant, condition or agreement to be complied with or satisfied by it under
this Agreement; or
(c) Any change or event having, or which, insofar as can reasonably be
foreseen, would have, a material adverse effect on such party and its
Subsidiaries taken as a whole or on the truth of their respective
representations and warranties or the ability of the conditions set forth in
Article VIII to be satisfied;
provided, however, that no such notification shall affect the representations,
warranties, covenants or agreements of the parties or the conditions to the
obligations of the parties under this Agreement. Additionally, Pinnacle shall
furnish to Pinnacle Acq Corp, as promptly as practicable following Pinnacle
Acq Corp's request therefor, all information reasonably necessary for Pinnacle
Acq Corp accurately to determine (i) what amounts, if any, payable under any
of the Plans or any other contract, agreement, or arrangement with respect to
which Pinnacle or any of its Subsidiaries may have any liability could fail to
be deductible for Federal income tax purposes by virtue of section 162(a)(1),
section 162(m) or section 280G of the Code, or (ii) whether Pinnacle or any of
its Subsidiaries has entered into any contract, agreement or arrangement that
would result in the disallowance of any tax deductions pursuant to section
280G of the Code.
Section 6.3 No Solicitation.
(a) Pinnacle shall not, nor shall it permit any of its Subsidiaries to, nor
shall it authorize or permit any agent, officer, director or employee of, or
any investment banker, attorney or other advisor or representative of,
Pinnacle or any of its Subsidiaries to, directly or indirectly, (i) solicit or
initiate, or encourage any inquiries regarding or the submission of, any
Takeover Proposal (including, without limitation, any proposal or offer to
Pinnacle's stockholders) or (ii) participate in any discussions or
negotiations regarding, or furnish to any Person any non-public information
with respect to, or take any other action to facilitate the making of any
proposal that
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would constitute a Takeover Proposal; provided, if in the opinion of the Board
of Directors of Pinnacle, after consultation with outside legal counsel, such
failure to act would be inconsistent with its fiduciary duties to Pinnacle's
stockholders under applicable law, Pinnacle may, in response to an
unsolicited, written Competitive Proposal (or Takeover Proposal which, based
on the advice of its financial advisors, the Board of Directors of Pinnacle
determines in good faith is reasonably likely to result in a Competitive
Proposal), and subject to compliance with Section 6.3(c) and pursuant to an
executed confidentiality agreement with customary terms and conditions and, in
any case, which includes customary standstill provisions which prohibit such
party from seeking to directly or indirectly accomplish a Takeover Proposal
except with the consent of the Board of Directors of Pinnacle, and which
expressly permits Pinnacle to fulfill its obligations under Section 6.3(c),
(A) furnish information with respect to Pinnacle to the Person who made such
unsolicited proposal and (B) participate in negotiations with such Person
regarding such Competitive Proposal (or Takeover Proposal which, based on the
advice of its financial advisors, the Board of Directors of Pinnacle
determines in good faith is reasonably likely to result in a Competitive
Proposal). Without limiting the foregoing, it is understood that any violation
of the restrictions set forth in the preceding sentence by any director,
officer, employee, Affiliate or agent, of Pinnacle or any of its Subsidiaries
(each a "Covered Person"), whether or not such Person is purporting to act on
behalf of Pinnacle or any of its Subsidiaries or otherwise, shall be deemed to
be a breach of this Section 6.3(a) by Pinnacle; provided that it is understood
that this Section 6.3(a) shall not be deemed to have violated if in response
to an unsolicited inquiry, a Covered Person states solely that he or she is
subject to the terms of this Agreement and provides only public information in
response to the inquiry. All Covered Persons shall immediately cease and cause
to be terminated any existing activities, discussions and negotiations with
any parties conducted heretofore with respect to, or that could reasonably be
expected to lead to, any of the foregoing.
(b) Neither the Board of Directors of Pinnacle nor any committee thereof
shall (i) withdraw or modify, or publicly propose to withdraw or modify in a
manner adverse to Pinnacle Acq Corp the approval or recommendation by such
Board of Directors or any such committee of this Agreement or the Pinnacle
Merger, (ii) approve or recommend, or publicly propose to approve or
recommend, any Takeover Proposal or (iii) cause Pinnacle to enter into any
agreement with respect to any Takeover Proposal. Notwithstanding the
foregoing, the Board of Directors of Pinnacle or the Special Committee, prior
to the approval of this Agreement or the Pinnacle Merger (including as the
same may be modified hereafter) by the Requisite Vote, to the extent required
by the fiduciary duties to Pinnacle's stockholders under applicable Law, after
consultation with outside legal counsel, may, subject to the terms of this and
the following sentences of this Section 6.3(b), withdraw or modify its
approval or recommendation of this Agreement or the Pinnacle Merger, or
approve or recommend a Competitive Proposal, in each case at any time after
12:00 noon, Los Angeles time, on the fifth day following Pinnacle Acq Corp's
receipt of written notice (a "Notice of Competitive Proposal") advising
Pinnacle Acq Corp that the Board of Directors of Pinnacle has received a
Competitive Proposal, specifying the material terms and conditions of such
Competitive Proposal and identifying the Person making such Competitive
Proposal. Pinnacle Acq Corp shall have the opportunity, until the end of the
fifth day after it receives a Notice of Competitive Proposal, to make an offer
to the Board of Directors of Pinnacle. Neither the Board of Directors of
Pinnacle nor any committee of the Board of Directors may withdraw, or modify
or publicly propose to withdraw, or modify in a manner adverse to Pinnacle Acq
Corp, its approval or recommendation of this Agreement or the Pinnacle Merger
or approve or recommend a Competitive Proposal unless and until it shall have
determined, in its good faith judgment (i) the value of the consideration
(based on the opinion, with only customary qualifications, of an independent
financial advisor of good national reputation in such matters) of such
proposal exceeds the value of each of the Pinnacle Merger Consideration and
any alternative proposal presented by Pinnacle Acq Corp or any of its
Affiliates and (ii) such proposal is more favorable to Pinnacle's stockholders
than the Pinnacle Merger and any alternative proposal presented by Pinnacle
Acq Corp or any of its Affiliates. In addition, if Pinnacle enters into an
agreement with respect to any Competitive Proposal, it shall, concurrently
with entering into such agreement, pay, or cause to be paid, to Pinnacle Acq
Corp the Termination Fee.
(c) In addition to the obligations of Pinnacle set forth in paragraph (b),
Pinnacle shall advise Pinnacle Acq Corp promptly of any request for non-public
information or of any Takeover Proposal, or any proposal with respect to any
Takeover Proposal, the material terms and conditions of such request or
Takeover Proposal, and
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the identity of the Person making any such Takeover Proposal or inquiry.
Pinnacle will use reasonable efforts to keep Pinnacle Acq Corp informed of the
status and details (including amendments or proposed amendments) of any such
request, Takeover Proposal or inquiry.
(d) Rule 14e-2 Disclosure. Nothing contained in this Section 6.3 shall
prohibit Pinnacle from taking and disclosing to its stockholders a position
contemplated by and in accordance with Rule 14e-2 promulgated under the
Exchange Act if, in the good faith judgment of the Board of Directors of
Pinnacle or the Special Committee, following consultation with outside
counsel, failure so to disclose would be a violation of its obligations under
applicable law; provided, however, that, neither Pinnacle nor its Board of
Directors, the Special Committee, nor any other committee thereof shall
withdraw or modify, or propose publicly to withdraw or modify, its position
with respect to the Pinnacle Merger or this Agreement, except in accordance
with the provisions of Section 6.3(b).
ARTICLE VII
ADDITIONAL AGREEMENTS
Section 7.1 Stockholders Meeting. Pinnacle will, as soon as practicable,
and in no event later than 120 days after the date hereof, duly call, give
notice of, convene and hold a meeting of the holders of Pinnacle Common Stock
(the "Pinnacle Stockholders Meeting"); provided however, the time period set
forth in this Section 7.1 shall toll from the 51st day to the 80th day that
the Proxy Statement (as defined below) and the Schedule 13E-3 (as defined
below) are filed with the SEC and remain under review by the SEC (but in no
event shall such period toll for more than 30 days in total or the Pinnacle
Stockholders Meeting occur later than the 150th day after the date hereof);
provided further that such tolling period shall only be available if the Proxy
Statement and the Schedule 13E-3 are filed in accordance with the provisions
of Section 7.2 hereof and Pinnacle has used its reasonable best efforts to
respond to SEC comments to such disclosure documentation promptly and
completely. Subject to the provisions of Section 6.3(b), Pinnacle will,
through its Board of Directors, recommend to its stockholders approval of this
Agreement, the Pinnacle Merger and the other transactions contemplated by this
Agreement.
Section 7.2 Proxy Statement and Other Filings; Auditor's Letter.
(a) Pinnacle shall, as promptly as practicable after the execution of this
Agreement, and in no event later than 45 days after the date hereof, prepare
and file with the SEC a proxy statement (together with any amendments or
supplements thereto, the "Proxy Statement") and a Rule 13E-3 Transaction
Statement on Schedule 13E-3 (together with any amendments or supplements
thereto, the "Schedule 13E-3") in connection with the Pinnacle Merger.
Pinnacle Acq Corp shall, upon request of Pinnacle, furnish Pinnacle with such
information concerning itself, PHCR and Colony as may be required by law or
any Governmental Entity in connection with the Proxy Statement and Schedule
13E-3. Pinnacle shall cause the Proxy Statement and the Schedule 13E-3 to
comply as to form in all material respects with the applicable provisions of
the Exchange Act. Pinnacle agrees that the Proxy Statement, the Schedule 13E-3
and each amendment or supplement thereto at the time it is filed shall not
include an untrue statement of material fact or omit to state a material fact
required to be stated therein or necessary to make the statements therein, in
light of the circumstances in which they were made, not misleading; provided,
however, that the foregoing shall not apply to the extent that any untrue
statement of a material fact or omission to state material fact was made by
Pinnacle in reliance upon and in conformity with information concerning
Pinnacle Acq Corp, PHCR, Colony III or their Affiliates furnished to Pinnacle
by Pinnacle Acq Corp or its attorneys or advisors specifically for use in the
Proxy Statement or Schedule 13E-3. As promptly as possible after clearance by
the SEC of the Proxy Statement, Pinnacle shall mail the Proxy Statement to its
stockholders. Pinnacle Acq Corp and the Pinnacle Surviving Corp shall
indemnify and hold harmless Pinnacle, its Subsidiaries and their respective
officers, directors, employees and agents from and against any and all losses,
liabilities, costs, and expenses (including reasonable attorneys' fees)
directly arising out of any untrue statement of material fact (or omission of
a statement of material fact necessary in
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order to make the statements therein not materially misleading) made in the
Proxy Statement, Schedule 13E-3 or any amendment or supplement thereto in
reliance upon and in conformity with information concerning Pinnacle Acq Corp,
PHCR, Colony III or their Affiliates furnished to Pinnacle in writing by
Pinnacle Acq Corp specifically for use in the Proxy Statement or Schedule 13E-
3. Pinnacle shall indemnify and hold harmless Pinnacle Acq Corp, the Pinnacle
Surviving Corp, PHCR, Colony, their respective Subsidiaries and Affiliates and
their respective officers, directors, stockholders, partners, members,
equityholders, employees and agents from and against any and all losses,
liabilities, costs, and expenses (including reasonable attorneys' fees)
directly arising out of any untrue statement of material fact (or omission of
a statement of material fact necessary in order to make the statements therein
not materially misleading) made in the Proxy Statement, Schedule 13E-3 or any
amendment or supplement thereto and directly attributable to information
provided by Pinnacle.
