Securities and Exchange Commission
Washington, D.C. 20549
Form 10-K
[X] Annual Report Pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934
For the fiscal year ended December 31, 2001
Commission file number 0-106-619
Pinnacle Entertainment, Inc.
(Exact Name of Registrant as Specified in Its Charter)
Delaware
(State or Other Jurisdiction of
Incorporation or Organization)
95-3667491
(IRS Employer Identification No.)
330 North Brand Boulevard, Suite 1100, Glendale, California 91203
(Address of Principal Executive Offices) (Zip Code)
(818) 662-5900
(Registrant's Telephone Number, Including Area Code)
Securities registered pursuant to Section 12(b) of the Act:
Pinnacle Entertainment, Inc.
Common Stock, $.10 par value
New York Stock Exchange
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark whether registrant: (1) has filed all reports required to
be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months, and (2) has been subject to such filing requirements
for the past 90 days. YES [X] NO [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ ]
The aggregate market value of the voting stock held by non-affiliates (therefore
excludes officers, directors and beneficial owners of 10% or more) of the
registrant at March 22, 2002, was $184,802,682 based on a closing price of $8.50
per common share. This determination of affiliate status is not necessarily a
conclusive determination for other purposes.
The number of outstanding shares of the registrant's common stock, as of the
close of business on March 22, 2002: 25,443,444.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Registrant's definitive 2002 proxy statement, anticipated to be
filed with the Securities and Exchange Commission within 120 days after the
close of the Registrant's fiscal year, are incorporated by reference into Part
III of this Form 10-K.
PINNACLE ENTERTAINMENT, INC.
Table of Contents
Part I
Item 1. Description of Business ..........................................................................1
General......................................................................................1
Company Overview.............................................................................3
Gaming - Continuing Operations...............................................................3
Operations Sold..............................................................................6
Expansion Plans..............................................................................7
Competition..................................................................................8
Government Regulation and Gaming Issues.....................................................11
Federal and State Income Tax Matters........................................................24
Employees...................................................................................25
Other Information...........................................................................25
Item 2. Properties.......................................................................................26
Properties..................................................................................26
Properties and Assets Held For Sale.........................................................27
Item 3. Legal Proceedings................................................................................27
Item 4. Submission of Matters to a Vote of Security Holders..............................................31
Part II
Item 5. Market for the Registrant's Common Equity and Related Stockholder Matters........................31
Item 6. Selected Financial Data..........................................................................32
Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations............34
Forward-Looking Statements..................................................................34
Risk Factors................................................................................35
Critical Accounting Policies................................................................38
Factors Affecting Future Operating Results..................................................39
Results of Operations.......................................................................41
Liquidity, Capital Resources and Other Factors Influencing Future Results...................48
Item 7A. Quantitative and Qualitative Disclosures About Market Risk.......................................50
Item 8. Financial Statements.............................................................................50
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure.............50
Part III
Item 10. Directors and Executive Officers of the Registrant
Incorporated by reference from the Registrant's definitive 2001 proxy statement.........51
Item 11. Executive Compensation
Incorporated by reference from the Registrant's definitive 2001 proxy statement.........51
Item 12. Security Ownership of Certain Beneficial Owners and Management
Incorporated by reference from the Registrant's definitive 2001 proxy statement.........51
Item 13. Certain Relationships and Related Transactions
Incorporated by reference from the Registrant's definitive 2001 proxy statement.........51
Part IV
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K.................................51
Signatures................................................................................................59
Part I
Item 1. Description of Business
-----------------------
General
Pinnacle Entertainment, Inc. (the "Company" or "Pinnacle Entertainment"), a
Delaware corporation, is a diversified gaming company that owns and operates
seven casinos (four with hotels) in Indiana, Louisiana, Mississippi, Nevada and
Argentina and is pursuing the development of a hotel and casino resort in Lake
Charles, Louisiana. The Company also receives lease income from two card club
casinos, both in the Los Angeles metropolitan area, and, until June 30, 2001,
interest income with cash flow participation from an Indian gaming facility in
Yakima, Washington. The Company's active subsidiaries at December 31, 2001 were
as follows: (1) Boomtown, Inc., which has three active subsidiaries: Boomtown
Hotel & Casino, Inc., Louisiana Gaming Enterprises, Inc. and Louisiana - I
Gaming L.P.; (2) Casino Magic Corp., which has three active subsidiaries: Biloxi
Casino Corp., Casino Magic of Louisiana, Corp. and Casino Magic Neuquen S.A.;
(3) HP/ Compton, Inc.; (4) Realty Investment Group, Inc.; and (5) Belterra
Resort Indiana, LLC.
The Company began as a gaming, sports and entertainment company engaged in the
operation of thoroughbred and greyhound racing facilities. Pinnacle
Entertainment is the successor to the Hollywood Park Turf Club, organized in
1938. Pinnacle Entertainment was incorporated in 1981 under the name Hollywood
Park Realty Enterprises, Inc.; in 1992, as part of a restructuring, was renamed
Hollywood Park, Inc.; and in February 2000, changed its name to Pinnacle
Entertainment, Inc.
In 1997, the Company began to transform itself into a major casino operator. The
Company's strategic plan is to own and operate a broad base of regionally
diversified casino entertainment facilities by developing new properties,
expanding existing facilities and making selected acquisitions. The strategic
plan anticipates the Company will establish and maintain a prominent position in
each of the markets in which it operates. In furtherance of this strategy, the
Company completed its first strategic gaming acquisition with its purchase of
Boomtown, Inc. in June 1997. Through its Boomtown, Inc. ("Boomtown") subsidiary,
the Company owns and operates land-based gaming operations in Verdi, Nevada
("Boomtown Reno") and dockside riverboat gaming operations in Harvey, Louisiana
("Boomtown New Orleans"), which riverboat has been permanently dockside since
April 1, 2001 based on legislation enacted in late March 2001 (see "Government
Regulation and Gaming Issues - Louisiana" below). In October 1998, the Company
completed its second strategic gaming acquisition with its purchase of Casino
Magic Corp. The Company currently owns and operates, through its Casino Magic
Corp. ("Casino Magic") subsidiary, dockside gaming operations in Biloxi,
Mississippi ("Casino Magic Biloxi"); dockside riverboat gaming operations in
Bossier City, Louisiana ("Casino Magic Bossier City"); and two land-based
casinos in Argentina ("Casino Magic Argentina").
In October 2000, the Company opened the Belterra Casino Resort, a hotel and
riverboat casino resort in Switzerland County, Indiana, in which the Company
owned a 97% interest, until August 2001, at which time the remaining 3% held by
a non-voting local partner was purchased by the Company (see Note 9 to the Notes
to Consolidated Financial Statements).
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
("Churchill Downs"), a wholly owned subsidiary of Churchill Downs Incorporated,
and subleased to an unaffiliated third party operator (see Note 11 to the Notes
to Consolidated Financial Statements). The Crystal Park Hotel and Casino
("Crystal Park Casino") is owned by the Company and is leased to an affiliate of
the card club operator that now leases and operates the Hollywood Park-Casino.
In the fourth quarter of 2001, in connection with the reclassification of the
net book value to "Assets held for sale" on the Consolidated Balance Sheet at
December 31, 2001 and reductions to rent payable to the Company from the
third-party operator, the Company wrote-down the Crystal Park Casino card club
asset to its estimated fair value (see Notes 4 and 5 to the Notes to
Consolidated Financial Statements).
1
Until June 30, 2001, the Company received interest income with cash flow
participation from the Legends Casino, an Indian gaming facility in Yakima,
Washington. In June 2001, the Company received an early pay-off of the
promissory note (which amount was approximately $6,300,000 at such time) and
related Master Lease and Sublease agreements for the cumulative amount of
approximately $8,490,000. Effective with this early termination of the
promissory note and related lease agreements, the Company no longer receives
interest income nor cash flow participation income for the sublease agreements
(see Note 6 to the Notes to Consolidated Financial Statements).
In April 2000, the Company entered into a definitive agreement with PH Casino
Resorts ("PHCR"), a newly formed subsidiary of Harveys Casino Resorts, and
Pinnacle Acquisition Corporation ("Pinnacle Acq Corp"), a newly formed
subsidiary of PHCR, pursuant to which PHCR would have acquired by merger (the
"Merger") all of the outstanding capital stock of Pinnacle Entertainment for
cash consideration (the "Merger Agreement"). Consummation of the Merger was
subject to numerous conditions, including PHCR obtaining the necessary financing
for the transaction and regulatory approvals. In January 2001, the Company
announced that it had been notified by PHCR that PHCR did not intend to further
extend the outside closing date of the Merger. Since all of the conditions to
consummation of the Merger would not be met by such date, the Company, PHCR and
Pinnacle Acq Corp mutually agreed that the Merger Agreement would be terminated
(see Note 10 to the Notes to Consolidated Financial Statements).
In August 2000, the Company completed the sale of its dockside gaming facilities
in Biloxi, Mississippi ("Boomtown Biloxi") and in Bay St. Louis, Mississippi
("Casino Magic Bay St. Louis") to subsidiaries of Penn National Gaming, Inc.; in
June 2000, completed the sale of Turf Paradise, Inc. ("Turf Paradise"), a horse
racing facility in Phoenix, Arizona, to a company owned by a private investor;
and, in September 1999, completed the disposition of the Hollywood Park Race
Track and Hollywood Park-Casino to Churchill Downs (see Note 11 to the Notes to
Consolidated Financial Statements).
The Company continues to pursue the growth strategy begun in 1997 through the
enhancement of current operations (such as the $10,000,000 renovation and
expansion of the 3rd deck of the dockside riverboat casino and pavilion building
at Boomtown New Orleans and the acquisition of new slot player marketing and
tracking systems), capital improvements at certain of its existing properties
(such as the $25,000,000 expansion and renovation of the land-based amenities
and dockside riverboat casino at Casino Magic Bossier City begun in December
2001 and expected to be substantially complete by early July 2002), and the
potential development of a casino, hotel and golf course resort complex in Lake
Charles, Louisiana (see Note 8 to the Notes to Consolidated Financial
Statements).
2
Company Overview
The following is an overview of the Company's gaming properties at December 31,
2001:
Number of
------------------------
Slot Table Hotel
Property Type of Gaming Machines Games Rooms
-------- ------------------ -------- ----- -----
Operating Properties:
Belterra Casino Resort Cruising Riverboat 1,344 45 308
Boomtown Reno Land-based 1,477 38 318
Boomtown New Orleans (a) Dockside Riverboat 1,467 44 --
Casino Magic Biloxi Dockside 1,312 35 378
Casino Magic Bossier City Dockside Riverboat 1,148 36 188
Casino Magic Argentina (b) Land-based 584 50 --
----- --- -----
Property Total 7,332 248 1,192
===== === =====
Card Clubs Leased:
Hollywood Park-Casino (c) Card Club -- 120 --
Crystal Park Casino (c) Card Club -- 21 237
----- --- -----
Card Club Total -- 141 237
===== === =====
(a) Beginning April 1, 2001, the riverboat casino has remained permanently
dockside, based on legislation enacted in late March 2001 (see "Government
Regulation and Gaming Issues - Louisiana" below).
(b) There are two separate land-based casinos in Argentina, Casino Magic Neuqen
and Casino Magic San Martin de los Andes, collectively, Casino Magic
Argentina.
(c) The Company does not operate these properties. The Company owns the Crystal
Park Casino and leases the Hollywood Park-Casino (see Note 11 to the Notes
to Consolidated Financial Statements). The Company leases/ subleases both
properties to an unaffiliated operator, for a fixed monthly rent.