(b) As promptly as practicable, each party hereto shall properly prepare
and file any other filings required under the Exchange Act, the Securities Act
or any other Laws relating to the Pinnacle Merger (collectively, "Other
Filings").
(c) PHCR and Pinnacle Acq Corp shall furnish Pinnacle with all information
concerning them as Pinnacle may reasonably request in connection with the
preparation of the Proxy Statement, the Schedule 13E-3 and the Other Filings.
(d) Pinnacle shall provide copies of drafts of the Proxy Statement and the
Schedule 13E-3 to Pinnacle Acq Corp and its counsel at least 5 Business Days
prior to the date of any filing of such document with the SEC (including with
respect to each amendment or supplement thereto) so as to allow Pinnacle Acq
Corp to comment on such documents. Prior to filing any Proxy Statement or
Schedule 13E-3 with the SEC, Pinnacle shall consider in good faith any
comments on such Proxy Statement or Schedule 13E-3, as the case may be, made
by, or changes requested by, Pinnacle Acq Corp or its attorneys or advisors.
Pinnacle shall also promptly provide Pinnacle Acq Corp with copies of any
correspondence received from the SEC, and shall permit representatives of
Pinnacle Acq Corp to attend any telephone call with the SEC which discusses
comments made by the staff.
Section 7.3 Access to Information; Confidentiality.
(a) Pinnacle shall afford to Pinnacle Acq Corp, and to its officers,
employees, accountants, counsel, financial advisers and other representatives,
reasonable access during normal business hours during the period prior to the
Effective Time to all the properties, books, contracts, commitments and
records of Pinnacle and its Subsidiaries and, during such period, Pinnacle
shall furnish promptly to Pinnacle Acq Corp (a) a copy of each report,
schedule, registration statement and other document filed by it or its
Subsidiaries during such period pursuant to the requirements of Federal or
state securities laws and (b) all other information concerning its or its
Subsidiaries' business, properties and personnel as Pinnacle Acq Corp may
reasonably request. Except as otherwise agreed to by Pinnacle, notwithstanding
termination of this Agreement, Pinnacle Acq Corp will keep, and will cause its
officers, employees, accountants, counsel, financial advisers and other
representatives and affiliates to keep, all Confidential Information (as
defined below) confidential and not to disclose any Confidential Information
to any Person other than Pinnacle Acq Corp or Pinnacle Acq Corp's directors,
officers, employees, affiliates or agents, and then only on a confidential
basis; provided, however, that Pinnacle Acq Corp may disclose Confidential
Information (i) as required by law, rule, regulation or judicial process, (ii)
to its attorneys, accountants, financial advisors, lenders, placement agents
and underwriters on a confidential basis or (iii) as required by any
Governmental Entity. For purposes of this Agreement, "Confidential
Information" shall include all information about Pinnacle which has been
furnished by Pinnacle to Pinnacle Acq Corp; provided, however, that
Confidential Information does not include information which (A) is or becomes
generally available to the public other than as a result of a disclosure by
Pinnacle Acq Corp, its attorneys, accountants or financial advisors not
permitted by this Agreement, (B) was available to Pinnacle Acq Corp on a non-
confidential basis prior to its disclosure to Pinnacle Acq Corp by Pinnacle or
(C) becomes available to Pinnacle Acq Corp on a non-confidential basis from a
Person other than Pinnacle who, to the knowledge of Pinnacle Acq Corp, is not
otherwise bound by a confidentiality agreement with Pinnacle or is not
otherwise prohibited from transmitting
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the relevant information to Pinnacle Acq Corp. In the event of termination of
this Agreement for any reason, Pinnacle Acq Corp shall promptly return all
Confidential Information to Pinnacle.
(b) Pinnacle Acq Corp shall use reasonable efforts to keep Pinnacle
informed of the status of its application for Gaming Approvals and its
activities related to obtaining the Financing.
(c) All permits and other governmental authorizations currently held by
Pinnacle and its Material Subsidiaries pursuant to the Environmental Laws will
be identified in writing to Pinnacle Acq Corp prior to Closing.
Section 7.4 Reasonable Efforts; Notification. Upon the terms and subject to
the conditions set forth in this Agreement, each of the parties agrees to use
all reasonable efforts to take, or cause to be taken (including through its
officers and directors and other appropriate personnel), all actions, and to
do, or cause to be done, and to assist and cooperate with the other parties in
doing, all things necessary, proper or advisable to consummate and make
effective, in the most expeditious manner practicable, the Pinnacle Merger,
the Financing and the other transactions contemplated by this Agreement,
including (a) the obtaining of all necessary actions or nonactions, waivers,
consents and approvals from Governmental Entities and the making of all
necessary registrations and filings (including filings with Governmental
Entities, if any) and the taking of all reasonable steps as may be necessary
to obtain Permits or waivers from, or to avoid an action or proceeding by, any
Governmental Entity (including in respect of any Gaming Law), (b) the seeking
of all necessary consents, approvals or waivers from third parties, (c) the
defending of any lawsuits or other legal proceedings, whether judicial or
administrative, challenging this Agreement or the consummation of any of the
transactions contemplated by this Agreement, including seeking to have any
stay or temporary restraining order entered by any court or other Governmental
Entity vacated or reversed and (d) the execution and delivery of any
additional instruments necessary to consummate the transactions contemplated
by, and to fully carry out the purposes of, this Agreement. In connection with
and without limiting the foregoing, Pinnacle and its Board of Directors shall
(including through its officers and directors and other appropriate personnel)
(i) take all reasonable action necessary to ensure that no U.S. state
takeover, business combination, control share, fair price or fair value
statute or similar statute or regulation is or becomes applicable to the
Pinnacle Merger, this Agreement or any of the other transactions contemplated
by this Agreement, (ii) if any U.S. state takeover, business combination,
control share, fair price or fair value statute or similar statute or
regulation becomes applicable to the Pinnacle Merger, this Agreement or any
other transaction contemplated by this Agreement, take all reasonable action
to ensure that the Pinnacle Merger and the other transactions contemplated by
this Agreement may be consummated as promptly as practicable on the terms
contemplated by this Agreement and otherwise to minimize the effect of such
statute or regulation on the Pinnacle Merger, this Agreement and the other
transactions contemplated by this Agreement, and (iii) take all reasonable
action to assist PHCR and Pinnacle Acq Corp in connection with efforts
reasonably related to obtaining and effectuating the Financing for the
Pinnacle Merger and related transactions including, but not limited to,
successful syndication of the credit facility and sale of subordinated notes,
participation in road shows, preparation of offering circulars and information
memoranda (including providing all financial and other information necessary
therefor), delivery of officers' certificates and opinions as are customary in
financings of this type, delivery of guarantees by Pinnacle and its
Subsidiaries and granting of pledges and security interests in and liens on
assets of Pinnacle and its Subsidiaries; provided that no obligation of
Pinnacle and its Subsidiaries under any guarantee or security document shall
be effective until the Effective Time. Notwithstanding the foregoing, the
parties acknowledge that none of Pinnacle Acq Corp or its Affiliates are
obligated by this Section 7.4(a) or any other provision of this Agreement to
obtain any consent, approval, license, waiver, order, decree, determination of
suitability or other authorization or to make any filing with respect to any
limited partner of Colony III or any of its Affiliates. Nothing herein shall
be deemed to require Pinnacle Acq Corp or its Affiliates to take any steps
(including without limitation the expenditure of funds) or provide any
information to obtain any consent, approval, license, waiver, order, decree,
determination of suitability or other authorization, other than is customary
in Argentina and the States of Arizona, California, Colorado, Indiana, Iowa,
Louisiana, Mississippi and Nevada for such matters.
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Section 7.5 Stock Option Plans; Change of Control Plan.
(a) As soon as practicable following the date of this Agreement, but in any
event no later than 30 days before the Closing Date, the Board of Directors of
Pinnacle (or, if appropriate, any committee administering the Pinnacle Stock
Option Plans) shall adopt such resolutions or use all reasonable efforts to
take such other actions as are required to provide that except as set forth in
the Voting Agreement each then outstanding stock option (whether or not
vested) to purchase shares of Pinnacle Common Stock (a "Pinnacle Stock
Option") heretofore granted under any stock option or other stock-based
incentive plan, program or arrangement of Pinnacle (collectively, the
"Pinnacle Stock Option Plans") shall be canceled immediately prior to the
Effective Time in exchange for payment of an amount in cash equal to the
product of (i) the number of shares of Pinnacle Common Stock subject to such
Pinnacle Stock Option immediately prior to the fifth Business Day prior to the
Closing Date and (ii) the excess, if any, of the cash amount of the Pinnacle
Merger Consideration over the per share exercise price of such Pinnacle Stock
Option. In addition, in the event that the Inglewood Sale shall not have
closed on or prior to the fifth Business Day prior to the Closing Date,
holders of In the Money Pinnacle Stock Options (as defined in Section 10.11)
also shall receive one Class A CPR for each share issuable upon exercise. A
listing of all outstanding Pinnacle Stock Options as of the date hereof,
showing what portions of such Pinnacle Stock Options are exercisable as of
such date, the dates upon which such Pinnacle Stock Options were granted, and
the exercise price of such Pinnacle Stock Options, is set forth in Schedule
7.5.
(b) All Pinnacle Stock Option Plans shall terminate as of the Effective
Time, and the provisions in any other Plan providing for the issuance,
transfer or grant of any capital stock of Pinnacle or any interest in respect
of any capital stock of Pinnacle shall be deleted as of the Effective Time.
Immediately following the Effective Time, no holder of a Pinnacle Stock Option
or any participant in any Pinnacle Stock Option Plan shall have any right
thereunder to acquire any capital stock of Pinnacle, Pinnacle Acq Corp, PHCR
or the Pinnacle Surviving Corporation.
Section 7.6 Indemnification and Insurance.
(a) The indemnification obligations set forth in Pinnacle's Certificate of
Incorporation and By-laws on the date of this Agreement shall be duplicated,
to the extent permissible under the DGCL, in the Pinnacle Surviving
Corporation's Certificate of Incorporation and By-laws and shall not be
amended, repealed or otherwise modified for a period of six years after the
Effective Time in any manner that would adversely affect the rights thereunder
of individuals who on or prior to the Effective Time were directors, officers,
employees or agents of Pinnacle. The indemnification obligations set forth in
Pinnacle's Certificate of Incorporation and By-laws on the date of this
Agreement and in the respective organizational documents of Pinnacle's
Subsidiaries shall not be amended, repealed or otherwise modified for a period
of six years after the Effective Time in any manner that would adversely
affect the rights thereunder of individuals who on or prior to the Effective
Time were directors, officers, employees or agents of Pinnacle or any of its
Subsidiaries (together with the persons listed in the previous sentence, the
"Indemnified Parties").
(b) Prior to the Effective Time, Pinnacle shall have procured directors'
and officers' liability insurance for a period of six years from the Effective
Time, (which policy shall be of at least the same coverage, with carriers
comparable to Pinnacle's and its Subsidiaries' existing carriers, containing
terms and conditions which are no less favorable to those covered in
Pinnacle's and its Subsidiaries' existing directors' and officers' liability
policy) to cover those Persons who are covered on the date of this Agreement
by Pinnacle's and its Subsidiaries' directors' and officers' liability
insurance policy with respect to those matters covered by Pinnacle's and its
Subsidiaries' directors' and officers' liability policy.