Gaming - Continuing Operations
Belterra Casino Resort Belterra Casino Resort opened on October 27, 2000 on 315
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acres of land adjacent to the Ohio River near Vevay, Indiana, approximately 45
miles southwest of downtown Cincinnati, Ohio. Belterra is the closest gaming
facility to portions of northeast Kentucky and southeast Indiana.
The property features a cruising riverboat casino, the Miss Belterra, with
38,000 square feet of casino space, 1,344 slot machines and 45 table games. The
property also features a 15-story, 308-room hotel with 11 suites, six
restaurants, retail area, a 1,500-seat entertainment showroom, a spa and a Tom
Fazio designed 18-hole championship golf course (which opened in July 2001). The
property provides 2,000 parking spaces, most of which are in a multi-level
parking structure.
Prior to August 2001, the Company owned a 97% interest in the Belterra Casino
Resort, with the remaining 3% held by a non-voting local partner. In November
2000, the Company entered into an agreement with the local partner whereby the
local partner had the right to require the Company to purchase, for a purchase
price determined in accordance with the agreement, its entire ownership interest
in the Belterra Casino Resort at any time on or after January 1, 2001. A
$100,000 deposit toward such ultimate purchase price was made by the Company to
the partner at that time. In July 2001, the local partner exercised the right to
require the Company to purchase the remaining 3% ownership interest held by the
partner for approximately $1,600,000 as calculated in accordance with the
agreement. In August 2001, the remaining payment of approximately $1,500,000 was
made to the partner and, as such, the Belterra Casino Resort is now wholly owned
by the Company.
Boomtown Reno The Company's Boomtown subsidiary operates two Boomtown
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properties: Boomtown Reno and Boomtown New Orleans. Boomtown Reno is a
land-based facility that has been operating for over 30 years on 569 acres near
Verdi, Nevada, directly off Interstate 80, the primary highway connecting
northern Nevada to northern California. Depending on the direction of travel,
Boomtown Reno is either the first or the last casino and hotel complex in Nevada
seen when traveling on Interstate 80.
3
The hotel features 318 rooms, and the 45,000 square foot casino contains 1,477
slot machines and 38 table games. In the second quarter of 1999, the Company
completed a $30,000,000 expansion and renovation project at Boomtown Reno that
added 196 hotel rooms, including 24 luxury suites, and over 10,000 square feet
of new convention space, as well as the renovation of major portions of the
casino space and certain restaurants. The property features four restaurants, an
80-seat lounge, a 25,000 square foot amusement center, 10,250 square feet of
meeting space and an indoor pool. In addition to the casino/ hotel, the property
also includes a full-service truck stop, a gas station/ mini-mart, a 203-space
RV park and 1,351 parking spaces.
The Company owns the 569 acres in Verdi, Nevada on which Boomtown Reno is
located, with current operations of Boomtown Reno presently utilizing
approximately 61 acres. Of the 508 excess acres, the Company considers
approximately 250 acres suitable for development. The Company may seek to sell
such excess acreage to interested developers or investors. The Company owns all
of the improvements and facilities at the property, including the casino, hotel,
truck stop, recreational vehicle park and service station, along with the
related water rights.
Boomtown New Orleans Boomtown New Orleans opened in Harvey, Louisiana in August
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1994 on a 54-acre site located approximately ten miles from downtown New Orleans
in the West Bank suburban area. Boomtown New Orleans is a dockside riverboat
gaming facility that features a riverboat, the Boomtown Belle II, containing
1,467 slot machines and 44 table games and a land-based pavilion comprised of
88,000 square feet and features two restaurants, a deli, a 350-seat nightclub,
21,000 square feet of meeting space, a banquet facility and an amusement center.
The facility also provides 1,729 parking spaces.
In 2001, in response to the legislation enacted in April 2001 enabling all
riverboat casinos in southern Louisiana to remain dockside at all times (see
"Government Regulations and Gaming Issues - Louisiana" below), the Company
commenced a $10,000,000 capital expenditure project, which included the
renovation of the pavilion building and the 3rd deck of the dockside riverboat
casino. Such renovation also included adding 300 new slot machines and the
construction of a high-limit table games area on the 3rd deck of the riverboat
casino and the renovation of various food and beverage outlets in the pavilion
building adjacent to the dockside riverboat casino. Such construction is
expected to be completed by or near the end of the first quarter of 2002.
The Company owns the 54 acres in Harvey, Louisiana, the riverboat and land based
facilities which are utilized by Boomtown New Orleans.
Casino Magic Biloxi Casino Magic Biloxi is a dockside barge located on 16 acres
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on the Mississippi Gulf Coast and features a dockside casino barge. The facility
began operation in June 1993. The property is situated on the beach of the Gulf
of Mexico, in the center of a cluster of three casinos known as "Casino Row". In
1998, the Company opened a 378-room hotel, including 86 suites, at the property.
The property features a 49,260 square foot casino providing 1,312 slot machines
and 35 table games. The facility also contains four restaurants, 6,600 square
feet of convention space and a health club. The property currently provides
1,315 parking spaces. In early 2001, the Company evaluated plans to build a
parking garage on the property, but elected to defer such project indefinitely.
Of the 16 acres on which Casino Magic Biloxi is located, the Company owns
approximately 4.5 acres and leases approximately 11.5 acres, including
approximately 6.4 acres of submerged tidelands leased from the state of
Mississippi. The tidelands are under a ten-year lease that expires on May 31,
2003, with an option to extend the term for five years under the same terms and
conditions, subject to the renegotiation of annual rent. The remaining leased
land is leased pursuant to leases that expire on June 30, 2003, each with
options to extend the terms thereof for additional five-year periods. The
Company owns the barge on which the casino is located and all of the land-based
facilities, including the hotel.
4
Casino Magic Bossier City Casino Magic Bossier City is a dockside facility
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located in Bossier City, Louisiana. The property opened in October 1996 on a
site directly off, and highly visible from, Interstate 20, a major thoroughfare
connecting Shreveport/Bossier City to Dallas/Fort Worth, a three-hour drive
away.
Gaming is conducted on a dockside riverboat casino that does not cruise. The
dockside riverboat casino provides 1,148 slot machines and 36 table games. In
December 1998, the Company opened a 188-room hotel, including four master suites
and 88 junior suites, adjacent to the land-based pavilion. The facility provides
2,100 parking spaces.
In the third quarter of 2001, based on continued competitive market conditions
and the slower than anticipated growth of the Shreveport/ Bossier City gaming
market, the Company elected to downsize its prior $110,000,000 expansion plans
for the Casino Magic Bossier City facility. Such construction now consists of a
$25,000,000 renovation and expansion project and includes remodeling of the
existing pavilion building and dockside riverboat casino, all new restaurants
and a new multi-purpose showroom. Such renovation and expansion commenced in
December 2001 and is expected to be substantially complete in early July 2002.
Concurrently with the completion of the renovation and expansion project, the
Company anticipates re-branding the facility to "Boomtown Bossier City".
Casino Magic Bossier City is located on 23 acres of land owned by the Company,
adjacent to the Red River in Bossier City, Louisiana. The Company owns the 23
acres of land, dockside riverboat casino, hotel, parking structure and other
land-based facilities on the property. The Company leases approximately one acre
of water bottoms from the state of Louisiana pursuant to a lease due to expire
in September 2006.
Casino Magic Argentina The Company operates two land-based casinos in the cities
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of Neuquen and San Martin de los Andes in the Province of Neuquen, Argentina.
The larger of the two casinos is located in the city of Neuquen and contains 38
table games, 484 slot machines and a 384-seat bingo facility. The smaller
facility, located in San Martin de los Andes, has 12 table games and 100 slot
machines. The Company does not own any real property at these sites.
The casinos opened in 1995 and are operated under a 12-year concession agreement
with the Province that expires in December 2006. In August 2001, the Company and
the Province entered into an agreement whereby the concession contract will be
extended for an additional fifteen years if Casino Magic Argentina invests in
the development of a new casino facility and related amenities in accordance
with the terms of the agreement. Due to recent political and economic
instability in Argentina, including the currency devaluation in January 2002
(see Note 3 to the Notes to Consolidated Financial Statements), the Company is
considering its long-term options regarding Argentina and therefore, there are
no assurances the Company will invest additional capital in Casino Magic
Argentina.
The Province of Neuquen is located in west-central Argentina and is the gateway
to the well-established tour destinations and ski resorts of the Andes
Mountains. There are no other gaming casino facilities within the Province;
however, in the Province of Rio Negro (which is immediately adjacent to the
Province of Neuquen), there is a casino smaller than Casino Magic Argentina's
Neuquen facility approximately 10 miles from such facility.
California Card Club Leases The Company receives lease income from two card
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clubs in the Los Angeles, California area: the Hollywood Park-Casino and the
Crystal Park Casino. The Company leases the Hollywood Park-Casino from Churchill
Downs California Company, a wholly owned subsidiary of Churchill Downs
Incorporated, and subleases it to an unaffiliated third party operator. The
Crystal Park Casino is owned by the Company and is leased to an affiliate of the
card club operator that leases and operates the Hollywood Park-Casino. The
Hollywood Park-Casino and Crystal Park Casino are not operated by the Company
because public corporations that are not qualified California Racetrack
Associations may not directly operate gambling enterprises in California (see
"Government Regulation and Gaming Issues - California").
5
The Hollywood Park-Casino is located in Inglewood, California, and is part of
the complex which includes the Hollywood Park Race Track. The Hollywood
Park-Casino contains approximately 30,000 square feet of card club gaming space,
offering 120 table games, and 30,000 square feet of retail and restaurant space.
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 (see Note
11 to the Notes to Consolidated Financial Statements).
The Crystal Park Casino, located on twenty acres in Compton, California, opened
in October 1996. The Crystal Park Casino contains approximately 40,000 square
feet of gaming and banquet space with 21 gaming tables. The adjoining hotel
contains 237 rooms, including 32 suites. The Company owns the approximately
twenty acres on which the casino facility, adjoining hotel and parking is
located. Prior to February 2001, the Company leased the adjoining hotel and
approximate 35 acres of unimproved land from the city of Compton under a 50-year
lease. In February 2001, in order to obtain full title to the property, the
Company purchased the hotel tower and approximately 14 acres of the leased land
for approximately $3,400,000. In the fourth quarter of 2001, in connection with
the reclassification of the net book value to "Assets held for sale" on the
Consolidated Balance Sheet at December 31, 2001 and reductions to rent payable
to the Company from the third-party operator, the Company wrote-down the Crystal
Park Casino card club asset to its estimated fair value (see Note 5 to the Notes
to Consolidated Financial Statements).
Other Gaming In 1998, the Company, through its wholly owned subsidiary HP
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Yakama, Inc. ("HP Yakama"), loaned approximately $9,618,000 to the Yakama Tribal
Gaming Corporation (the "Tribal Corporation") to construct the Legends Casino in
Yakima, Washington. The Tribal Corporation gave HP Yakama a promissory note for
the $9,618,000, payable in 84 equal monthly installments at a 10% rate of
interest.
Pursuant to a seven year Master Lease between HP Yakama and the Confederated
Tribes and Bands of the Yakama Indian Nation (the "Tribes"), HP Yakama was
required to pay the Tribes monthly rent of $1,000. HP Yakama and the Tribal
Corporation concurrently entered into a corresponding seven-year Sublease, under
which the Tribal Corporation owed rent to HP Yakama. Such rent under the
Sublease was initially set at 28% of Net Revenues (as defined in the relevant
agreements), and decreased to 22% over the seven-year term of the lease.
In June 2001, the Company received an early pay-off of the promissory note
(which amount was approximately $6,300,000 at such time) and related Master
Lease and Sublease agreements for a cumulative amount of approximately
$8,490,000. After deducting for cash participation receivables through June 30,
2001, and certain closing costs, the Company's pre-tax gain from the transaction
(which was recorded in the second quarter of 2001) was approximately $639,000.
Effective with this early termination of the promissory note and related lease
agreements, the Company no longer receives interest income nor cash flow
participation income for the sublease agreements.
General For a discussion of risk factors related to the Company's business and
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operations, see "Item 7 Management's Discussion and Analysis of Financial
Condition and Results of Operations - Forward-Looking Statements," "-Risk
Factors" and "-Factors Affecting Future Operating Results".
Operations Sold
Boomtown Biloxi Boomtown Biloxi, located in Biloxi, Mississippi, was sold to a
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subsidiary of Penn National Gaming in August 2000 (see Note 11 to the Notes to
Consolidated Financial Statements). The Company has granted Penn National a
license to use the "Boomtown" name and trademark for its Biloxi location only,
subject to certain restrictions. The license is until the later of August 1,
2003 or two years following the date on which the Company notifies Penn National
of its intent to abandon the "Casino Magic" name. If the Company decides to
abandon all use of the "Boomtown" name, Penn National has a right to acquire the
name for a two-year period from the Company's notice of intent to abandon.
Currently, the Company does not anticipate abandoning either the "Boomtown" or
"Casino Magic" names.
6
Casino Magic Bay St. Louis Casino Magic Bay St. Louis, located in Bay St. Louis,
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Mississippi, was sold to a subsidiary of Penn National Gaming in August 2000
(see Note 11 to the Notes to Consolidated Financial Statements). The Company has
granted Penn National a perpetual license to use the "Casino Magic" name and
trademark for its Bay St. Louis location only, subject to certain restrictions.
If the Company decides to abandon all use of the "Casino Magic" name, Penn
National has a right to acquire the name for a two-year period from the
Company's notice of intent to abandon.
Turf Paradise Race Track Turf Paradise, located in Phoenix, Arizona, was sold in
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June 2000 (see Note 11 to the Notes to Consolidated Financial Statements). The
property, as operated by the Company, conducted one continuous live thoroughbred
race meet from September through May.
Hollywood Park Race Track and Hollywood Park-Casino The Hollywood Park Race
- ---------------------------------------------------
Track, at which the Company conducted live thoroughbred racing meets, and the
adjacent Hollywood Park-Casino, located in Inglewood, California, were sold in
September 1999 and the Hollywood Park-Casino was then leased back to the Company
(see Note 11 to the Notes to Consolidated Financial Statements).
Expansion Plans
The following is a summary of the property enhancements and expansion projects
that the Company undertook, or is undertaking, with respect to its properties.
Boomtown New Orleans During 2001, the Company commenced a $10,000,000 renovation
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and expansion project at Boomtown New Orleans that included the addition of 300
new slot machines and a new high-limit table games area on the 3rd deck of the
dockside riverboat casino and renovation of various food and beverage outlets
and other amenities within the pavilion building adjacent to the riverboat
casino. Such construction is expected to be completed by or near the end of the
first quarter of 2002.
Casino Magic Bossier City In December 2001, Casino Magic Bossier City commenced
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a $25,000,000 renovation and expansion project that includes remodeling of the
existing pavilion building and dockside riverboat casino, all new restaurants
and a new multi-purpose showroom. Such renovation and expansion commenced in
December 2001 and is expected to be substantially completed in early July 2002.
Concurrently with the completion of the renovation and expansion project, the
Company anticipates re-branding the facility to "Boomtown Bossier City".
Belterra Casino Resort In October 2000, the Company completed construction of
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and opened the Belterra Casino Resort, a hotel and casino resort in southern
Indiana. The property, located on 315 acres adjacent to the Ohio River in
Switzerland County, Indiana, (which is approximately 45 miles southwest of
downtown Cincinnati, Ohio), features a 15-story, 308-room hotel, a cruising
riverboat casino (the Miss Belterra) with 1,344 slot machines and 45 table
games, an 18-hole Tom Fazio-designed championship golf course (which opened July
2001), six restaurants, a 1,500-seat entertainment showroom, a spa, retail areas
and other amenities.
Lake Charles In November 1999, the Company filed an application for the
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fifteenth and final gaming license to be issued by the Louisiana Gaming Control
Board (the "Gaming Control Board"). In July 2000, the Company was one of three
groups that presented their proposed projects to the Gaming Control Board. On
October 16, 2001, the Company was selected by the Gaming Control Board to
receive the license. Issuance of the license is subject to a number of
conditions, which conditions were finalized by the Company and the Gaming
Control Board in November 2001 (the "Lake Charles Conditions"). The Lake Charles
Conditions include, but are not limited to, the approval of the voters of
Calcasieu Parish, where the Lake Charles project is located, currently scheduled
for April 6, 2002. There are no assurances that the Company will be successful
in such referendum.
In addition to the April 6, 2002 Calcasieu Parish vote noted above, other Lake
Charles Conditions include, but are not limited to, building a facility
consistent with the July 2000 presentation, meeting certain construction
milestone dates and satisfying the financing requirements to complete the
project (including segregating
7
$22,500,000 in a refundable "escrow" account upon the voter approval of the
project in Calcasieu Parish and demonstrating the financial resources in cash
and available credit facility access for the full project amount of $225,000,000
once construction commences in the second half of 2002). The Company anticipates
it will continue to meet each of the Lake Charles Conditions, however there can
be no assurances the Company will do so, in which event the Company would not be
licensed to operate a casino in Lake Charles, Louisiana.
The proposed project is the construction and operation of a $225,000,000
(excluding capitalized interest) dockside riverboat casino, hotel and golf
course resort complex in Lake Charles, Louisiana. The Company is considering
various financing options for the development of the proposed project (and
therefore compliance with the financing requirement of the Lake Charles
Conditions), including, but not limited to, utilizing the Company's existing
credit facility (see Note 14 to the Notes to Consolidated Financial Statements),
a new credit facility or other senior debt and joint venture arrangements. The
Company anticipates building a facility similar in design and scope to that of
Belterra Casino Resort. See "Competition-Lake Charles Market" below for a
discussion of competition in the Lake Charles market and the possible impact on
an expansion of Indian gaming in Louisiana on the Company's decision to proceed
with this project.
There can be no assurance that the Company will be successful in completing any
currently contemplated or future expansion projects or, even if they are
completed, that the projects will be successful. Numerous factors, including
regulatory or financial constraints, could intervene and cause the Company to
alter, delay or abandon expansion plans. Such risks include an inability to
secure required financing or required local gaming approvals or other permits
and approvals, as well as risks typically associated with any construction
project, including possible shortages of materials or skilled labor, unforeseen
engineering, environmental or geological problems, work stoppages, weather
interference and unanticipated costs overruns. In addition, the Company is
subject to state and local laws and regulations, ordinances and similar
provisions relating to zoning and other matters that may restrict the possible
uses of the Company's land and other assets. Any additional development of the
Company's land, including the expansion plans described above, may require
approval of such items as environmental impact reports or other similar
certifications. There can be no assurance that other requisite approvals would
be obtained.
Competition
The Company faces significant competition in each of the jurisdictions in which
it has established gaming operations, and such competition is expected to
intensify in some of these jurisdictions as new gaming operations enter these
markets and existing competitors expand their operations. The Company's
properties compete directly with other gaming properties in Indiana, Louisiana,
Mississippi, Nevada, and Argentina, as well as in states adjacent to the
Company's properties. To a lesser extent, the Company also competes for
customers with other casino operators in North American markets, including
casinos located on Indian reservations, and other forms of gaming such as
lotteries and internet gaming. Many of the Company's competitors are larger,
have substantially greater name recognition and marketing resources as well as
access to lower cost sources of financing. Moreover, consolidation of companies
in the gaming industry could increase the concentration of large gaming
companies in the markets in which the Company operates, and may result in the
Company's competitors having even greater resources, name recognition and
licensing prospects than such competitors currently enjoy.
Ohio River Valley Market The Company operates the Belterra Casino Resort in the
- ------------------------
Ohio River Valley market, which competes with four other cruising riverboats.
The primary competitors are the Grand Victoria riverboat casino in Rising Sun,
operated by Hyatt, the Caesar's riverboat casino in Harrison County, operated by
Park Place Entertainment, and the Argosy riverboat casino in Lawrenceburg. Gross
gaming revenues in 2001 from the five riverboats in this market grew 11.6% over
year 2000.
In addition to competition from existing riverboats in southern Indiana, the
property is at risk from the possible legislative approval of casino type gaming
in Kentucky. Northern Kentucky is a significant feeder market to the Ohio River
Valley riverboat casino operators. Currently legislation is being discussed in
Kentucky which would approve the installation and operation of slot machines at
thoroughbred race tracks in the state, including
8
Turfway Park in nearby Florence, Kentucky and other horse racing tracks in the
Lexington and Louisville, Kentucky areas. In the event Kentucky were to approve
such an expansion of casino type gaming, it would, in all probability, have a
material adverse impact on the Company's operations at Belterra Casino Resort.
Bossier City/Shreveport Market The Company operates Casino Magic Bossier City in
- ------------------------------
this market. The property competes directly with four other dockside riverboat
gaming facilities, one of which, the Hollywood Casino, opened in December 2000,
and another of which, Harrah's Casino, opened a new 500-room hotel tower in
January 2001. The largest and most successful is Horseshoe Casino, which has a
606-room luxury hotel and has the largest riverboat, at 62,400 square feet
(though all of the casinos in Louisiana are limited to 30,000 square feet of
gaming space). Isle of Capri Casinos completed construction of a 305-room hotel
in mid-1999. Competition is negatively affecting the Company in this market
since the market did not grow as initially anticipated following the opening of
the new Hollywood Casino in late 2000 and the new Harrah's hotel tower in early
2001. As such, the additional competition in the market, without the benefit of
substantial growth, has caused operators in the market to pursue and draw from
the existing customer base and effectively reduce Casino Magic Bossier City's
market share. Additionally, if gaming were legalized in jurisdictions near the
property where gaming currently is not permitted, the Company could face
additional competition. For example, the Arkansas Attorney General certified for
the November 2000 general election ballot at least three ballot initiatives,
including a proposed constitutional amendment that would have permitted casino
gambling in Arkansas. Although none of the initiatives were approved in the
November 2000 election, there can be no assurance that similar initiatives will
not be proposed in the future. The Bossier City property could be negatively
impacted by the existence of gaming in Arkansas.
New Orleans Market The Company operates its Boomtown New Orleans property in
- ------------------
Harvey, Louisiana, approximately ten miles from downtown New Orleans, on the
"Westbank" in Jefferson Parish. Boomtown New Orleans directly competes with two
other dockside riverboat casinos, Bally's and Treasure Chest, and Harrah's Jazz
land-based casino and entertainment facility in downtown New Orleans. The
Harrah's Jazz casino has over 100,000 square feet of gaming space and over 3,600
gaming positions compared with Boomtown New Orleans, which has less than 30,000
square feet gaming space and 1,775 gaming positions. Dockside riverboat casinos,
including Boomtown New Orleans, are restricted by Louisiana gaming regulations
from expanding the gaming space beyond 30,000 square feet.