(c) Section 7.6 shall survive the consummation of the Pinnacle Merger at
the Effective Time, is intended to benefit Pinnacle, the Pinnacle Surviving
Corporation and the Indemnified Parties (and the heirs and representatives of
the Indemnified Parties), and shall be binding on all successors and assigns
of Pinnacle Acq Corp and the Pinnacle Surviving Corporation and shall be
enforceable by each Indemnified Party and his or her heirs and
representatives.
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Section 7.7 Fees.
(a) Except as provided below, all fees and expenses incurred in connection
with the Pinnacle Merger, this Agreement and the transactions contemplated
hereby shall be paid by the party incurring such fees or expenses, whether or
not the Pinnacle Merger is consummated.
(b) Pinnacle shall pay, or cause to be paid, in same day funds to Pinnacle
Acq Corp $25 million (the "Termination Fee") upon demand if (A) Pinnacle Acq
Corp or Pinnacle, as applicable, terminates this Agreement pursuant to Section
9.1 (f) and prior to such termination a Significant Takeover Proposal shall
have been made; (B) Pinnacle Acq Corp terminates this Agreement pursuant to
Section 9.1(e); (C) Pinnacle terminates this Agreement pursuant to Section
9.1(g); or (D) prior to any other termination of this Agreement pursuant to
Section 9.1(d) or Section 9.1(c)(A) (which termination does not follow from
the failure of Pinnacle Acq Corp to cause any condition specified in Section
8.3 to be satisfied), (x) a Competitive Proposal (disregarding for this
purpose the proviso in the definition thereof) or (y) a Significant Takeover
Proposal ("Triggering Proposal"), shall have been made on or after March 2,
2000 and within 12 months of such termination, a transaction constituting a
Significant Takeover Proposal is consummated or Pinnacle enters into an
agreement (which is thereafter consummated) with respect to, or the Board of
Directors of Pinnacle or a committee thereof approves or recommends, or
publicly proposes to approve or recommend, a Significant Takeover Proposal
(which is thereafter consummated).
(c) Notwithstanding Section 7.7(b)(D)(y) above, the Termination Fee in such
event shall not be payable by Pinnacle in the event that Pinnacle makes a good
faith demonstration, reasonably satisfactory to Pinnacle Acq Corp, that (A)
such Significant Takeover Proposal is made by a Person (i) who is unaffiliated
with the Person that made the Triggering Proposal, and (ii) who did not
solicit, have significant discussions or engage in any negotiations with, or
receive any non-public information from Pinnacle, its Subsidiaries or any of
Pinnacle's Covered Persons during the period in which this Agreement was in
effect, (B) such Significant Takeover Proposal is not related to, contemplated
by, or otherwise connected, directly or indirectly, with the Triggering
Proposal and (C) there is no direct or indirect nexus or causal effect between
the Triggering Proposal and the Significant Takeover Proposal (which Pinnacle
may demonstrate (X)(1) by establishing the Triggering Proposal has been
terminated or withdrawn, (2) the initial contact relating to such Significant
Takeover Proposal is made to or by Pinnacle, any of its Subsidiaries or any of
Pinnacle's Covered Persons a significant time after such termination or
withdrawal, and (3) during the period beginning on the date the Triggering
Proposal is terminated or withdrawn and ending on the date of the initial
contact regarding the Significant Takeover Proposal, neither Pinnacle, its
Subsidiaries nor its Covered Persons shall have solicited, initiated,
encouraged or entertained any inquiries regarding or the submission of, or
participated in any discussions or negotiations regarding, or furnished any
information with respect to, any Significant Takeover Proposal or (Y)
otherwise.
(d) Only one Termination Fee shall be payable to Pinnacle Acq Corp pursuant
to the terms hereof.
Section 7.8 Public Announcement. PHCR and Pinnacle Acq Corp and their
respective Affiliates, on the one hand, and Pinnacle, on the other hand, will
consult with each other before issuing, and provide each other the opportunity
to review and comment upon, any press release or other public statements with
respect to the transactions contemplated by this Agreement, including the
Pinnacle Merger, and shall not issue any such press release or make any such
public statement prior to such consultation, except as may be required by
applicable law, court process or by obligations pursuant to any listing
agreement with any national securities exchange or national securities
quotation system (in which case the parties will use reasonable efforts to
cooperate in good faith with respect to such press release or other public
statement). The parties agree that the initial press release to be issued with
respect to the transactions contemplated by this Agreement shall be in the
form heretofore agreed to by the parties.
Section 7.9 Title Insurance, Surveys, and Flood Insurance.
(a) As promptly as practicable after the date hereof but in no event later
than ninety (90) days prior to the Effective Time, Pinnacle shall deliver
copies of previous owner policies or other title evidence sufficient to obtain
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commitments (the "Commitments") to be issued by a title company acceptable to
Pinnacle Acq Corp (the "Title Insurer") for the issuance of an ALTA Leasehold
Policy of Title Insurance, an ALTA Owner's or Lender's Policy of Title
Insurance or a "date-down" of such policies, as applicable, for such of the
Real Properties as Pinnacle Acq Corp shall designate (collectively, the "Title
Policies"). Each of the Title Policies shall name an entity designated by
Pinnacle Acq Corp as insured and shall show leasehold title or fee simple
title to each of the Real Properties vested at the Effective Time in Pinnacle
or its Subsidiaries, subject only to the Permitted Liens, provided, however,
no monetary liens (other than those being contested by Pinnacle or its
Subsidiaries in good faith) shall encumber the title to any Real Property,
including, without limitation, the Bank Credit Facility. The Commitments and
the Title Policies to be issued by the Title Insurer shall have all standard
and general exceptions deleted so as to afford full "extended form coverage"
and shall contain contiguity (where appropriate), survey, and such other
endorsements as may be reasonably requested by Pinnacle Acq Corp or its
lender. At the Closing, Pinnacle and its Subsidiaries shall deliver such
affidavits or other instruments as the Title Insurer may reasonably require to
delete standard and general exceptions and to provide the endorsements
reasonably required hereunder. Pinnacle and its Subsidiaries shall cause the
Commitments to be later-dated to cover the Closing and to cause the Title
Insurer to delete all Schedule B-1 requirements and all standard and general
exceptions in the Commitment at the Closing as directed by Pinnacle Acq Corp.
(b) As promptly as practicable after the date hereof but in no event later
than ninety (90) days prior to the Effective Time, Pinnacle and its
Subsidiaries shall deliver to Pinnacle Acq Corp and Title Insurer an as-built
survey of each of the Owned Properties and the Leased Properties which
constitute ground leases, except the Asset Dispositions other than the
property located in Compton, California (collectively, the "Surveys"),
prepared by a registered land surveyor or engineer, licensed in the state
where such Owned Property or Leased Property is located, dated on or after the
date hereof, certified to Pinnacle Acq Corp, Title Insurer, and such other
entities as Pinnacle Acq Corp may designate in writing to Pinnacle, and
conforming to current ALTA/ACSM Minimum Detail Requirements for Land Title
Surveys, sufficient to cause Title Insurer to delete the standard printed
survey exception. The Surveys shall show only Permitted Liens. Each Survey
shall show access from the land to dedicated roads and shall include a flood
plain certification. Any survey may be a recertification of a prior survey,
provided that it meets the above-described criteria.
(c) To the extent any Real Property is located within an area designated as
"flood prone" or a "special flood hazard area" (as defined under the
regulations adopted under the National Flood Insurance Act of 1968 and the
Flood Disaster Protection Act of 1973), at Pinnacle Acq Corp's request,
Pinnacle shall obtain and maintain flood insurance, if available, in an amount
specified by Pinnacle Acq Corp with respect to such Real Property.
(d) Pinnacle and its Subsidiaries shall use reasonable efforts to obtain
prior to Closing estoppel certificates in form and substance reasonably
satisfactory to Pinnacle Acq Corp and its lenders from each of the lessors
under the leases described on Schedule 4.17(b).
(e) If the Commitments reveal any mortgages, deeds of trust, ground leases
or similar matters affecting the Leased Properties which will remain of record
after the Closing and are senior in priority to the respective Lease and for
which Pinnacle or its Subsidiary has not previously obtained a nondisturbance
and attornment agreement, then Pinnacle and its Subsidiaries shall use their
reasonable efforts to obtain non-disturbance and attornment agreements in form
and substance reasonably acceptable to Pinnacle Acq Corp and its lenders, from
the applicable mortgagees, holders of beneficial interests under the deeds of
trust, ground lessors and similar parties.
(f) Pinnacle and its Subsidiaries shall use their reasonable efforts and
shall cooperate with Pinnacle Acq Corp to obtain, prior to Closing, (i) any
required consents to any assignments and/or financing of any of the Leased
Properties, and (ii) any modifications reasonably and customarily required by
Pinnacle Acq Corp's lender to the leases for the Leased Properties.
Section 7.10 Transfer Taxes. All liability for any transfer or other
similar taxes in connection with the exchange of Pinnacle Common Stock to the
Pinnacle Acq Corp or the consummation of any other transaction contemplated by
this Agreement shall be borne by Pinnacle.
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Section 7.11 Financing.
(a) Pinnacle Acq Corp shall use its commercially reasonable efforts to
obtain and effectuate the Financing. Pinnacle shall use its commercially
reasonable efforts to cooperate with and assist Pinnacle Acq Corp in obtaining
and effectuating the Financing; provided that "commercially reasonable
efforts" shall not require Pinnacle Acq Corp to expend money in excess of the
expenses set forth in Exhibit A hereto, seek or provide any equity or
supplemental investment in connection with the transactions contemplated
hereby, or amend in any manner adverse to Pinnacle Acq Corp any of the terms
set forth on Exhibit A hereto.
(b) Neither Pinnacle Acq Corp nor PHCR shall, and each shall cause Harveys
not to, voluntarily enter into any agreement, commitment or understanding with
respect to or concerning any financing, acquisition, disposition or corporate
transaction not contemplated hereby or by the Voting Agreement which would, as
of the date of such transaction, reasonably be expected to materially impair
the ability of PHCR to obtain the Financing. Pinnacle shall have no remedy
with respect to this Section 7.11, and Pinnacle shall not be permitted to
claim a breach under this Section 7.11 unless and until such time as this
Agreement is terminated (i) by Pinnacle Acq Corp solely because of the failure
of the condition Section 8.2(f) hereof to be satisfied, or (ii) by Pinnacle or
by Pinnacle Acq Corp pursuant to Section 9.1(h) hereof.
Section 7.12 Tax Treatment. Each of PHCR and Pinnacle shall use its
reasonable best efforts to cause the Harveys Merger, the Pinnacle Merger and
the contributions described in the Voting Agreement to qualify as an exchange
governed by section 351 of the Code.
Section 7.13 Tender Offer and Consent Solicitations. To the extent required
in connection with the transactions contemplated hereby, Pinnacle Acq Corp
shall use its reasonable best efforts to obtain the consent or valid tender,
without subsequent withdrawal, of not less than 50% of each tranche of the
outstanding principal amount of debt of Pinnacle pursuant to a consent
solicitation and/or tender offer for such debt; provided that "reasonable best
efforts" shall not require Pinnacle Acq Corp to expend money in excess of the
expenses set forth in Exhibit A hereto, seek or provide any equity or
supplemental investment in connection with the transactions contemplated
hereby, or amend in any manner adverse to Pinnacle Acq Corp any of the terms
set forth in Exhibit A hereto.