Lake Charles Market The Company is contemplating the development and operation
- -------------------
of a dockside riverboat casino in Lake Charles, Louisiana. In February 2002, it
was announced that the Governor of Louisiana signed a compact with the Jena Band
of Choctaw Indians (the "Choctaw Indians") to allow for the development and
operation of a land-based casino in the city of Vinton, Louisiana (which city is
in Calcasieu Parish and is 20 miles closer to Houston, Texas, the major
marketing area for casinos in Lake Charles, than the Company's proposed Lake
Charles project). In March 2002, such compact was disapproved by the U.S.
Department of the Interior. There can be no assurances the Choctaw Indians will
not seek to amend the compact, negotiate a revised compact with the state of
Louisiana and seek to resubmit with the Department of the Interior. In the event
the Choctaw Indians are successful in obtaining the approval of the Department
of the Interior for a new compact for their site in Vinton, Louisiana, the
Company believes such facility would have a material adverse effect upon the
Company's decision to develop it's proposed Lake Charles project. In the absence
of an additional Indian gaming facility in Calcasieu Parish (as one currently
exists to the east of the Company's proposed Lake Charles project), the Company
anticipates building a facility similar in design and scope to that of Belterra
Casino Resort.
In addition to the existing Indian gaming facility located to the east of the
Company's proposed Lake Charles project, there are four dockside riverboat
gaming licenses in the Lake Charles market, operated by two different companies
(each company operating two of the dockside riverboat casinos). The Company
believes its proposed Lake Charles casino and resort, if developed to the size
and scope initially contemplated, would be superior to the existing dockside
riverboat casino facilities.
Finally, competing in the Lake Charles gaming market is a horse race track
facility ("Delta Downs") that was recently renovated to accommodate
approximately 1,500 slot machines and various food and beverage
9
outlets. Delta Downs is closer to the Texas border than the Company's proposed
site, yet is not located immediately off Interstate 10, the main thoroughfare
between the Lake Charles area and the Houston, Texas market. Although Delta
Downs is closer to the main feeder market for the Lake Charles gaming market,
the Company believes its proposed Lake Charles project, if developed to the size
and scope initially contemplated, would be superior in design and scope to Delta
Downs.
Gulf Coast Market The Company operates Casino Magic Biloxi in the Gulf Coast
- -----------------
Market. The Mississippi gaming industry is ranked third in the United States,
behind Nevada and New Jersey. The Gulf Coast Market for 2001 was estimated to
have generated gaming revenues of $1.15 billion, which was approximately 43% of
the revenue generated by the entire Mississippi gaming market. One of the major
reasons for the growth was the entry of MGM/Mirage Resorts Beau Rivage Resort,
which opened in March 1999. Currently, Mississippi law does not limit the number
of gaming licenses that may be granted. Competition is negatively affecting the
Company in this market, as operators in the market, including the Company's
Casino Magic Biloxi property, are aggressively marketing their properties to
existing and prospective customers. Such marketing programs by competitors have
eroded some of Casino Magic Biloxi's revenues. These same programs implemented
by Casino Magic Biloxi can affect such revenue erosion, but do increase the
overall marketing expense of the property.
Reno Markets and California, Proposition 1A In Nevada, the Company operates
- -------------------------------------------
Boomtown Reno and in California, leases the Hollywood Park-Casino and the
Crystal Park Casino (both of which are California card clubs) to a third party
operator. Indian tribes have operated casinos in California for approximately
ten years, and currently there are approximately 40 Indian tribes operating
gambling halls, though most are significantly smaller than the typical Las Vegas
casino. In March 2000, California voters passed Proposition 1A, a ballot
initiative that allows Indian tribes to conduct various gaming activities
including horse race wagering, gaming devices (including slot machines), banked
card games (as in traditional Las Vegas card games) and lotteries. As a result
of the passage of Proposition 1A in California, additional Indian gaming casinos
have begun to open, and the Company expects additional Indian gaming casinos
will open in the future. Such new competition has begun to impact the Reno
market, including the Company's Boomtown Reno location, although the property
has faired better than most other operators in the market due to its location
immediately off of Interstate 80, the main thoroughfare between northern
California and northern Nevada. The Company expects further market pressures to
affect both the Reno market and Boomtown Reno in the future as more Indian
gaming casinos open, which may lower future revenue and cause increased
marketing costs to retain and attract customers for Reno gaming facilities,
including Boomtown Reno.
Card Clubs The Hollywood Park-Casino and the Crystal Park Casino face
- ----------
significant competition from other card club casinos in neighboring cities, as
well as competition from other forms of gaming around southern California,
including horse racing and Indian gaming.
Argentina The Company's current concession agreement with the Province of
- ---------
Neuquen provides for the exclusive operation of casinos in the province.
However, in the Province of Rio Negro, immediately adjacent to the Province of
Neuquen, there is a casino approximately 10 miles from Casino Magic Argentina's
Neuquen operations. Although such facility is smaller than Casino Magic
Argentina's Neuquen facility, there can be no assurance such facility will not
expand its facility and draw additional customers from the Company's casino.
General While the Company believes that it has been able to adequately compete
- -------
in these markets to date, increasing competition may adversely affect gaming
operations in the future. The Company believes that increased legalized gaming
in other states, particularly in areas close to its existing gaming properties,
such as in Texas, Alabama, Arkansas, Ohio or Kentucky, or the expansion of
Indian gaming in or near the states in which the Company operates, could create
additional competition for the Company and could adversely affect its
operations.
10
Government Regulation and Gaming Issues
Indiana The ownership and operation of riverboat casinos at Indiana-based sites
- -------
are subject to extensive state regulation under the Indiana Riverboat Gaming Act
("Indiana Act"), as well as regulations which the Indiana Gaming Commission (the
"Indiana Commission") has adopted pertaining to the Indiana Act. The Indiana Act
and regulations are significant to the Company's prospects for successfully
operating the Belterra facility.
The Indiana Act grants broad and pervasive regulatory powers and authority to
the Indiana Commission. Comprehensive regulations have been adopted covering
ownership and reporting for licensed riverboat casinos together with "rules of
the game" governing riverboat casino operations. The Indiana Commission has also
adopted a set of regulations under the Indiana Act which govern a series of
operational matters for Indiana riverboat casinos.
Among the regulations adopted by the Indiana Commission is one dealing with
riverboat excursions, routes and public safety. The Indiana Act requires
licensed riverboat casinos to be cruising vessels, and the regulations carry out
the legislative intent by requiring cruising with appropriate recognition of
public safety needs. The regulations explicitly preclude "dockside gambling".
Riverboat gaming excursions are limited to a maximum duration of four hours
unless otherwise expressly approved by the Indiana Commission. Excursion routes
and schedules are subject to the approval of the Indiana Commission. No gaming
may be conducted while the boat is docked except: (1) for thirty-minute
embarkment and disembarkment periods at the beginning and end of a cruise; (2)
if the master of the riverboat reasonably determines that specific weather or
water conditions present a danger to the riverboat, its passengers and crew; (3)
if either the vessel or the docking facility is undergoing mechanical or
structural repair; (4) if water traffic conditions present a danger to the
riverboat, riverboat passengers and crew, or to other vessels on the water, or
(5) if the master has been notified that a condition exists that would cause a
violation of Federal law if the riverboat were to cruise.
For Ohio River excursions, such as those Belterra conducts from its Switzerland
County development, "full excursions" must be conducted at all times during the
year unless the master determines otherwise, for the above-stated reasons. A
"full excursion" is a cruise on the Ohio River. The Ohio River has waters in
both Indiana and Kentucky. The cruise route employed by Belterra is completely
in Indiana waters on the Ohio River with no need or likelihood of entering
Kentucky waters. Therefore, Kentucky laws precluding any kind of casino gaming
have no impact on the Belterra operations.
An Indiana riverboat owner's license has an initial effective period of five
years; thereafter, a license is subject to annual renewal. The Indiana
Commission has broad discretion over the initial issuance of licenses and over
the renewal, revocation, suspension and control of riverboat owner's licenses.
Belterra will be subject to a reinvestigation in 2003 to ensure it continues to
be in compliance with the Indiana Act. Officers, directors and principal owners
of the actual license holder and employees who are to work on the riverboat are
subject to substantial disclosure requirements as a part of securing and
maintaining necessary licenses. Significant contracts to which Belterra is party
are subject to disclosure and approval processes imposed by the regulations. A
riverboat owner's licensee may not enter into or perform any contract or
transaction in which it transfers or receives consideration which is not
commercially reasonable or which does not reflect the fair market value of the
goods or services rendered or received. All contracts are subject to disapproval
by the Indiana Commission. Suppliers of gaming equipment and materials must also
be licensed under the Indiana Act.
Licensees are statutorily required to disclose to the Indiana Commission the
identity of all directors, officers and persons holding direct or indirect
beneficial interests of 1% or greater. The Indiana Commission also requires a
broad and comprehensive disclosure of financial and operating information on
licensees and their principal officers, and their parent corporations and other
upstream owners. The Company and Belterra have provided full information and
documentation to the Indiana Commission, and they must continue to do so
throughout the period of licensure. The Indiana Act prohibits contributions to a
candidate for a state, legislative, or local
11
office, or to a candidate's committee or to a regular party committee by the
holder of a riverboat owner's license or a supplier's license, by an officer of
a licensee, by an officer of a person that holds at least a 1% interest in the
licensee or by a person holding at least a 1% interest in the licensee. The
Indiana Commission has promulgated a rule requiring quarterly reporting by such
licensees, officers, and persons.
Adjusted gross receipts from gambling games authorized under the Indiana Act are
subject to a tax at the rate of 20%. "Adjusted gross receipts" means the total
of all cash and property received from gaming operations less cash paid out as
winnings and uncollectible gaming receivables (not to exceed 2%). The Indiana
Act also prescribes an additional tax for admissions, based upon $3 per person
per excursion. Real Property taxes are imposed on riverboats at rates determined
by local taxing authorities. Income to the Company from Belterra is subject to
the Indiana gross income tax, the Indiana adjusted gross income tax and the
Indiana supplemental corporate net income tax. Sales on a riverboat and at
related resort facilities are subject to applicable use, excise and retail
taxes. The Indiana Act requires a riverboat owner licensee to directly reimburse
the Indiana Commission for the costs of inspectors and agents required to be
present while authorized gaming is conducted.
Through the establishment of purchasing "goals," the Indiana Act encourages
minority and women's business enterprise participation in the riverboat gaming
industry. Each riverboat licensee must establish goals of at least 10% of total
dollar value of the licensee's contracts for goods and services with minority
business enterprises and 5% with women business enterprises. The Indiana
Commission may suspend, limit or revoke the owner's license or impose a fine for
failure to comply with the statutory requirements. The Indiana Commission has
indicated it will be vigilant in monitoring attainment of these goals. The
Company is currently in compliance with such purchasing goals, but has failed to
achieve such goals at various times in the past.
Minimum and maximum wagers on games on the riverboat are left to the discretion
of the licensee. Wagering may not be conducted with money or other negotiable
currency. There are no statutory restrictions on extending credit to patrons;
however, the matter of credit continues to be a matter of potential legislative
action.
If an institutional investor acquires 5% or more of any class of voting
securities of a holding company of a licensee, the investor is required to
notify the Indiana Commission and to provide additional information, and may be
subject to a finding of suitability. Institutional investors who acquire 15% or
more of any class of voting securities are subject to a finding of suitability.