Section 7.14 Termination of Voting Agreement. Upon any termination of this
Agreement pursuant to the terms of Article IX hereof, the Voting Agreement
shall also terminate and become void and have no effect, without any
liability, or obligation on the part of the parties thereto.
Section 7.15 Compliance Committees. Pinnacle shall, and Pinnacle Acq Corp
shall cause Harveys to, use their reasonable best efforts to cause the
compliance committees of the Boards of Directors of Pinnacle and Harveys,
respectively, to review and approve this Agreement and the transactions
contemplated hereby as promptly as practicable after the date hereof.
Section 7.16 Atlantic Land Warrant. Pinnacle shall use its commercially
reasonable efforts to cause the warrant agreement governing the Atlantic Land
Warrant to be amended to provide for each of the following: (i) in the event
that the Inglewood Sale shall have closed on or prior to the fifth Business
Day prior to the Closing Date, then, as of the Effective Time, the Atlantic
Land Warrant shall be converted into the right to receive from the Pinnacle
Surviving Corporation an amount in cash equal to the product of (x) the number
of shares of Pinnacle Common Stock that were subject to the Atlantic Land
Warrant immediately prior to the Effective Time and (y) the excess (if any) of
the cash amount of the Pinnacle Merger Consideration over the exercise price
per share of the Atlantic Land Warrant immediately prior to the Effective
Time; (ii) in the event that the Inglewood Sale shall not have closed on or
prior to the fifth Business Day prior to the Closing Date, the holder of the
Atlantic Land Warrant shall not receive the amount contemplated by clause (i)
above and shall instead be deemed to have received a number of Class B CPRs
(as defined in Section 10.11 hereof) equal to the number of shares of Pinnacle
Common Stock that were subject to the Atlantic Land Warrant immediately prior
to the Effective Time; and (iii) as of the Effective Time, the Atlantic Land
Warrant shall no longer be outstanding and shall
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automatically be canceled and shall cease to exist, and the holder of the
Atlantic Land Warrant shall cease to have any rights with respect thereto,
except the right to receive the consideration (if any) described in
clause (i) above which such holder is entitled to receive.
Section 7.17 Filing of Corporate Gaming License Applications. PHCR and
Pinnacle Acq Corp shall, and PHCR shall cause Harveys and Harveys Acq Corp to,
file, within sixty days of the date of this Agreement, corporate applications
for gaming licenses in each jurisdiction in which Gaming Approvals are
required to permit such persons to consummate the transactions contemplated by
this Agreement and the Harveys Merger Agreement; provided that if advised by
any of their gaming counsel that filing any such corporate application for
gaming licenses in such 60-day period is not conducive to the timely
satisfaction of the condition set forth in Section 8.3(d), then PHCR and
Pinnacle Acq Corp shall, and PHCR shall cause Harveys and Harveys Acq Corp to,
file such corporate applications for gaming licenses as soon after such 60-day
period as is appropriate; provided, further, that Pinnacle and each of its
Affiliates shall reasonably cooperate to the extent needed to facilitate the
approval of such application. Nothing in this Section 7.17 shall require any
of PHCR, Pinnacle Acq Corp, Harveys or Harveys Acq Corp to file during such
60-day period any gaming license applications with respect to any individual.
In addition, nothing in this Section 7.17 shall obligate any of PHCR, Pinnacle
Acq Corp, Harveys, Harveys Acquisition Corporation, or any of their respective
Affiliates to obtain any consent, approval, license, waiver, order, decree,
determination of suitability or other authorization or make any filing or
application with respect to any limited partner of Colony III or its
Affiliates.
ARTICLE VIII
CONDITIONS PRECEDENT
Section 8.1 Conditions to Each Party's Obligation to Effect the Pinnacle
Merger. The respective obligations of each party to effect the Pinnacle Merger
is subject to the satisfaction or waiver on or prior to the Closing Date of
the following conditions:
(a) Stockholder Approval. This Agreement shall have been approved and
adopted by the Requisite Vote in accordance with applicable Law and the
Certificate of Incorporation of Pinnacle.
(b) No Injunctions or Restraints. No statute, rule, regulation, executive
order, decree, temporary restraining order, preliminary or permanent
injunction or other order enacted, entered, promulgated, enforced or issued by
any Governmental Entity or other legal restraint or prohibition preventing the
consummation of the Pinnacle Merger or the transactions contemplated hereby
shall be in effect; provided, in the case of a decree, injunction or other
order, each of the parties shall have used their best efforts to prevent the
entry of any such injunction or other order and to appeal as promptly as
possible any decree, injunction or other order that may be entered.
(c) HSR Act. Any waiting period (and any extension thereof) applicable to
the transaction contemplated by this Agreement under the HSR Act shall have
expired or shall have been terminated.
Section 8.2 Conditions to Obligations of Pinnacle Acq Corp. The obligations
of Pinnacle Acq Corp to effect the Pinnacle Merger are further subject to the
satisfaction or waiver on or prior to the Closing Date of the following
conditions:
(a) Representations and Warranties. The representations and warranties of
Pinnacle contained herein that are qualified as to materiality shall be true
and accurate, and those not so qualified shall be true and accurate in all
material respects, in each case on the date hereof and at and as of the
Effective Time with the same force and effect as though made at and as of the
Effective Time (except to the extent a representation or warranty speaks
specifically as of an earlier date or except as contemplated by this
Agreement), and Pinnacle Acq Corp shall have received a certificate signed on
behalf of Pinnacle by its President and its Chief Financial Officer to such
effect.
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(b) Covenants. Pinnacle shall have performed, in all material respects, all
obligations and complied, in all material respects, with all covenants
required by this Agreement to be performed or complied with by it at or prior
to the Effective Time, and Pinnacle Acq Corp shall have received certificates
signed on behalf of Pinnacle by its President and its Chief Financial Officer
to such effect.
(c) No Material Adverse Effect. From the date hereof through and including
the Effective Time, no event or events shall have occurred which, individually
or in the aggregate, would reasonably be expected to have a material adverse
effect on Pinnacle or the transactions contemplated hereby.
(d) Gaming Authority Approval. All licenses, permits, registrations,
authorizations, consents, waivers, orders, findings of suitability or other
approvals required to be obtained from, and all filings, notices or
declarations required to be made with, any Gaming Authority or Governmental
Entity to permit Pinnacle Acq Corp and Pinnacle to consummate the Pinnacle
Merger, to permit Harveys Acq Corp and Harveys to complete the Harveys Merger,
and to permit the Pinnacle Surviving Corporation and the Harveys Surviving
Corporation and each of their respective Subsidiaries to conduct their
respective businesses in the jurisdictions regulated by such Gaming
Authorities after the Effective Time in the same manner as conducted by
Pinnacle and Harveys and their respective Subsidiaries prior to the Effective
Time (collectively, the "Gaming Approvals") shall have been obtained or made,
as applicable; provided that this condition shall not be deemed satisfied if
any Gaming Approval obligates Pinnacle Acq Corp or Harveys Acq Corp, or any of
their respective Affiliates to obtain any consent, approval, license, waiver,
order, decree, determination of suitability or other authorization or make any
filing or application with respect to any limited partner of Colony III or its
Affiliates.
(e) Consents. All consents, waivers, orders, approvals, authorizations,
registrations, findings of suitability, licensing and action of (i) any
Governmental Entity other than a Gaming Authority required to permit the
consummation of the Pinnacle Merger, and (ii) any third party listed on
Schedule 4.4(a) or 4.4(b) hereof with respect to which consent is indicated on
such Schedule to be obtained, shall have been obtained or made, free of any
condition that would be materially adverse to Pinnacle or the transactions
contemplated hereby.
(f) Financing. Pinnacle Acq Corp and Harveys Acq Corp shall have received
the cash proceeds of the Financing.
(g) Tender Offers and Consent Solicitations. To the extent required in
connection with the transactions contemplated hereby, Pinnacle Acq Corp shall
have received valid consents and related tenders under the outstanding
principal amount of debt of Pinnacle and Harveys pursuant to tender offers for
such debt. Pinnacle Acq Corp shall have received the requisite consents under
the instruments under which such debt was issued for any amendments of such
instruments necessary in connection with the transactions contemplated hereby
and such amendments shall have become effective in accordance with the terms
of such instruments.
(h) Principal Asset Dispositions. The Principal Asset Dispositions (other
than the Inglewood Sale) shall have been consummated on substantially the
terms and subject to the conditions contained in the applicable Asset
Disposition Agreement, Pinnacle shall have received therefrom not less than
the net proceeds indicated on Schedule 6.1(c) hereto, and the Chief Financial
Officer of Pinnacle shall have delivered a certificate to Pinnacle Acq Corp
certifying that his good faith reasonable estimate of net proceeds from such
Principal Asset Dispositions are not less than the amounts set forth on
Schedule 6.1(c) hereto.
(i) Transaction Documents. The transactions contemplated by the Transaction
Documents shall have been consummated immediately prior to the Effective Time.
(j) Dissenting Shares. The aggregate number of Pinnacle Dissenting Shares
shall not exceed 5% of the total number of shares of Pinnacle Common Stock
outstanding immediately prior to the Pinnacle Stockholders Meeting.
(k) Indiana Project. (i) All material phases of the Indiana Project (other
than the golf course and performance theater) shall have been substantially
completed and opened to the public by not later than
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September 15, 2000; and (ii) the costs associated with the Indiana Project
shall not be, in the aggregate, more than $207 million, and the project (other
than the golf course and performance theater) will have been completed in
substantial conformity with the written budgets, plans and policies relating
to the Indiana Project provided to Pinnacle Acq Corp prior to the date hereof.
Section 8.3 Conditions to Obligations of Pinnacle. The obligations of
Pinnacle to effect the Pinnacle Merger are further subject to the satisfaction
or waiver on or prior to the Closing Date of the following conditions:
(a) Representations and Warranties. The representations and warranties of
Pinnacle Acq Corp contained herein that are qualified as to materiality shall
be true and accurate, and those not so qualified shall be true and accurate in
all material respects, in each case at and as of the Effective Time with the
same force and effect as though made at and as of the Effective Time (except
to the extent a representation or warranty speaks specifically as of an
earlier date or except as contemplated by this Agreement), and Pinnacle shall
have received certificates signed on behalf of Pinnacle Acq Corp by its
President to such effect.
(b) Agreements and Covenants. Pinnacle Acq Corp shall have performed, in
all material respects, all obligations and complied, in all material respects,
with all covenants required by this Agreement to be performed or complied with
by it at or prior to the Effective Time, and Pinnacle shall have received a
certificate signed on behalf of Pinnacle Acq Corp by its President to such
effect.
(c) Gaming Authority Approval. All licenses, permits, registrations,
authorizations, consents, waivers, orders, findings of suitability or other
approvals required to be obtained from, and all filings, notices or
declarations required to be made with, any Gaming Authority to permit Pinnacle
Acq Corp to consummate the Pinnacle Merger shall have been obtained or made,
as applicable.