Any other person who acquired 5% or more of any class of voting securities of a
holding company of a licensee is required to apply to the Indiana Commission for
a finding of suitability. A riverboat licensee or an affiliate may not enter
into a debt transaction of $1,000,000 or more without approval of the Indiana
Commission. The Indiana Commission has taken the position that a "debt
transaction" includes increases in maximum amount available under reducing
revolving credit facilities. A riverboat owner's license is a revocable
privilege and is not a property right under the Indiana Act. A riverboat owner
licensee or any other person may not lease, hypothecate, borrow money against or
loan money against or otherwise securitize a riverboat owner's license.
Louisiana The ownership and operation of a riverboat gaming vessel is subject to
- ---------
the Louisiana Riverboat Economic Development and Gaming Control Act (the
"Louisiana Act"). As of May 1, 1996, gaming activities are regulated by the
Louisiana Gaming Control Board (the "Board"). The Board is responsible for
issuing the gaming license and enforcing the laws, rules and regulations
relative to riverboat gaming activities. The Board is empowered to issue up to
fifteen licenses to conduct gaming activities on a riverboat of new construction
in accordance with applicable law. However, no more than six licenses may be
granted to riverboats operating from any one designated waterway.
An initial license to conduct gaming operations is valid for a term of five
years. The Louisiana Act provides for successive five year renewals after the
initial five year term.
The laws and regulations of Louisiana seek to: (i) prevent unsavory or
unsuitable persons from having any direct or indirect involvement with gaming at
any time or in any capacity; (ii) establish and maintain
12
responsible accounting practices and procedures; (iii) maintain effective
control over the financial practices of licensees, including establishing
procedures for reliable record keeping and making periodic reports to the Board;
(iv) prevent cheating and fraudulent practices; (v) provide a source of state
and local revenues through fees; and (vi) ensure that gaming licensees, to the
extent practicable, employ and contract with Louisiana residents, women and
minorities.
The Louisiana Act specifies certain restrictions and conditions relating to the
operation of riverboat gaming, including, but not limited to, the following: (i)
in parishes bordering the Red River, such as the Company's Casino Magic property
in Bossier, gaming may be conducted dockside; however, prior to the passage of
legislation legalizing dockside gaming effective April 1, 2001 in the 2001
Special Session of the Louisiana Legislature, in all other authorized locations
such as Boomtown New Orleans, gaming is not permitted while a riverboat is
docked, other than for forty-five minutes between excursions, unless dangerous
weather or water conditions exist; (ii) prior to the passage of legislation
legalizing dockside gaming effective April 1, 2001 in the 2001 Special Session
of the Louisiana Legislature, each round trip riverboat cruise may not be less
than three nor more than eight hours in duration, subject to specified
exceptions; (iii) agents of the Board are permitted on board at any time during
gaming operations; (iv) gaming devices, equipment and supplies may be purchased
or leased from permitted suppliers; (v) gaming may only take place in the
designated river or waterway; (vi) gaming equipment may not be possessed,
maintained, or exhibited by any person on a riverboat except in the specifically
designated gaming area, or a secure area used for inspection, repair, or storage
of such equipment; (vii) wagers may be received only from a person present on a
licensed riverboat; (viii) persons under 21 are not permitted in designated
gaming areas; (ix) except for slot machine play, wagers may be made only with
tokens, chips, or electronic cards purchased from the licensee aboard a
riverboat; (x) licensees may only use docking facilities and routes for which
they are licensed and may only board and discharge passengers at the riverboat's
licensed berth; (xi) licensees must have adequate protection and indemnity
insurance; (xii) licensees must have all necessary federal and state licenses,
certificates and other regulatory approvals prior to operating a riverboat; and
(xiii) gaming may only be conducted in accordance with the terms of the license
and the rules and regulations adopted by the Board.
No person may receive any percentage of the profits from the Company's
operations in Louisiana without first being found suitable. In March 1994,
Boomtown New Orleans, its officers, key personnel, partners and persons holding
a 5% or greater interest in the partnership were found suitable by the
predecessor to the Board. In April 1996, the Board's predecessor confirmed that
Casino Magic Bossier's officers, key personnel, partners and persons holding a
5% or greater interest in the corporation were suitable and authorized to
acquire an existing licensee. In July 1999, the Board renewed Boomtown New
Orleans' license to conduct gaming operations. In May 2001, the Board renewed
Casino Magic Bossier's license to conduct gaming operations. A gaming license is
deemed to be a privilege under Louisiana law and as such may be denied, revoked,
suspended, conditioned or limited at any time by the Board. In issuing a
license, the Board must find that the applicant is a person of good character,
honesty and integrity and the applicant is a person whose prior activities,
criminal record, if any, reputation, habits and associations do not pose a
threat to the public interest of the State of Louisiana or to the effective
regulation and control of gaming, or create or enhance the dangers of
unsuitable, unfair or illegal practices, methods, and activities in the conduct
of gaming or the carrying on of business and financial arrangements in
connection therewith. The Board will not grant any licenses unless it finds
that: (i) the applicant is capable of conducting gaming operations, which means
that the applicant can demonstrate the capability, either through training,
education, business experience, or a combination of the above, to operate a
gaming casino; (ii) the proposed financing of the riverboat and the gaming
operations is adequate for the nature of the proposed operation and from a
source suitable and acceptable to the Board; (iii) the applicant demonstrates a
proven ability to operate a vessel of comparable size, capacity and complexity
to a riverboat in its application for a license; (v) the applicant designates
the docking facilities to be used by the riverboat; (vi) the applicant shows
adequate financial ability to construct and maintain a riverboat; (vii) the
applicant has a good faith plan to recruit, train and upgrade minorities in all
employment classifications; and (viii) the applicant is of good moral character.
The Board may not award a license to any applicant who fails to provide
information and documentation to reveal any fact material to qualification or
who supplies information which is untrue or misleading as to a
13
material fact pertaining to the qualification criteria; who has been convicted
of or pled nolo contendere to an offense punishable by imprisonment of more than
one year; who is currently being prosecuted for or regarding whom charges are
pending in any jurisdiction of an offense punishable by more than one year
imprisonment; if any holder of 5% or more in the profits and losses of the
applicant has been convicted of or pled guilty or nolo contendere to an offense
which at the time of conviction is punishable as a felony.
The transfer of a license is prohibited; however, the sale, assignment,
transfer, pledge, or disposition of securities which represent 5% or more of the
total outstanding shares issued by a holder of a license may be transferred,
subject to prior Board approval. A security issued by a holder of a license must
generally disclose these restrictions.
Section 2501 of the regulations enacted by the Louisiana State Police Riverboat
Gaming Division pursuant to the Louisiana Act (the "Regulations") requires prior
written approval of the Board of all persons involved in the sale, purchase,
assignment, lease, grant or foreclosure of a security interest, hypothecation,
transfer, conveyance or acquisition of an ownership interest (other than in a
corporation) or economic interest of five percent (5%) or more in any licensee.
Section 2523 of the Regulations requires notification to and prior approval from
the Board of the: (a) application for, receipt, acceptance or modification of a
loan, the (b) use of any cash, property, credit, loan or line of credit, or the
(c) guarantee or granting of other forms of security for a loan by a licensee or
person acting on a licensee's behalf. Exceptions to prior written approval
include, without limitation, any transaction for less than $2,500,000 in which
all of the lending institutions are federally regulated, the transaction
modifies the terms of an existing, previously approved loan transaction, or if
the transaction involves publicly registered debt and securities sold pursuant
to a firm underwriting agreement.
The failure of a licensee to comply with the requirements set forth above may
result in the suspension or revocation of that licensee's gaming license.
Additionally, if the Board finds that the individual owner or holder of a
security of a corporate license or intermediary company or any person with an
economic interest in a licensee is not qualified under the Louisiana Act, the
Board may require, under penalty of suspension or revocation of the license,
that the person not: (a) receive dividends or interest on securities of the
corporation, (b) exercise directly or indirectly a right conferred by securities
of the corporation, (c) receive remuneration or economic benefit from the
licensee, or (d) continue in an ownership or economic interest in the licensee.
A licensee must periodically report the following information to the Board,
which is not confidential and is to be available for public inspection: (a) the
licensee's net gaming proceeds from all authorized games; (b) the amount of net
gaming proceeds tax paid; and, (c) all quarterly and annual financial statements
presenting historical data that are submitted to the Board, including annual
financial statements that have been audited by an independent certified public
accountant.
The Louisiana Act restricts gaming space on riverboats to no more than 30,000
square feet. The Board has adopted rules governing the method for approval of
the area of operations and the rules and odds of authorized games and devices
permitted, and prescribing grounds and procedures for the revocation, limitation
or suspension of licenses and permits.
On April 19, 1996, the Louisiana legislature adopted legislation requiring
statewide local elections on a parish-by-parish basis to determine whether to
prohibit or continue to permit licensed riverboat gaming, licensed video poker
gaming, and licensed land-based gaming in Orleans Parish. The applicable local
election took place on November 5, 1996, and the voters in the parishes of
Boomtown New Orleans and Casino Magic Bossier voted to continue licensed
riverboat and video poker gaming. However, it is noteworthy that the current
legislation does not provide for any moratorium on future local elections on
gaming.
Prior to the passage of legislation in the 2001 Special Session of the Louisiana
Legislature, fees to the state of Louisiana for conducting gaming activities on
a riverboat include: (i) $50,000 per riverboat for the first year of operation
and $100,000 per year, per riverboat thereafter, plus (ii) 18.5% of net gaming
proceeds. In the 2001
14
Special Session of the Louisiana Legislature, a law was passed legalizing
dockside gaming and increasing the fees paid to the state of Louisiana to 21.5%
of net gaming proceeds effective April 1, 2001 for the nine riverboats in the
southern region of the state, including the Company's Boomtown New Orleans
property, while the fee increase to 21.5% of net gaming proceeds will be phased
in over an approximately two year period for the riverboats operating in
parishes bordering the Red River, including the Company's Casino Magic Bossier
City property.
Mississippi The ownership and operation of casino facilities in Mississippi are
- -----------
subject to extensive state and local regulation, but primarily the licensing and
regulatory control of the Mississippi Gaming Commission (the "Mississippi
Commission") and the Mississippi State Tax Commission (the "Mississippi Gaming
Authorities").
The Mississippi Gaming Control Act (the "Mississippi Act"), which legalized
dockside casino gaming in Mississippi, was enacted June 29, 1990. Although not
identical, the Mississippi Act is similar to the Nevada Gaming Control Act. The
Mississippi Commission adopted regulations which are also similar in many
respects to the Nevada gaming regulations.
The laws, regulations and supervisory procedures of Mississippi and the
Mississippi Commission seek to: (i) prevent unsavory or unsuitable persons from
having any direct or indirect involvement with gaming at any time or in any
capacity; (ii) establish and maintain responsible accounting practices and
procedures; (iii) maintain effective control over the financial practices of
licensees, including establishing minimum procedures for internal fiscal affairs
and safeguarding of assets and revenues, providing reliable record keeping and
making periodic reports to the Mississippi Commission; (iv) prevent cheating and
fraudulent practices; (v) provide a source of state and local revenues through
taxation and licensing fees; and (vi) ensure that gaming licensees, to the
extent practicable, employ Mississippi residents. The regulations are subject to
amendment and interpretation by the Mississippi Commission. Changes in
Mississippi laws or regulations may limit or otherwise materially affect the
types of gaming that may be conducted and such changes, if enacted, could have
an adverse effect on the Company and the Company's Mississippi gaming operation.
The Mississippi Act provides for legalized dockside gaming at the discretion of
the fourteen counties that border the Gulf Coast or the Mississippi River, but
only if the voters in such counties have not voted to prohibit gaming in that
county. In recent years, certain anti-gaming groups proposed for adoption
through the initiative and referendum process certain amendments to the
Mississippi Constitution, which would prohibit gaming in the state. The
proposals were declared illegal by Mississippi courts on constitutional and
procedural grounds. The latest ruling was appealed to the Mississippi Supreme
Court, which affirmed the decision of the lower court. If another such proposal
were to be offered and if a sufficient number of signatures were to be gathered
to place a legal initiative on the ballot, it is possible for the voters of
Mississippi to consider such a proposal in November of 2003. As of January 1,
2002, dockside gaming was permissible in nine of the fourteen eligible counties
in the state and gaming operations had commenced in Adams, Coahoma, Hancock,
Harrison, Tunica, Warren and Washington counties. Under Mississippi law, gaming
vessels must be located on the Mississippi River or on navigable waters in
eligible counties along the Mississippi River or in the waters lying south of
the counties along the Mississippi Gulf Coast. The law permits unlimited stakes
gaming on permanently moored vessels on a 24-hour basis and does not restrict
the percentage of space which may be utilized for gaming. There are no
limitations on the number of gaming licenses which may be issued in Mississippi.
The Mississippi Act permits substantially all traditional casino games and
gaming devices, and, on August 11, 1997, a Mississippi Circuit Court judge
issued a ruling that the Mississippi Act permits race books on the premises of
licensed casinos. The Mississippi Commission appealed the decision to the
Mississippi Supreme Court, which has not yet rendered a decision.
The Company and Biloxi Casino Corp (the "Mississippi Gaming Subsidiary") which
operates Casino Magic Biloxi, is subject to the licensing and regulatory control
of the Mississippi Commission. The Company must be registered under the
Mississippi Act as a publicly traded holding company for the Mississippi Gaming
Subsidiary and is required periodically to submit detailed financial and
operating reports to the Mississippi
15
Commission and furnish any other information which the Mississippi Commission
may require. If the Company is unable to continue to satisfy the registration
requirements of the Mississippi Act, the Company and its Mississippi Gaming
Subsidiary cannot own or operate gaming facilities in Mississippi.
The Mississippi Gaming Subsidiary must maintain a gaming license from the
Mississippi Commission to operate a casino in Mississippi. Such licenses are
issued by the Mississippi Commission subject to certain conditions, including
continued compliance with all applicable state laws and regulations. Gaming
licenses are not transferable, are issued for a three-year period and must be
renewed periodically thereafter. Casino Magic Biloxi's license is due to expire
in January 2004. No person may become a stockholder of or receive any percentage
of profits from a licensed subsidiary of a registered holding company without
first obtaining licenses and approvals from the Mississippi Commission. The
Company has obtained such approvals in connection with the licensing of its
Mississippi Gaming Subsidiary, and the registration of the Company as a
publicly-traded holding company.
Certain officers and employees of the Company and the officers, directors and
certain key employees of the Company's Mississippi Gaming Subsidiary must be
found suitable to be licensed by the Mississippi Commission. The Company
believes that it has obtained, applied for or is in the process of applying for
all necessary findings of suitability with respect to such persons associated
with the Company or its Mississippi Gaming Subsidiary, although the Mississippi
Commission in its discretion may require additional persons to file applications
for findings of suitability. In addition, any person having a material
relationship or involvement with the Company or its Mississippi Gaming
Subsidiary may be required to be found suitable, in which case those persons
must pay the costs and fees associated with such investigation. The Mississippi
Commission may deny an application for a finding of suitability for any cause
that it deems reasonable. Changes in certain licensed positions must be reported
to the Mississippi Commission. In addition to its authority to deny an
application for a finding of suitability, the Mississippi Commission has
jurisdiction to disapprove a change in a person's corporate position or title
and such changes must be reported to the Mississippi Commission. The Mississippi
Commission has the power to require the Mississippi Gaming Subsidiary and the
Company to suspend or dismiss officers, directors and other key employees or
sever relationships with other persons who refuse to file appropriate
applications or whom the authorities find unsuitable to act in such capacities.
Employees associated with gaming must obtain work permits that are subject to
immediate suspension under certain circumstances. The Mississippi Commission
shall refuse to issue a work permit to a person convicted of a felony and it may
refuse to issue a work permit to a gaming employee if the employee has committed
certain misdemeanors, or knowingly violated the Mississippi Act, or for any
other reasonable cause.
At any time, the Mississippi Commission has the power to investigate and require
the finding of suitability of any record or beneficial stockholder of the
Company. Mississippi law requires any person who acquires more than 5% of the
common stock of a publicly traded corporation registered with the Mississippi
Commission to report the acquisition to the Mississippi Commission, and such
person may be required to be found suitable. Also, any person who becomes a
beneficial owner of more than 10% of the common stock of such a company, as
reported to the Securities and Exchange Commission, must apply for a finding of
suitability by the Mississippi Commission and must pay the costs and fees that
the Mississippi Commission incurs in conducting the investigation. The
Mississippi Commission has generally exercised its discretion to require a
finding of suitability of any beneficial owner of more than 5% of a registered
publicly-traded holding company's common stock. However, pursuant to Mississippi
Gaming Commission Policy on Findings of Suitability of Institutional
Shareholders dated January 20, 2000, an "institutional investor", as defined by
the policy, which acquires more than 10%, but not more than 15%, of a registered
publicly-traded holding company's voting securities may apply to the Mississippi
Commission for a waiver of finding of suitability if such institutional investor
holds the voting securities for investment purposes only. An institutional
investor shall not be deemed to hold voting securities for investment purposes
only unless the voting securities were acquired and are held in the ordinary
course of business as an institutional investor and not for the purpose of
causing, directly or indirectly, the election of a majority of the members of
the board of directors, any change in the corporate charter, bylaws, management,
policies or operations of the registered publicly-traded holding company or any
of its affiliates, or any other action which the Mississippi Commission finds to
be inconsistent with investment purposes only.
16
The following activities shall not be deemed to be inconsistent with holding
voting securities for investment purposes only: (i) voting, directly or
indirectly through the delivery of a proxy furnished by the board of directors,
on all matters voted upon by the holders of such voting securities; (ii) serving
as a member of any committee of creditors or security holders; (iii) nominating
any candidate for election or appointment to the board of directors in
connection with a debt restructuring; (iv) accepting appointment or election (or
having a representative accept appointment or election) as a member of the board
of directors in connection with a debt restructuring and serving in that
capacity until the conclusion of the member's term; (v) making financial and
other inquiries of management of the type normally made by securities analysts
for informational purposes and not to cause a change in its management, policies
or operations; and (vi) such other activities as the Mississippi Commission may
determine to be consistent with such investment intent. If a stockholder who
must be found suitable is a corporation, partnership or trust, it must submit
detailed business and financial information, including a list of beneficial
owners.
Any person who fails or refuses to apply for a finding of suitability or a
license within 30 days after being ordered to do so by the Mississippi
Commission may be found unsuitable. The same restrictions apply to a record
owner, if the record owner, after request, fails to identify the beneficial
owner. Management believes that compliance by the Company with the licensing
procedures and regulatory requirements of the Mississippi Commission will not
affect the marketability of the Company's securities. Any person found
unsuitable and who holds, directly or indirectly, any beneficial ownership of
the securities of the Company beyond such time as the Mississippi Commission
prescribes, may be guilty of a misdemeanor. The Company is subject to
disciplinary action if, after receiving notice that a person is unsuitable to be
a stockholder or to have any other relationship with the Company or its
Mississippi Gaming Subsidiary, the Company: (i) pays the unsuitable person any
dividend or other distribution upon the voting securities of the Company; (ii)
recognizes the exercise, directly or indirectly, of any voting rights conferred
by securities of the Company held by the unsuitable person; (iii) pays the
unsuitable person any remuneration in any form for services rendered or
otherwise, except in certain limited and specific circumstances; or (iv) fails
to pursue all lawful efforts to require the unsuitable person to divest himself
of the securities, including, if necessary, the immediate purchase of the
securities for cash at a fair market value.
The Company may be required to disclose to the Mississippi Commission, upon
request, the identities of the holders of any of the Company's debt or other
securities. In addition, under the Mississippi Act the Mississippi Commission
may, in its discretion: (i) require holders of securities of registered
corporations, including debt securities such as the Company's 9.5% Notes and the
9.25% Notes, to file applications, (ii) investigate such holders, and (iii)
require such holders to be found suitable to own such securities. If the
Mississippi Commission determines that a person is unsuitable to own such
security, then the issuer may be sanctioned, including the loss of its
approvals, if without the prior approval of the Mississippi Commission, it (i)
pays to the unsuitable person any dividend, interest, or any distribution
whatsoever; (ii) recognizes any voting right by such unsuitable person in
connection with such securities; (iii) pays the unsuitable person remuneration
in any form; or (iv) makes any payment to the unsuitable person by way of
principal, redemption, conversion, exchange, liquidation, or similar
transaction. Although the Mississippi Commission generally does not require the
individual holders of obligations such as the Notes to be investigated and found
suitable, the Mississippi Commission retains the discretion to do so for any
reason, including but not limited to a default, or where the holder of the debt
instrument exercises a material influence over the gaming operations of the
entity in question. Any holder of debt securities required to apply for a
finding of suitability must pay all investigative fees and costs of the
Mississippi Commission in connection with such an investigation.
The Mississippi Gaming Subsidiary must maintain in Mississippi a current ledger
with respect to ownership of its equity securities, and the Company must
maintain in Mississippi a current list of stockholders of the Company which must
reflect the record ownership of each outstanding share of any class of equity
security issued by the Company. The ledger and stockholder lists must be
available for inspection by the Mississippi Commission at any time. If any
securities of the Company are held in trust by an agent or by a nominee, the
record holder may be required to disclose the identity of the beneficial owner
to the Mississippi Commission. A failure to make such disclosure may be grounds
for finding the record holder unsuitable. The Company must also render maximum
assistance in determining the identity of the beneficial owners.
17
The Mississippi Act requires that the certificates representing securities of a
publicly-traded corporation bear a legend to the general effect that such
securities are subject to the Mississippi Act and the regulations of the
Mississippi Commission. The Company has received from the Mississippi Commission
a waiver from this legend requirement. The Mississippi Commission has the power
to impose additional restrictions on the holders of the Company's securities at
any time.
Substantially all loans, leases, sales of securities and similar financing
transactions by the Mississippi Gaming Subsidiary must be reported to or
approved by the Mississippi Commission. The Mississippi Gaming Subsidiary may
not make a public offering of its securities, but may pledge or mortgage casino
facilities. The Company may not make a public offering of its securities without
the prior approval of the Mississippi Commission if any part of the proceeds of
the offering is to be used to finance the construction, acquisition or operation
of gaming facilities in Mississippi or to retire or extend obligations incurred
for one or more such purposes. Such approval, if given, does not constitute a
recommendation or approval of the investment merits of the securities subject to
the offering.
Under the regulations of the Mississippi Commission, a gaming licensee may not
guarantee a security issued by an affiliate company pursuant to a public
offering, or pledge its assets to secure payment or performance of the
obligations evidenced by the security issued by the affiliated company, without
the prior approval of the Mississippi Commission. A pledge of stock of a gaming
licensee and the foreclosure of such a pledge are ineffective without the prior
approval of the Mississippi Commission. Moreover, restrictions on the transfer
of an equity security issued by a Mississippi licensee and agreements not to
encumber such securities are ineffective without the prior approval of the
Mississippi Commission.