ARTICLE IX
TERMINATION, AMENDMENT AND WAIVER
Section 9.1 Termination. This Agreement may be terminated at any time prior
to the Effective Time, whether before or after approval of matters presented
in connection with the Pinnacle Merger by the stockholders of Pinnacle:
(a) by mutual written consent of each of the parties;
(b) by either Pinnacle Acq Corp or Pinnacle if any Governmental Entity
shall have issued an order, decree or ruling or taken any other action
permanently enjoining, restraining or otherwise prohibiting the acceptance for
payment of, or payment for, shares of Pinnacle Common Stock pursuant to the
Pinnacle Merger and such order, decree or ruling or other action shall have
become final and nonappealable; provided, in the case of an order, decree,
ruling or other order, each of the parties shall have used their best efforts
to prevent the entry of any such order, decree, ruling or other order and to
appeal as promptly as possible any order, decree, ruling or other order that
may be entered; provided further, the right to terminate this Agreement
pursuant to the foregoing clause shall not be available to any party that
fails to comply with Section 7.4;
(c) (A) by either Pinnacle Acq Corp or Pinnacle, at any time after January
15, 2001 if the Effective Time shall not have occurred on or prior to such
date other than due to the failure of the party seeking to terminate this
Agreement to perform its obligations under this Agreement required to be
performed at or before the Closing; provided, however, that, Pinnacle Acq Corp
may, at its option, (x) extend such date for up to six months if (i) it can
demonstrate to Pinnacle's reasonable good faith satisfaction that there is a
reasonable likelihood that it will receive the Gaming Approvals by such date,
and (ii) Pinnacle Acq Corp delivers to Pinnacle commitment letter(s) and
highly confident letter(s) reflecting amounts that are at least sufficient to
cover the Financing with expiration dates that are at least coextensive with
the date of such extension (and "Extended Commitment"); or
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(y) extend the January 15, 2001 date for up to two months if the parties shall
have received from any responsible individual of each Gaming Authority (i) the
approval of which is required to be obtained to permit Pinnacle Acq Corp and
Harveys Acq Corp to consummate the Pinnacle Merger and Harveys Merger,
respectively and (ii) which has not prior to January 15, 2001 finally
determined whether such approval shall be granted, reasonable assurance
(written or oral) that a hearing is scheduled or can reasonably be expected to
be scheduled prior to March 15, 2001;
(B) Notwithstanding the foregoing, in the event that Pinnacle or Pinnacle
Acq Corp receives a final and nonappealable written statement from any of the
Gaming Authorities that states that such Gaming Authority has disapproved or
will not give approval to this Agreement, which disapproval would cause
Pinnacle Acq Corp to be unable to consummate the Pinnacle Merger, or if
Pinnacle Acq Corp has finally withdrawn (with no intent to resubmit) its
gaming application with such Gaming Authority, such party may terminate this
Agreement with written notice of such termination given to the other party
hereto; provided that no party may terminate this Agreement pursuant to the
terms of this sentence if such party is in material breach of this Agreement;
(d) by Pinnacle Acq Corp, if this Agreement has not been approved by the
Requisite Vote of the outstanding shares of Pinnacle Common Stock within 120
days after the date hereof; provided however, the time period set for in this
Section shall toll from the 51st day to the 80th day that the Proxy Statement
and the Schedule 13E-3 are filed with the SEC and remain under review by the
SEC (but in no event shall such period toll for more than 30 days in total or
the Pinnacle Stockholders Meeting occur later than the 150th day after the
date hereof); provided further that such tolling period shall only be
available if the Proxy Statement and the Schedule 13E-3 are filed in
accordance with the provisions of Section 7.2 hereof and Pinnacle has used its
reasonable best efforts to respond to SEC comments to such disclosure
documentation promptly and completely;
(e) by Pinnacle Acq Corp if the Board of Directors of Pinnacle amends,
modifies or withdraws its recommendation or publicly proposes to amend, modify
in a manner adverse to Pinnacle Acq Corp, or withdraw its recommendation of
the Pinnacle Merger or this Agreement or if, following a Takeover Proposal,
Pinnacle fails to comply with its obligations under Sections 6.3 and 7.4
hereof;
(f) by either Pinnacle or Pinnacle Acq Corp if, at a duly held stockholders
meeting of Pinnacle or any adjournment thereof at which this Agreement is
voted upon, the Requisite Vote in favor of the adoption of this Agreement
shall not have been obtained; or
(g) by Pinnacle in connection with simultaneously entering into a
definitive agreement in accordance with Section 6.3(b); provided, it has
complied with all provisions thereof, including the notice provisions therein,
and that it simultaneously makes payment of the Termination Fee.
(h) by Pinnacle Acq Corp or Pinnacle in the event that the Financing
Letters shall have been withdrawn or terminated by the issuing lenders, and
Pinnacle Acq Corp is unable, despite the exercise of its reasonable efforts,
to obtain a replacement commitment letter(s) and/or highly confident letter(s)
reflecting amounts that are at least sufficient to cover the Financing, within
20 Business Days following such withdrawal or termination.
Section 9.2 Effect of Termination. In the event of termination of this
Agreement by either Pinnacle or Pinnacle Acq Corp as provided in Section 9.1,
this Agreement shall forthwith become void and have no effect, without any
liability or obligation on the part of Pinnacle Acq Corp or Pinnacle, other
than the provisions of Section 7.2, Section 7.3, Section 7.7, this Section 9.2
and Article X (other than Section 10.11) and except to the extent that such
termination results from the wilful and material breach by a party of any of
its representations, warranties, covenants or agreements set forth in this
Agreement, in which case each other party shall be entitled to recover all
damages allowable at law and all relief available in equity; provided that,
upon receipt by Pinnacle Acq Corp of the Termination Fee in accordance with
the provisions hereof, Pinnacle Acq Corp shall have no further rights
hereunder, at law or in equity, to damages or other relief and shall release
and forever discharge Pinnacle, and each of its past, present and future
representatives, affiliates, stockholders, directors, officers, employees,
subsidiaries, successors and assigns from any and all claims, demands,
proceedings or other
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obligations, known or unknown, both at law and in equity, which Pinnacle Acq
Corp may ever have against such persons arising out of any matter, cause or
event occurring at or prior to the Effective Time; provided further that the
limitation set forth in the previous proviso is not intended to act as a
limitation of liability in the event that the Termination Fee is not payable
pursuant to the terms hereof.
Section 9.3 Amendment. This Agreement may be amended by the mutual
agreement of the parties at any time before or after any required approval of
matters presented in connection with the Pinnacle Merger by the stockholders
of Pinnacle; provided, that after any such approval, there shall not be made
any amendment that by law requires further approval by such stockholders
without the further approval of such stockholders. This Agreement may not be
amended except by an instrument in writing signed on behalf of each of the
parties.
Section 9.4 Extension; Waiver. At any time prior to the Effective Time, the
parties may (a) extend the time for the performance of any of the obligations
or other acts of the other parties, (b) waive any inaccuracies in the
representations and warranties of the other party contained in this Agreement
or in any document delivered pursuant to this Agreement or (c) subject to the
proviso of Section 9.3, waive compliance by the other party with any of the
agreements or conditions contained in this Agreement. Any agreement on the
part of a party to any such extension or waiver shall be valid only if set
forth in an instrument in writing signed on behalf of such party. The failure
of any party to this Agreement to assert any of its rights under this
Agreement or otherwise shall not constitute a waiver of those rights.
Section 9.5 Procedure for Termination, Amendment, Extension or Waiver. A
termination of this Agreement pursuant to Section 9.1, an amendment of this
Agreement pursuant to Section 9.3 or an extension or waiver pursuant to
Section 9.4 shall, in order to be effective, require in the case of Pinnacle
Acq Corp or Pinnacle, action by its Board of Directors or the duly authorized
designee of its Board of Directors.
ARTICLE X
GENERAL PROVISIONS
Section 10.1 Nonsurvival of Representations. None of the representations
and warranties in this Agreement shall survive the Effective Time. This
Section 10.1 shall not limit any covenant or agreement of the parties which by
its terms contemplates performance after the Effective Time of the Pinnacle
Merger.
Section 10.2 Representations and Warranties. Notwithstanding anything in
this Agreement to the contrary, the disclosure of any information on any
schedule to this Agreement shall be deemed to constitute the disclosure of
such information for all other schedules to this Agreement to the extent that
it is clear from a reading of such information that it is applicable to such
other schedules.
Section 10.3 Notices. All notices, requests, claims, demands and other
communications under this Agreement shall be in writing and shall be deemed
given if delivered personally or sent by overnight courier (providing proof of
delivery) to the parties or sent by telecopy (providing confirmation of
transmission) at the following addresses or telecopy number (or at such other
address or telecopy number for a party as shall be specified by like notice):
(a) if to Pinnacle Acq Corp or PHCR, to:
c/o Harveys Casino Resorts
Highway 50 & Stateline Avenue
Lake Tahoe, Nevada 89449
Attention: Charles W. Scharer
Telephone: 775-586-6756
Facsimile: 775-586-6852
and
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c/o Colony Capital, Inc.
1999 Avenue of the Stars, Suite 1200
Los Angeles, California 90067
Telephone: 310-282-8820
Facsimile: 310-282-8813
Attention: Jonathan H. Grunzweig
with a copy to:
Skadden, Arps, Slate, Meagher & Flom LLP
300 South Grand Avenue, Suite 3400
Los Angeles, California 90071
Attention: Nick P. Saggese, Esq.
Telephone: 213-687-5550
Facsimile: 213-687-5600
(b) if to Pinnacle, to
Pinnacle Entertainment, Inc.
330 North Brand Boulevard, Suite 1100
Glendale, California 91203
Attention: Loren Ostrow, Esq.
Telephone: 818-662-5900
Facsimile: 818-662-5901
with a copy to:
Irell & Manella LLP
1800 Avenue of the Stars, Suite 900
Los Angeles, California 90067
Attention: Alvin Segel, Esq.
Telephone: 310-203-7069
Facsimile: 310-203-7199
and
Munger, Tolles & Olson LLP
355 South Grand Avenue, Suite 3500
Los Angeles, California 90071
Attention: Simon Lorne, Esq.
Telephone: 213-683-9100
Facsimile: 213-687-3702
Section 10.4 Interpretation. When a reference is made in this Agreement to
an Article, Section or Schedule, such reference shall be to an Article or
Section of or a Schedule to, this Agreement unless otherwise indicated. The
table of contents and headings contained in this Agreement are for reference
purposes only and shall not affect in any way the meaning or interpretation of
this Agreement. Whenever the words "include," "includes" or "including" are
used in this Agreement, they shall be deemed to be followed by the words
"without limitation." The Transaction Documents and the consummation of the
transactions contemplated by such Transaction Documents are transactions
contemplated by this Agreement. To the extent any restriction on the
activities of Pinnacle or its Subsidiaries under the terms of this Agreement
requires prior approval under any Gaming Law, such restriction shall be of no
force or effect unless and until such approval is obtained. If any provision
of this Agreement is illegal or unenforceable under any Gaming Law, such
provision shall be void and of no force or effect.
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Section 10.5 Counterparts. This Agreement may be executed in one or more
counterparts, all of which shall be considered one and the same agreement and
shall become effective when one or more counterparts have been signed by each
of the parties and delivered to the other parties.
Section 10.6 Entire Agreement; No Third-Party Beneficiaries. This Agreement
and the Voting Agreement constitute the entire agreements, and supersede all
prior agreements and understandings, both written and oral, among the parties
with respect to the subject matter of these agreements and are not intended to
confer upon any Person other than the parties any rights or remedies
hereunder, except that (i) officers, directors, employees and agents of
Pinnacle and its Subsidiaries are intended beneficiaries of the covenants and
agreements set forth in Section 7.6 and (ii) the holders of Pinnacle Stock
Options are the intended beneficiaries of the covenants and agreements set
forth in Section 7.5.
Section 10.7 Governing Law. THIS AGREEMENT SHALL BE GOVERNED BY, AND
CONSTRUED IN ACCORDANCE WITH, THE LAWS OF THE STATE OF DELAWARE, WITHOUT
REGARD TO ANY APPLICABLE CONFLICTS OF LAW.
Section 10.8 Gaming Laws. Each of the provisions of this Agreement is
subject to and shall be enforced in compliance with the Gaming Laws.
Section 10.9 Assignment. Neither this Agreement nor any of the rights,
interests or obligations under this Agreement shall be assigned, in whole or
in part, by operation of law or otherwise by any of the parties without the
prior written consent of the other parties, except that Pinnacle Acq Corp may
assign, in its sole discretion, any of or all its rights, interests and
obligations under this Agreement to any controlled affiliate of Colony
Capital, Inc., provided such party assumes Pinnacle Acq Corp's obligations
hereunder, and Pinnacle Acq Corp remains liable hereunder. Subject to the
preceding sentence, this Agreement will be binding upon, inure to the benefit
of, and be enforceable by, the parties and their respective successors and
assigns.
Section 10.10 Enforcement. The parties agree that irreparable damage would
occur in the event that any of the provisions of this Agreement were not
performed in accordance with their specific terms or were otherwise breached.
It is accordingly agreed that the parties shall be entitled to an injunction
or injunctions to prevent breaches of this Agreement and to enforce
specifically the terms and provisions of this Agreement in any court of the
United States located in the State of Delaware or in Delaware state court,
this being in addition to any other remedy to which they are entitled at law
or in equity. In addition, each of the parties hereto (a) consents to commit
itself to the personal jurisdiction of any Federal court located in the State
of Delaware or any Delaware state court in the event any dispute arises out of
this Agreement or any of the transactions contemplated by this Agreement, (b)
agrees that it will not attempt to deny or defeat such personal jurisdiction
by motion or other request for leave from any such court and (c) agrees that
it will not bring any action relating to this Agreement or any of the
transactions contemplated by this Agreement in any court other than a Federal
or state court sitting in the State of Delaware.
Section 10.11 Inglewood Sale; CPRs.
(a) Upon the occurrence of an event set forth below, the Pinnacle Merger
Consideration shall be adjusted in the manner set forth below with respect to
such event:
(i) In the event that the Inglewood Sale shall have closed on or prior
to the fifth Business Day prior to the Closing Date and the Net Proceeds to
Pinnacle from the Inglewood Sale are equal to or greater than $40,750,000,
then the Pinnacle Merger Consideration shall equal $25.00 in cash.
(ii) In the event that the Inglewood Sale shall have closed on or prior
to the fifth Business Day prior to the Closing Date and the Net Proceeds to
Pinnacle from the Inglewood Sale are greater than $13,054,000 but less than
$40,750,000, then the Pinnacle Merger Consideration shall equal the sum of
(x) $24.00 in cash, and (y) the Proceeds Adjustment, in cash.
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(iii) In the event that the Inglewood Sale shall have closed on or prior
to the fifth Business Day prior to the Closing Date and the Net Proceeds to
Pinnacle from the Inglewood Sale are less than or equal to $13,054,000,
then there shall be no adjustment to the Pinnacle Merger Consideration.
(iv) In the event that the Inglewood Sale shall not have closed on or
prior to the fifth Business Day prior to the Closing Date, then the
Pinnacle Merger Consideration shall equal (i) $24.00 in cash, and (ii) one
Class A CPR; provided that, the holder of the Atlantic Land Warrant shall
not receive the Pinnacle Merger Consideration and shall instead receive
that number of Class B CPRs equal to the number of shares issuable upon
exercise of the Atlantic Land Warrant immediately prior to the Effective
Time and no other consideration.
(b) As used in this Agreement, the following terms shall have the following
respective meanings:
"Class A CPR" means a contingent payment right representing the right to
receive from the Pinnacle Surviving Corporation (or, at its option, PHCR),
in cash, the Class A CPR Amount, if any. The Paying Agent shall distribute
to holders of Class A CPRs the Class A CPR Amount, if any, as soon as
practicable following the closing of the Inglewood Sale. Payments in
respect of Class A CPRs shall be without interest and less any withholding
or deduction for Taxes required under applicable law. The CPRs shall not
represent an equity or other ownership interest in PHCR or the Pinnacle
Surviving Corporation, shall not be transferable by the holders thereof,
except by operation of law or will, shall not be represented by any form of
certificate or instrument, and shall not bear interest. Holders of Class A
CPRs shall have no voting or other rights as stockholders of PHCR or the
Pinnacle Surviving Corporation. No amount shall be payable with respect to
the Class A CPRs if the Inglewood Sale shall not have closed prior to
December 31, 2001 (the "Expiration Date"). If the Inglewood Sale shall not
have closed prior to the Expiration Date, no further obligations shall be
owing in respect of the Class A CPRs or the provisions of this Section
10.11.
"Class B CPR" means a contingent payment right representing the right to
receive from the Pinnacle Surviving Corporation (or, at its option, PHCR),
in cash the Class B CPR Amount, if any. The Paying Agent shall distribute
to holders of Class B CPRs the Class B CPR Amount, if any, as soon as
practicable following the closing of the Inglewood Sale. Payments in
respect of Class B CPRs shall be without interest and less any withholding
or deduction for Taxes required under applicable law. The Class B CPRs
shall not represent an equity or other ownership interest in PHCR or the
Pinnacle Surviving Corporation, shall not be transferable by the holders
thereof, except by operation of law or will, shall not be represented by
any form of certificate or instrument, and shall not bear interest. Holders
of Class B CPRs shall have no voting or other rights as stockholders of
PHCR or the Pinnacle Surviving Corporation. No amount shall be payable with
respect to the Class B CPRs if the Inglewood Sale shall not have closed
prior to the Expiration Date. If the Inglewood Sale shall not have closed
prior to the Expiration Date, no further obligations shall be owing in
respect of the Class B CPRs or the provisions of this Section 10.11.
"Class A CPR Adjustment" means the quotient determined by dividing (a)
the difference of (1) the Net Proceeds to the Pinnacle Surviving
Corporation from the Inglewood Sale, minus (2) $13,054,000, minus (3) the
product of (x) the Class B CPR Amount, and (y) the number of Class B CPRs
outstanding, by (b) the sum of (1) the total number of shares of Pinnacle
Common Stock outstanding immediately prior to the Effective Time, plus (2)
the Implied Option Shares Number plus (3) the number of shares redeemed in
accordance with Section 6.1(d) of this Agreement; provided that, if such
number is negative, it shall be deemed to be zero.
"Class A CPR Amount" means, with respect to an event described below,
the amount set forth below with respect to such event:
(A) In the event that Net Proceeds to the Pinnacle Surviving
Corporation from the Inglewood Sale are equal to or greater than
$40,750,000, then the Class A CPR Amount shall equal $1.00.
(B) In the event that the Net Proceeds to the Pinnacle Surviving
Corporation from the Inglewood Sale are greater than $13,054,000 but
less than $40,750,000, then the Class A CPR Amount shall equal the
Class A CPR Adjustment.
A-44
(C) In the event that the Net Proceeds to the Pinnacle Surviving
Corporation from the Inglewood Sale are less than or equal to
$13,054,000, then the Class A CPR Amount shall equal zero dollars ($0).
"Class B CPR Adjustment" means the difference of (a) the quotient
determined by dividing (1) the difference of (x) Net Proceeds to the
Pinnacle Surviving Corporation from the Inglewood Sale, minus
(y) $13,054,000, by (2) the total number of Class A CPRs and Class B CPRs
outstanding, minus (b) $0.78; provided that, if such number is negative, it
shall be deemed to be zero.
"Class B CPR Amount" means, with respect to an event described below,
the amount set forth below with respect to such event:
(A) In the event that Net Proceeds to the Pinnacle Surviving
Corporation from the Inglewood Sale are equal to or greater than
$40,750,000, then the Class B CPR Amount shall equal $0.22.
(B) In the event that the Net Proceeds to the Pinnacle Surviving
Corporation from the Inglewood Sale are greater than $13,054,000 but
less than $40,750,000, then the Class B CPR Amount shall equal the
Class B CPR Adjustment.
(C) In the event that the Net Proceeds to the Pinnacle Surviving
Corporation from the Inglewood Sale are less than or equal to
$13,054,000, then the Class B CPR Amount shall equal zero dollars ($0).
"Gross Proceeds" means the aggregate dollar amount of any and all gross
proceeds to Pinnacle or the Pinnacle Surviving Corporation, as the case may
be, from the Inglewood Sale.
"Implied Option Shares Number" means the number obtained by multiplying
(a) the quotient derived by dividing (1) the difference of (x) the Maximum
Option Consideration, minus (y) the aggregate exercise price of all In the
Money Pinnacle Options, by (2) the Maximum Option Consideration, times (b)
the total number of shares of Pinnacle Common Stock issuable upon exercise
of the In the Money Pinnacle Options.
"In the Money Pinnacle Options" means Pinnacle Options with an exercise
price less than $24.00 per share.
"Inglewood Sale" means the sale or other disposition for value of the
entire Inglewood Property, whether accomplished in a single transaction or
in more than one transaction; provided, however, that if the Inglewood Sale
is accomplished in more than one transaction, the Inglewood Sale shall not
be deemed to have been closed until such time as the transaction with
respect to the last remaining portion of the Inglewood Property shall have
closed.
"Maximum Option Consideration" means the product derived by multiplying
(a) $24.00, times (b) the total number of shares of Pinnacle Common Stock
issuable upon exercise of the In the Money Pinnacle Options.
"Net Proceeds" means the sum of (a) the product determined by
multiplying (i) 0.58 by (ii) the difference of (x) the Gross Proceeds,
minus (y) Pinnacle's inside tax basis in the Inglewood Property, plus (b)
Pinnacle's inside tax basis in the Inglewood Property.
"Proceeds Adjustment" means an amount of cash equal to the quotient
determined by dividing (a) the difference of (1) the Net Proceeds to
Pinnacle from the Inglewood Sale, minus (2) $13,054,000, minus (3) the
Warrant Adjustment Amount, by (b) the sum of (1) the total number of shares
of Pinnacle Common Stock outstanding immediately prior to the Effective
Time, plus (2) the Implied Option Shares Number, plus (3) the number of
shares redeemed in accordance with Section 6.1(d) of this Agreement;
provided that, if such number is negative, it shall be deemed to be zero.
"Warrant Adjustment Amount" means the difference of (a) the quotient
determined by dividing (1) the difference of (x) Net Proceeds to the
Pinnacle Surviving Corporation from the Inglewood Sale,
A-45
minus (y) $13,054,000, by (2) the sum of (x) the total number of shares of
Pinnacle Common Stock outstanding, plus (y) the total number of shares of
Pinnacle Common Stock issuable upon exercise of the In the Money Options
plus (c) the total number of shares of Pinnacle Common Stock issuable upon
exercise of the Atlantic Land Warrant, plus (d) the number of shares
redeemed in accordance with Section 6.1(d) of this Agreement minus (b)
$0.78; provided that, if such number is negative, it shall be deemed to be
zero.
(c) In the event that the Inglewood Sale shall not have closed on or prior
to the fifth Business Day prior to the Closing Date, the Pinnacle Surviving
Corporation shall use its commercially reasonable efforts to consummate the
Inglewood Sale during the period beginning on the date following the Closing
Date and continuing through to but not including the Expiration Date;
provided, however, that none of PHCR, Pinnacle Acq Corp or the Pinnacle
Surviving Corporation shall have any liability for breach of this Section
10.11(c) except to the extent that any such breach shall have resulted from a
willful and material breach by such party.