Changes in control of the Company through merger, consolidation, acquisition of
assets, management or consulting agreements or any form of takeover, cannot
occur without the prior approval of the Mississippi Commission. The Mississippi
Commission may also require controlling stockholders, officers, directors and
other persons having a material relationship or involvement with the entity
proposing to acquire control, to be investigated and licensed as part of the
approval process relating to the transaction.
The Mississippi legislature has declared that some corporate acquisitions
opposed by management, repurchases of voting securities and other corporate
defense tactics that affect corporate gaming licensees in Mississippi and
corporations whose stock is publicly traded that are affiliated with those
licensees, may be injurious to stable and productive corporate gaming. The
Mississippi Commission has established a regulatory scheme to ameliorate the
potentially adverse effects of these business practices upon Mississippi's
gaming industry and to further Mississippi's policy to: (i) assure the financial
stability of corporate gaming operators and their affiliates; (ii) preserve the
beneficial aspects of conducting business in the corporate form; and (iii)
promote a neutral environment for the orderly governance of corporate affairs.
Approvals are, in certain circumstances, required from the Mississippi
Commission before the Company may make exceptional repurchases of voting
securities in excess of the current market price of its common stock (commonly
called "greenmail") or before a corporate acquisition opposed by management may
be consummated. Mississippi's gaming regulations will also require prior
approval by the Mississippi Commission if the Company adopts a plan of
recapitalization proposed by its Board of Directors opposing a tender offer made
directly to the shareholders for the purpose of acquiring control of the
Company.
Neither the Company nor any subsidiary may engage in gaming activities in
Mississippi while also conducting gaming operations outside of Mississippi
without approval of the Mississippi Commission. The Mississippi Commission may
require determinations that, among other things, there are means for the
Mississippi Commission to have access to information concerning the out-of-state
gaming operations of the Company and its affiliates. The Mississippi Commission
has approved the Company's current operations in other jurisdictions but must
approve the Company's future gaming operations in any new jurisdictions.
If the Mississippi Commission decides that the Mississippi Gaming Subsidiary
violated a gaming law or regulation, the Mississippi Commission could limit,
condition, suspend or revoke the license of the Mississippi
18
Gaming Subsidiary, subject to compliance with certain statutory and regulatory
procedures. In addition, the Mississippi Gaming Subsidiary, the Company and the
persons involved could be subject to substantial fines for each separate
violation. Because of such a violation, the Mississippi Commission could attempt
to appoint a supervisor to operate the casino facilities. Limitation,
conditioning or suspension of any gaming license or the appointment of a
supervisor could (and revocation of any gaming license would) materially
adversely affect the Company, the Mississippi Gaming Subsidiary's gaming
operations and the Company's results of operations.
License fees and taxes, computed in various ways depending on the type of gaming
involved, are payable to the State of Mississippi and to the counties and cities
in which the Mississippi Gaming Subsidiary's respective operations will be
conducted. Depending upon the particular fee or tax involved, these fees and
taxes are payable either monthly, quarterly or annually and are based upon (i) a
percentage of the gross gaming revenues received by the casino operation, (ii)
the number of slot machines operated by the casino, or (iii) the number of table
games operated by the casino. The license fee payable to the State of
Mississippi is based upon "gaming receipts" (generally defined as gross receipts
less pay outs to customers as winnings) and equals 4% of gaming receipts of
$50,000 or less per month, 6% of gaming receipts over $50,000 and less than
$134,000 per month, and 8% of gaming receipts over $134,000. The foregoing
license fees are allowed as a credit against the licensee's Mississippi income
tax liability for the year paid. The gross revenue fee imposed by the
Mississippi communities in, which the Company's casino operations are located,
equals approximately 4% of the gaming receipts.
In October 1994, the Mississippi Commission adopted two new regulations. Under
the first regulation, as a condition of licensure or license renewal, casino
vessels on the Mississippi Gulf Coast that are not self-propelled must be moored
to withstand a Category 4 hurricane with 155 mile-per-hour winds and 15-foot
tidal surge. The Company believes that the Mississippi Gaming Subsidiary
currently meets this requirement. The second regulation requires as a condition
of licensure or license renewal that a gaming establishment's plan include a
500-car parking facility in close proximity to the casino complex and
infrastructure facilities, the expenditures for which will amount to at least
25% of the casino cost. Such facilities shall include any of the following: a
250-room hotel of at least a two-star rating as defined by the current edition
of the Mobil Travel Guide, a theme park, golf courses, marinas, tennis complex,
entertainment facilities, or any other such facility as approved by the
Mississippi Commission as infrastructure. Parking facilities, roads, sewage and
water systems, or facilities normally provided by cities and/or counties are
excluded. The Mississippi Commission may in its discretion reduce the number of
rooms required, where it is shown to the Commission's satisfaction that
sufficient rooms are available to accommodate the anticipated visitor load. The
Company believes that the Mississippi Gaming Subsidiary currently meets such
requirements. The Mississippi Commission has recently adopted amendments to the
regulation that increase the infrastructure development requirement from 25% to
100% for new casinos (or upon acquisition of a closed casino), but grandfather
existing licensees.
The sale of food or alcoholic beverages at the Mississippi Gaming Subsidiary is
subject to licensing, control and regulation by the applicable state and local
authorities. The agencies involved have full power to limit, condition, suspend
or revoke any such license, and any such disciplinary action could (and
revocation would) have a materially adverse effect upon the operations of the
affected casino or casinos. Certain officers and managers of the Company and the
Mississippi Gaming Subsidiary must be investigated by the Alcoholic Beverage
Control Division of the State Tax Commission (the "ABC") in connection with the
Mississippi Gaming Subsidiary's liquor permits. Changes in licensed positions
must be approved by the ABC.
Mississippi Anti-Gaming Initiative In 1998, two referenda were proposed which,
- ----------------------------------
if approved, would have amended the Mississippi Constitution to ban gaming in
Mississippi and would have required all currently legal gaming entities to cease
operations within two years of the ban. A Mississippi State Circuit Court judge
ruled that the first of the proposed referenda was illegal because, among other
reasons, it failed to include required information regarding its anticipated
effect on government revenues. The Mississippi Supreme Court affirmed the
Circuit Court ruling, but only on procedural grounds. The second referendum
proposal included the same language on government revenues as the first
referendum and was struck down by another Mississippi State Circuit Court judge
on the same grounds as the first.
19
On March 22, 1999, another such referendum was filed with the Mississippi
Secretary of State. The Circuit Court of Hinds County struck down this third
referendum on May 6, 1999 because the initiative failed once again to include
language pertaining to the initiative's negative economic impact. The latest
ruling was appealed to the Mississippi Supreme Court, which affirmed the
decision of the lower court. Any such referendum must be approved by the
Mississippi Secretary of State and signatures of approximately 98,000 registered
voters must be gathered and certified in order for such a proposal to be
included on a statewide ballot for consideration by the voters. The next
election, for which the proponents could attempt such a proposal on the ballot,
would be November 2003. It is likely at some point that a revised initiative
will be filed which would adequately address the issues regarding the effect on
government revenues of prohibition of gaming in Mississippi. However, while it
is too early in the process for the Company to make any predictions with respect
to whether such a referendum will appear on a ballot or the likelihood of such a
referendum being approved by the voters, if such a referendum were passed and
gaming were prohibited in Mississippi, it would have a materially adverse effect
on the Company.
Nevada The ownership and operation of casino gaming facilities in Nevada are
- ------
subject to: (i) the Nevada Gaming Control Act and the regulations promulgated
there under (collectively, "Nevada Act"); and (ii) various local regulations.
The Company's gaming operations are subject to the licensing and regulatory
control of the Nevada Gaming Commission ("Nevada Commission"), the Nevada State
Gaming Control Board ("Nevada Board") and Washoe County. The Nevada Commission,
the Nevada Board and Washoe County are collectively referred to as the "Nevada
Gaming Authorities."
The laws, regulations and supervisory procedures of the Nevada Gaming
Authorities are based upon declarations of public policy which are concerned
with, among other things: (i) the prevention of unsavory or unsuitable persons
from having a direct or indirect involvement with gaming at any time or in any
capacity; (ii) the establishment and maintenance of responsible accounting
practices and procedures; (iii) the maintenance of effective controls over the
financial practices of licensees, including the establishment of minimum
procedures for internal fiscal affairs and the safeguarding of assets and
revenues, providing reliable record keeping and requiring the filing of periodic
reports with the Nevada Gaming Authorities; (iv) the prevention of cheating and
fraudulent practices; and (v) providing a source of state and local revenues
through taxation and licensing fees. Changes in such laws, regulations and
procedures could have an adverse effect on Boomtown Reno's gaming operations.
Boomtown Hotel & Casino, Inc. (the "Gaming Subsidiary"), which operates Boomtown
Reno and two other gaming operations with slot machines only, is required to be
licensed by the Nevada Gaming Authorities. The gaming licenses require the
periodic payment of fees and taxes and are not transferable. The Company is
currently registered by the Nevada Commission as a publicly traded corporation
(a "Registered Corporation") and has been found suitable to own the stock of
Boomtown, which is registered as an intermediary company ("Intermediary
Company"). Boomtown has been found suitable to own the stock of the Gaming
Subsidiary, which is a corporate licensee (a "Corporate Licensee") under the
terms of the Nevada Act. As a Registered Corporation, the Company is required
periodically to submit detailed financial and operating reports to the Nevada
Commission and furnish any other information which the Nevada Commission may
require. No person may become a stockholder of, or holder of an interest of, or
receive any percentage of profits from an Intermediary Company or a Corporate
Licensee without first obtaining licenses and approvals from the Nevada Gaming
Authorities. The Company, Boomtown and the Gaming Subsidiary have obtained from
the Nevada Gaming Authorities the various registrations, findings of
suitability, approvals, permits and licenses required in order to engage in
gaming activities in Nevada.
The Nevada Gaming Authorities may investigate any individual who has a material
relationship to, or material involvement with, the Company, Boomtown or the
Gaming Subsidiary in order to determine whether such individual is suitable or
should be licensed as a business associate of a gaming licensee. Officers,
directors and certain key employees of the Company, Boomtown and the Gaming
Subsidiary must file applications with the Nevada Gaming Authorities and may be
required to be licensed or found suitable by the Nevada Gaming Authorities.
Officers, directors and key employees of the Company and Boomtown who are
actively and
20
directly involved in gaming activities of the Gaming Subsidiary may be required
to be licensed or found suitable by the Nevada Gaming Authorities. The Nevada
Gaming Authorities may deny an application for licensing for any cause which
they deem reasonable. A finding of suitability is comparable to licensing, and
both require submission of detailed personal and financial information followed
by a thorough investigation. The applicant for licensing or a finding of
suitability must pay all the costs of the investigation. Changes in licensed
positions must be reported to the Nevada Gaming Authorities and, in addition to
their authority to deny an application for a finding of suitability or
licensure, the Nevada Gaming Authorities have jurisdiction to disapprove a
change in a corporate position.
If the Nevada Gaming Authorities were to find an officer, director or key
employee unsuitable for licensing or unsuitable to continue having a
relationship with the Company, Boomtown or the Gaming Subsidiary, the companies
involved would have to sever all relationships with such person. In addition,
the Nevada Commission may require the Company, Boomtown or the Gaming Subsidiary
to terminate the employment of any person who refuses to file appropriate
applications. Determinations of suitability or of questions pertaining to
licensing are not subject to judicial review in Nevada.
The Company and the Gaming Subsidiary are required to submit detailed financial
and operating reports to the Nevada Commission. Substantially all material
loans, leases, sales of securities and similar financing transactions by the
Company, Boomtown and the Gaming Subsidiary must be reported to or approved by
the Nevada Commission.