(d) The obligation of the Pinnacle Surviving Corporation to pay the Class A
CPR Amount and the Class B CPR Amount shall be secured by a letter of credit
in an amount of $27,696,000 to be obtained at or prior to the Effective Time
issued in favor of the Paying Agent (or in the event that the Paying Agent is
unwilling to act in such capacity, a bank or title company reasonably
acceptable to Pinnacle and Pinnacle Acq Corp), which shall expire on the
Expiration Date.
(e) A committee comprised of member of the present Board of Directors of
Pinnacle or their designee(s) (the "Inglewood Sale Committee") shall have
approval rights over any proposed sale of the Inglewood Property and such
sales effort shall be managed by the present president of Realty Investment
Group, Inc., or such other person as may be mutually agreed to by the Pinnacle
Surviving Corporation and the Inglewood Sale Committee.
[signature pages follow]
A-46
IN WITNESS WHEREOF, PHCR, Pinnacle and Pinnacle Acq Corp have caused this
Agreement to be signed by their respective officers thereunto duly authorized,
all as of the date first written above.
PH CASINO RESORTS, INC.
By: /s/ Charles W. Scharer
--------------------------------
Name: Charles W. Scharer
Title: President
PINNACLE ENTERTAINMENT, INC.
By: /s/ Paul Alanis
--------------------------------
Name: Paul Alanis
Title: President
PINNACLE ACQUISITION CORPORATION
By: /s/ Charles W. Scharer
--------------------------------
Name: Charles W. Scharer
Title: President
A-47
ANNEX B
April 17, 2000
The Special Committee of the Board of Directors
The Board of Directors
PINNACLE ENTERTAINMENT, INC.
330 North Brand Boulevard
Suite 1100
Glendale, CA 91203-2308
To the Special Committee of the Board of Directors and the Board of Directors:
We understand that Pinnacle Entertainment, Inc., a Delaware corporation
("Pinnacle"), and Harveys Casino Resorts, a Nevada corporation (the
"Purchaser") majority owned by Colony Capital, Inc. ("Colony"), propose to
enter into an Agreement and Plan of Merger dated as of April 17, 2000 (the
"Merger Agreement") whereby Pinnacle and the Purchaser will merge (the
"Transaction"). Pursuant to the Merger Agreement, each share of Pinnacle
common stock, par value $0.10 per share ("Pinnacle Common Stock"), outstanding
immediately prior to the effective time of the Transaction will receive up to
$25.00, $24.00 in cash plus up to $1.00 per share contingent upon the
occurrence of, and amount of proceeds from, the sale of certain real estate
located in Inglewood, California, (the "Acquisition Consideration"). You have
requested Jefferies & Company, Inc.'s ("Jefferies") opinion as investment
bankers as to whether the Acquisition Consideration is fair, from a financial
point of view, to the holders of Pinnacle Common Stock.
In our review and analysis and in rendering this opinion, we have with your
permission assumed and relied upon the accuracy and completeness of all
information provided to us by Pinnacle's management, as well as publicly
available information, and have not verified such information. We have not
conducted a physical inspection of any of the properties or facilities of
Pinnacle, nor have we made, been provided with or considered any independent
evaluation or appraisals of any of such properties or facilities. The
Acquisition Consideration was based on negotiations between Pinnacle and the
Purchaser during which Jefferies provided investment banking services to the
Special Committee of the Board of Directors of Pinnacle (the "Committee").
In conducting our analysis and rendering our opinion as expressed herein,
we have reviewed and considered such financial and other factors as we have
deemed appropriate under the circumstances including, among others, the
following: (i) the Merger Agreement; (ii) the historical financial condition
and results of operations of Pinnacle, including the Annual Reports on Form
10-K of Pinnacle for the years ended December 31, 1997, 1998, and 1999; (iii)
certain internal financial and non-financial information prepared by the
management of Pinnacle, which data was made available to us in our role as
financial advisor to the Committee; (iv) published information regarding the
financial performance and operating characteristics of a selected group of
companies which we deemed comparable; (v) business prospects of Pinnacle as
projected by the management of Pinnacle; (vi) the historical and current
market prices for Pinnacle Common Stock and for the equity securities of
certain other companies with businesses that we consider relevant to our
inquiry; and (vii) publicly available information, including research reports
on companies we considered relevant to our inquiry. We have met with certain
officers and employees of Pinnacle to discuss the foregoing as well as other
matters we believed relevant to our opinion. We have also taken into account
general economic, monetary, political, market and other conditions as well as
our experience in connection with similar transactions and securities
valuation generally. Our opinion is based upon all of such conditions as they
exist currently and can be evaluated on the date hereof. Existing conditions
are subject to rapid and unpredictable changes and such changes could impact
our opinion. Our opinion does not constitute a recommendation of the
Transaction over any alternative transactions which may be available to
Pinnacle and does not address Pinnacle's underlying business decision to
effect the Transaction.
For purposes of rendering this opinion and based on your direction and with
your consent, Jefferies has assumed that, in all respects material to its
analysis, the representations and warranties of Pinnacle contained in
B-1
the Merger Agreement are true and correct, Pinnacle and Colony will each
perform all of the covenants and agreements to be performed by it under the
Merger Agreement, and all conditions to the obligations of Pinnacle to
consummate the Transaction will be satisfied without any waiver thereof.
Jefferies is a registered broker-dealer. Jefferies has acted as financial
advisor to the Committee in connection with the Transaction and will receive
(i) a cash fee upon rendering of the opinion and (ii) a cash fee at the
closing of the Transaction. Jefferies maintains a market in Pinnacle Common
Stock and regularly publishes research reports regarding securities of
Pinnacle. In the ordinary course of business, Jefferies and its affiliates may
actively trade or hold the securities of Pinnacle for their own account and
the accounts of customers and, accordingly, may at any time hold a long or
short position in securities of Pinnacle.
Based upon and subject to the foregoing, we are of the opinion as
investment bankers that the Acquisition Consideration to be received by the
holders of Pinnacle Common Stock pursuant to the Transaction is fair, from a
financial point of view, to such holders.
It is understood and agreed that this opinion is provided for the use and
benefit of the Committee as one element in its consideration of the
Transaction. Without limiting the foregoing, this opinion does not constitute
a recommendation to any shareholder of Pinnacle as to whether to tender such
holder's Pinnacle Common Stock or as to how such person should vote with
respect to the proposed Transaction.
Sincerely,
/s/ JEFFERIES & COMPANY, INC.
B-2
ANNEX C
SECTION 262 OF THE GENERAL CORPORATION LAW OF THE STATE OF DELAWARE
(S) 262. Appraisal Rights.
(a) Any stockholder of a corporation of this State who holds shares of
stock on the date of the making of a demand pursuant to subsection (d) of this
section with respect to such shares, who continuously holds such shares
through the effective date of the merger or consolidation, who has otherwise
complied with subsection (d) of this section and who has neither voted in
favor of the merger or consolidation nor consented thereto in writing pursuant
to Section 228 of this title shall be entitled to an appraisal by the Court of
Chancery of the fair value of the stockholder's shares of stock under the
circumstances described in subsections (b) and (c) of this section. As used in
this section, the word "stockholder" means a holder of record of stock in a
stock corporation and also a member of record of a nonstock corporation; the
words "stock" and "share" mean and include what is ordinarily meant by those
words and also membership or membership interest of a member of a nonstock
corporation; and the words "depository receipt" mean a receipt or other
instrument issued by a depository representing an interest in one or more
shares, or fractions thereof, solely of stock of a corporation, which stock is
deposited with the depository.
(b) Appraisal rights shall be available for the shares of any class or
series of stock of a constituent corporation in a merger or consolidation to
be effected pursuant to Section 251 (other than a merger effected pursuant to
Section 251(g) of this title), Section 252, Section 254, Section 257, Section
258, Section 263 or Section 264 of this title:
(1) Provided, however, that no appraisal rights under this section shall
be available for the shares of any class or series of stock, which stock,
or depository receipts in respect thereof, at the record date fixed to
determine the stockholders entitled to receive notice of and to vote at the
meeting of stockholders to act upon the agreement of merger or
consolidation, were either (i) listed on a national securities exchange or
designated as a national market system security on an interdealer quotation
system by the National Association of Securities Dealers, Inc. or (ii) held
of record by more than 2,000 holders; and further provided that no
appraisal rights shall be available for any shares of stock of the
constituent corporation surviving a merger if the merger did not require
for its approval the vote of the stockholders of the surviving corporation
as provided in subsection (f) of Section 251 of this title.
(2) Notwithstanding paragraph (1) of this subsection, appraisal rights
under this section shall be available for the shares of any class or series
of stock of a constituent corporation if the holders thereof are required
by the terms of an agreement of merger or consolidation pursuant to
Sections 251, 252, 254, 257, 258, 263 and 264 of this title to accept for
such stock anything except:
a. Shares of stock of the corporation surviving or resulting from
such merger or consolidation, or depository receipts in respect
thereof;
b. Shares of stock of any other corporation, or depository receipts
in respect thereof, which shares of stock (or depository receipts in
respect thereof) or depository receipts at the effective date of the
merger or consolidation will be either listed on a national securities
exchange or designated as a national market system security on an
interdealer quotation system by the National Association of Securities
Dealers, Inc. or held of record by more than 2,000 holders;
c. Cash in lieu of fractional shares or fractional depository
receipts described in the foregoing subparagraphs a. and b. of this
paragraph; or
d. Any combination of the shares of stock, depository receipts and
cash in lieu of fractional shares or fractional depository receipts
described in the foregoing subparagraphs a., b. and c. of this
paragraph.
(3) In the event all of the stock of a subsidiary Delaware corporation
party to a merger effected under Section 253 of this title is not owned by
the parent corporation immediately prior to the merger, appraisal rights
shall be available for the shares of the subsidiary Delaware corporation.
C-1
(c) Any corporation may provide in its certificate of incorporation that
appraisal rights under this section shall be available for the shares of any
class or series of its stock as a result of an amendment to its certificate of
incorporation, any merger or consolidation in which the corporation is a
constituent corporation or the sale of all or substantially all of the assets
of the corporation. If the certificate of incorporation contains such a
provision, the procedures of this section, including those set forth in
subsections (d) and (e) of this section, shall apply as nearly as is
practicable.
(d) Appraisal rights shall be perfected as follows:
(1) If a proposed merger or consolidation for which appraisal rights are
provided under this section is to be submitted for approval at a meeting of
stockholders, the corporation, not less than 20 days prior to the meeting,
shall notify each of its stockholders who was such on the record date for
such meeting with respect to shares for which appraisal rights are
available pursuant to subsections (b) or (c) hereof that appraisal rights
are available for any or all of the shares of the constituent corporations,
and shall include in such notice a copy of this section. Each stockholder
electing to demand the appraisal of such stockholder's shares shall deliver
to the corporation, before the taking of the vote on the merger or
consolidation, a written demand for appraisal of such stockholder's shares.
Such demand will be sufficient if it reasonably informs the corporation of
the identity of the stockholder and that the stockholder intends thereby to
demand the appraisal of such stockholder's shares. A proxy or vote against
the merger or consolidation shall not constitute such a demand. A
stockholder electing to take such action must do so by a separate written
demand as herein provided. Within 10 days after the effective date of such
merger or consolidation, the surviving or resulting corporation shall
notify each stockholder of each constituent corporation who has complied
with this subsection and has not voted in favor of or consented to the
merger or consolidation of the date that the merger or consolidation has
become effective; or
(2) If the merger or consolidation was approved pursuant to Section 228
or Section 253 of this title, each constituent corporation, either before
the effective date of the merger or consolidation or within ten days
thereafter, shall notify each of the holders of any class or series of
stock of such constituent corporation who are entitled to appraisal rights
of the approval of the merger or consolidation and that appraisal rights
are available for any or all shares of such class or series of stock of
such constituent corporation, and shall include in such notice a copy of
this section; provided that, if the notice is given on or after the
effective date of the merger or consolidation, such notice shall be given
by the surviving or resulting corporation to all such holders of any class
or series of stock of a constituent corporation that are entitled to
appraisal rights. Such notice may, and, if given on or after the effective
date of the merger or consolidation, shall, also notify such stockholders
of the effective date of the merger or consolidation. Any stockholder
entitled to appraisal rights may, within 20 days after the date of mailing
of such notice, demand in writing from the surviving or resulting
corporation the appraisal of such holder's shares. Such demand will be
sufficient if it reasonably informs the corporation of the identity of the
stockholder and that the stockholder intends thereby to demand the
appraisal of such holder's shares. If such notice did not notify
stockholders of the effective date of the merger or consolidation, either
(i) each such constituent corporation shall send a second notice before the
effective date of the merger or consolidation notifying each of the holders
of any class or series of stock of such constituent corporation that are
entitled to appraisal rights of the effective date of the merger or
consolidation or (ii) the surviving or resulting corporation shall send
such a second notice to all such holders on or within 10 days after such
effective date; provided, however, that if such second notice is sent more
than 20 days following the sending of the first notice, such second notice
need only be sent to each stockholder who is entitled to appraisal rights
and who has demanded appraisal of such holder's shares in accordance with
this subsection. An affidavit of the secretary or assistant secretary or of
the transfer agent of the corporation that is required to give either
notice that such notice has been given shall, in the absence of fraud, be
prima facie evidence of the facts stated therein. For purposes of
determining the stockholders entitled to receive either notice, each
constituent corporation may fix, in advance, a record date that shall be
not more than 10 days prior to the date the notice is given, provided, that
if the notice is given on or after the effective date of the merger or
consolidation, the record date shall be such effective date. If no record
date is fixed and the notice is given prior to the effective date, the
record date shall be the close of business on the day next preceding the
day on which the notice is given.
C-2
(e) Within 120 days after the effective date of the merger or
consolidation, the surviving or resulting corporation or any stockholder
who has complied with subsections (a) and (d) hereof and who is otherwise
entitled to appraisal rights, may file a petition in the Court of Chancery
demanding a determination of the value of the stock of all such
stockholders. Notwithstanding the foregoing, at any time within 60 days
after the effective date of the merger or consolidation, any stockholder
shall have the right to withdraw such stockholder's demand for appraisal
and to accept the terms offered upon the merger or consolidation. Within
120 days after the effective date of the merger or consolidation, any
stockholder who has complied with the requirements of subsections (a) and
(d) hereof, upon written request, shall be entitled to receive from the
corporation surviving the merger or resulting from the consolidation a
statement setting forth the aggregate number of shares not voted in favor
of the merger or consolidation and with respect to which demands for
appraisal have been received and the aggregate number of holders of such
shares. Such written statement shall be mailed to the stockholder within 10
days after such stockholder's written request for such a statement is
received by the surviving or resulting corporation or within 10 days after
expiration of the period for delivery of demands for appraisal under
subsection (d) hereof, whichever is later.
(f) Upon the filing of any such petition by a stockholder, service of a
copy thereof shall be made upon the surviving or resulting corporation,
which shall within 20 days after such service file in the office of the
Register in Chancery in which the petition was filed a duly verified list
containing the names and addresses of all stockholders who have demanded
payment for their shares and with whom agreements as to the value of their
shares have not been reached by the surviving or resulting corporation. If
the petition shall be filed by the surviving or resulting corporation, the
petition shall be accompanied by such a duly verified list. The Register in
Chancery, if so ordered by the Court, shall give notice of the time and
place fixed for the hearing of such petition by registered or certified
mail to the surviving or resulting corporation and to the stockholders
shown on the list at the addresses therein stated. Such notice shall also
be given by 1 or more publications at least 1 week before the day of the
hearing, in a newspaper of general circulation published in the City of
Wilmington, Delaware or such publication as the Court deems advisable. The
forms of the notices by mail and by publication shall be approved by the
Court, and the costs thereof shall be borne by the surviving or resulting
corporation.
(g) At the hearing on such petition, the Court shall determine the
stockholders who have complied with this section and who have become
entitled to appraisal rights. The Court may require the stockholders who
have demanded an appraisal for their shares and who hold stock represented
by certificates to submit their certificates of stock to the Register in
Chancery for notation thereon of the pendency of the appraisal proceedings;
and if any stockholder fails to comply with such direction, the Court may
dismiss the proceedings as to such stockholder.
(h) After determining the stockholders entitled to an appraisal, the
Court shall appraise the shares, determining their fair value exclusive of
any element of value arising from the accomplishment or expectation of the
merger or consolidation, together with a fair rate of interest, if any, to
be paid upon the amount determined to be the fair value. In determining
such fair value, the Court shall take into account all relevant factors. In
determining the fair rate of interest, the Court may consider all relevant
factors, including the rate of interest that the surviving or resulting
corporation would have had to pay to borrow money during the pendency of
the proceeding. Upon application by the surviving or resulting corporation
or by any stockholder entitled to participate in the appraisal proceeding,
the Court may, in its discretion, permit discovery or other pretrial
proceedings and may proceed to trial upon the appraisal prior to the final
determination of the stockholder entitled to an appraisal. Any stockholder
whose name appears on the list filed by the surviving or resulting
corporation pursuant to subsection (f) of this section and who has
submitted such stockholder's certificates of stock to the Register in
Chancery, if such is required, may participate fully in all proceedings
until it is finally determined that such stockholder is not entitled to
appraisal rights under this section.
(i) The Court shall direct the payment of the fair value of the shares,
together with interest, if any, by the surviving or resulting corporation
to the stockholders entitled thereto. Interest may be simple or compound,
as the Court may direct. Payment shall be so made to each such stockholder,
in the case of
C-3
holders of uncertificated stock forthwith, and the case of holders of shares
represented by certificates upon the surrender to the corporation of the
certificates representing such stock. The Court's decree may be enforced as
other decrees in the Court of Chancery may be enforced, whether such surviving
or resulting corporation be a corporation of this State or of any state.
(j) The costs of the proceeding may be determined by the Court and taxed
upon the parties as the Court deems equitable in the circumstances. Upon
application of a stockholder, the Court may order all or a portion of the
expenses incurred by any stockholder in connection with the appraisal
proceeding, including, without limitation, reasonable attorney's fees and the
fees and expenses of experts, to be charged pro rata against the value of all
the shares entitled to an appraisal.
(k) From and after the effective date of the merger or consolidation, no
stockholder who has demanded appraisal rights as provided in subsection (d) of
this section shall be entitled to vote such stock for any purpose or to
receive payment of dividends or other distributions on the stock (except
dividends or other distributions payable to stockholders of record at a date
which is prior to the effective date of the merger or consolidation);
provided, however, that if no petition for an appraisal shall be filed within
the time provided in subsection (e) of this section, or if such stockholder
shall deliver to the surviving or resulting corporation a written withdrawal
of such stockholder's demand for an appraisal and an acceptance of the merger
or consolidation, either within 60 days after the effective date of the merger
or consolidation as provided in subsection (e) of this section or thereafter
with the written approval of the corporation, then the right of such
stockholder to an appraisal shall cease. Notwithstanding the foregoing, no
appraisal proceeding in the Court of Chancery shall be dismissed as to any
stockholder without the approval of the Court, and such approval may be
conditioned upon such terms as the Court deems just.
(l) The shares of the surviving or resulting corporation to which the
shares of such objecting stockholders would have been converted had they
assented to the merger or consolidation shall have the status of authorized
and unissued shares of the surviving or resulting corporation.
C-4
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PROXY
PINNACLE ENTERTAINMENT, INC.
Proxy for Annual Meeting of Stockholders to be held August , 2000
The undersigned hereby acknowledges receipt of the Notice of Annual Meeting
of Stockholders of Pinnacle Entertainment, Inc. (the "Company") dated [ ],
2000 and the accompanying Proxy Statement relating to the above-referenced
Annual Meeting, and hereby appoints R.D. Hubbard, or in his absence, Loren S.
Ostrow, with full power to each of substitution in each, as attorneys and
proxies of the undersigned.
Said proxies are hereby given authority to vote all shares of common stock of
the Company which the undersigned may be entitled to vote at the Annual Meeting
of Stockholders of the Company, to be held at [ .m. local time, on , ,
2000, at ] and at any and all adjournments or postponements thereof on
behalf of the undersigned on the matters set forth on the reverse side hereof
and in the manner designated thereon.
This proxy is solicited by the Board of Directors of the Company, and when
properly executed, the shares represented hereby will be voted in accordance
with the instructions in this proxy. If no direction is made, this proxy will
be voted FOR the approval and adoption of the Merger Agreement and FOR the
election of all nominees named as directors of the Company.
PLEASE DATE, SIGN AND RETURN THIS PROXY CARD PROMPTLY
IN THE ENCLOSED ENVELOPE
(See reverse side)
- --------------------------------------------------------------------------------
-- FOLD AND DETACH HERE --
- --------------------------------------------------------------------------------
Please mark
your votes as [X]
indicated in
this example
WITHHOLD
AUTHORITY
1. Approval and Adoption of Agreement and Plan of Merger, WITHHOLD
dated as of April 17, 2000, by and among Pinnacle FOR AGAINST AUTHORITY
Entertainment, Inc., PH Casino Resorts, Inc. and [_] [_] [_]
Pinnacle Acquisition Corporation
2.Election of Nine Directors:
AUTHORITY
Nominees: FOR FROM
Paul R. Alanis Michael Ornest ALL ALL
R.D. Hubbard Timothy J. Parrott [_] [_]
Robert T. Manfuso Lynn P. Reitnouer
James L. Martineau Marlin Torguson
Gary G. Miller
For all nominees except:
(Instruction: To withhold authority to vote for any indi-
vidual nominee, write that nominee's name in the space
provided below).
_______________________
This Proxy will be voted as directed or, if no direction is
indicated, the proxies are authorized to vote in their dis-
cretion "FOR" the approval and adoption of the Merger Agree-
ment and "FOR" the election of the above-listed nominees or
such substitute nominee(s) for directors as the Board of Di-
rectors of Pinnacle Entertainment, Inc. shall select.
This Proxy also confers discretionary authority on the prox-
ies to vote as to any other matter that is properly brought
before the Annual Meeting that the Board of Directors did
not have notice of prior to the date specified in the Proxy
Statement.
- -------------------------------------------------------------
Dated: ___________, 2000
________________________
(Signature)
________________________
(Title)
________________________
(Signature if held
jointly)
Note: Please date and
sign exactly as your
name(s) appear on this
proxy card. If shares
are registered in more
than one name, all such
persons should sign. A
corporation should sign
in its full corporate
name by a duly autho-
rized officer, stating
his title. When signing
as attorney, executor,
administrator, trustee
or guardian, please
sign in your official
capacity and give your
full title as such. If
a partnership, please
sign in the partnership
name by an authorized
person.
- --------------------------------------------------------------------------------
-- FOLD AND DETACH HERE --