If it were determined that the Nevada Act was violated by the Gaming Subsidiary,
the gaming licenses it holds could be limited, conditioned, suspended or
revoked, subject to compliance with certain statutory and regulatory procedures.
In addition, the Company, Boomtown, the Gaming Subsidiary and the persons
involved could be subject to substantial fines for each separate violation of
the Nevada Act at the discretion of the Nevada Commission. Further, a supervisor
could be appointed by the Nevada Commission to operate Boomtown Reno and, under
certain circumstances, earnings generated during the supervisor's appointment
(except for reasonable rental value of the casino) could be forfeited to the
State of Nevada. Limitation, conditioning or suspension of the gaming licenses
of the Gaming Subsidiary or the appointment of a supervisor could (and
revocation of any gaming license would) materially adversely affect the
Company's gaming operations.
Any beneficial holder of the Company's voting securities, regardless of the
number of shares owned, may be required to file an application, be investigated,
and be found suitable as a beneficial holder of the Company's voting securities
if the Nevada Commission has reason to believe that such ownership would
otherwise be inconsistent with the declared policies of the State of Nevada. The
applicant must pay all costs of investigation incurred by the Nevada Gaming
Authorities in conducting any such investigation.
The Nevada Act requires any person who acquires beneficial ownership of more
than 5% of a Registered Corporation's voting securities to report the
acquisition to the Nevada Commission. The Nevada Act requires that beneficial
owners of more than 10% of a Registered Corporation's voting securities apply to
the Nevada Commission for a finding of suitability within thirty days after the
Chairman of the Nevada Board mails the written notice requiring such filing.
Under certain circumstances, an "institutional investor," as defined in the
Nevada Act, which acquires more than 10%, but not more than 15%, of a Registered
Corporation's voting securities may apply to the Nevada Commission for a waiver
of such finding of suitability if such institutional investor holds the voting
securities for investment purposes only. An institutional investor shall not be
deemed to hold voting securities for investment purposes unless the voting
securities were acquired and are held in the ordinary course of business as an
institutional investor and not for the purpose of causing, directly or
indirectly, the election of a majority of the members of the board of directors
of the Registered Corporation, any change in the Registered Corporation's
corporate charter, bylaws, management, policies or operations of the Registered
Corporation, or any of its gaming affiliates, or any other action which the
Nevada Commission finds to be inconsistent with holding the Registered
Corporation's voting securities for investment purposes only. Activities which
are not deemed to be inconsistent with holding voting securities for investment
purposes only include: (i) voting on all matters voted on by stockholders; (ii)
making financial and other inquiries of
21
management of the type normally made by securities analysts for informational
purposes and not to cause a change in its management, policies or operations;
and (iii) such other activities as the Nevada Commission may determine to be
consistent with such investment intent. If the beneficial holder of voting
securities who must be found suitable is a corporation, partnership or trust, it
must submit detailed business and financial information, including a list of
beneficial owners. The applicant is required to pay all costs of investigation.
Any person who fails or refuses to apply for a finding of suitability or a
license within thirty days after being ordered to do so by the Nevada Commission
or the Chairman of the Nevada Board, may be found unsuitable. The same
restrictions apply to a record owner if the record owner, after request, fails
to identify the beneficial owner. Any stockholder found unsuitable and who
holds, directly or indirectly, any beneficial ownership of the common stock
beyond such period of time as may be prescribed by the Nevada Commission may be
guilty of a criminal offense. The Company is subject to disciplinary action if,
after it receives notice that a person is unsuitable to be a stockholder or to
have any other relationship with the Company, Boomtown or the Gaming Subsidiary,
the Company: (i) pays that person any dividend or interest upon voting
securities of the Company, (ii) allows that person to exercise, directly or
indirectly, any voting right conferred through securities held by that person,
(iii) pays remuneration in any form to that person for services rendered or
otherwise, or (iv) fails to pursue all lawful efforts to require such unsuitable
person to relinquish his voting securities including, if necessary, the
immediate purchase of said voting securities for cash at fair market value.
The Nevada Commission may, in its discretion, require the holder of any debt
security of a Registered Corporation to file applications, be investigated and
be found suitable to own the debt security of a Registered Corporation. If the
Nevada Commission determines that a person is unsuitable to own such security,
then pursuant to the Nevada Act, the Registered Corporation can be sanctioned,
including the loss of its approvals, if without the prior approval of the Nevada
Commission, it: (i) pays to the unsuitable person any dividend, interest, or any
distribution whatsoever; (ii) recognizes any voting right by such unsuitable
person in connection with such securities; (iii) pays the unsuitable person
remuneration in any form; or (iv) makes any payment to the unsuitable person by
way of principal, redemption, conversion, exchange, liquidation, or similar
transaction.
The Company is required to maintain a current stock ledger in Nevada which may
be examined by the Nevada Gaming Authorities at any time. If any securities are
held in trust by an agent or by a nominee, the record holder may be required to
disclose the identity of the beneficial owner to the Nevada Gaming Authorities.
A failure to make such disclosure may be grounds for finding the record holder
unsuitable. The Company is also required to render maximum assistance in
determining the identity of the beneficial owner. The Nevada Commission has the
power to require that the Company's stock certificates bear a legend indicating
that the securities are subject to the Nevada Act. However, to date the Nevada
Commission has not imposed such a requirement on the Company.
The Company is not permitted to make a public offering of its securities without
the prior approval of the Nevada Commission if the securities or the proceeds
there from are intended to be used to construct, acquire or finance gaming
facilities in Nevada, or to retire or extend obligations incurred for such
purposes. On March 22, 2001, the Nevada Commission granted the Company prior
approval to make public offerings for a period of two years, subject to certain
conditions (the "Shelf Approval"). The Shelf Approval also applies to any
affiliated company wholly owned by the Company (an "Affiliate"), which is a
publicly traded corporation or would thereby become a publicly traded
corporation pursuant to a public offering. The Shelf Approval also includes
approval for Boomtown and the Gaming Subsidiary to guarantee any security issued
by, and for the Gaming Subsidiary to hypothecate its assets to secure the
payment or performance of any obligations evidenced by a security issued by the
Company or an Affiliate in a public offering under the Shelf Approval. The Shelf
Approval also includes approval to place restrictions upon the transfer of and
enter into agreements not to encumber the equity securities of Boomtown and the
Gaming Subsidiary. The Shelf Approval, however, may be rescinded for good cause
without prior notice upon the issuance of an interlocutory stop order by the
Chairman of the Nevada Board. The Shelf Approval does not constitute a finding,
recommendation or approval of the Nevada Gaming Authorities as to the accuracy
or the adequacy of the prospectus or the investment merits of the securities
offered thereby. Any representation to the contrary is unlawful.
22
Changes in control of a Registered Corporation through merger, consolidation,
stock or asset acquisitions, management or consulting agreements, or any act or
conduct by a person whereby he obtains control, may not occur without the prior
approval of the Nevada Commission. Entities seeking to acquire control of a
Registered Corporation must satisfy the Nevada Board and Nevada Commission in a
variety of stringent standards prior to assuming control of such Registered
Corporation. The Nevada Commission may also require controlling stockholders,
officers, directors and other persons having a material relationship or
involvement with the entity proposing to acquire control to be investigated and
licensed as part of the approval process relating to the transaction.
The Nevada legislature has declared that some corporate acquisitions opposed by
management, repurchases of voting securities and corporate defense tactics
affecting Nevada corporate gaming licensees, and Registered Corporations that
are affiliated with those operations, may be injurious to stable and productive
corporate gaming. The Nevada Commission has established a regulatory scheme to
ameliorate the potentially adverse effects of these business practices upon
Nevada's gaming industry and to further Nevada's policy to: (i) assure the
financial stability of corporate gaming licensees and their affiliates; (ii)
preserve the beneficial aspects of conducting business in the corporate form;
and (iii) promote a neutral environment for the orderly governance of corporate
affairs. Approvals are, in certain circumstances, required from the Nevada
Commission before the Registered Corporation can make exceptional repurchases of
voting securities above the current market price thereof and before a corporate
acquisition opposed by management can be consummated. The Nevada Act also
requires prior approval of a plan of recapitalization proposed by the Registered
Corporation's Board of Directors in response to a tender offer made directly to
the Registered Corporation's stockholders for the purposes of acquiring control
of the Registered Corporation.
License fees and taxes, computed in various ways depending on the type of gaming
or activity involved, are payable to the State of Nevada and to Washoe County,
in which the Gaming Subsidiary's operations are conducted. Depending upon the
particular fee or tax involved, these fees and taxes are payable either monthly,
quarterly or annually and are based upon either: (i) a percentage of the gross
revenues received; (ii) the number of gaming devices operated; or (iii) the
number of table games operated. A casino entertainment tax is also paid by
casino operations where entertainment is furnished in a cabaret, nightclub,
cocktail lounge or casino showroom in connection with the serving or selling of
food or refreshments, or the selling of any merchandise.
Any person who is licensed, required to be licensed, registered, required to be
registered, or is under common control with such persons (collectively,
"Licensees"), and who proposes to become involved in a gaming venture outside of
Nevada, is required to deposit with the Nevada Board, and thereafter maintain, a
revolving fund in the amount of $10,000 to pay the expenses of investigation by
the Nevada Board of such Licensee's participation in such foreign gaming. The
revolving fund is subject to increase or decrease in the discretion of the
Nevada Commission. Thereafter, Licensees are required to comply with certain
reporting requirements imposed by the Nevada Act. Licensees are also subject to
disciplinary action by the Nevada Commission if they knowingly violate any laws
of the foreign jurisdiction pertaining to the foreign gaming operation, fail to
conduct the foreign gaming operation in accordance with the standards of honesty
and integrity required of Nevada gaming operations, engage in activities or
enter into associations that are harmful to the State of Nevada or its ability
to collect gaming taxes and fees, or employ, contract with, or associate with a
person in the foreign operation who has been denied a license or finding of
suitability in Nevada on the ground of unsuitability.
California Operation of California card club casinos such as the Hollywood
- ----------
Park-Casino and the Crystal Park Casino is governed by the Gambling Control Act
(the "GCA") and is subject to the oversight of the California Attorney General
and the California Gambling Control Commission. Under the GCA, a California card
club casino may only offer certain forms of card games, including Poker, Pai
Gow, and California Blackjack. A card club casino may not offer many of the card
games and other games of chance permitted in Nevada and other jurisdictions
where the Company conducts business.
23
Although the California Attorney General takes the position that, under the GCA,
only individuals, partnerships or privately-held companies (as opposed to
publicly-traded companies such as the Company) are eligible to operate card club
casinos, the enactment of California Senate Bill 100 ("SB-100") in 1995, and the
subsequent enactment of Senate Bill-8 permit a publicly-owned racing association
to own and operate a card club casino if it also owns and operates a race track
on the same premises.
In September 1995, the Attorney General granted the Company a provisional
registration under SB-100 to operate the Hollywood Park-Casino, which
provisional registration was renewed effective January 1, 1999. Pursuant to the
GCA, on September 10, 1999, in connection with the sale of the Hollywood Park
Race Track (see Note 11 to the Notes to Consolidated Financial Statements), the
Company was no longer eligible to operate the Hollywood Park-Casino and
therefore entered into a sublease arrangement of the Hollywood Park-Casino with
the same third party operator which leases the Crystal Park Casino. In the event
the GCA were to be amended to permit publicly-traded companies such as the
Company to operate card clubs, the Company, and its officers, directors and
certain stockholders, would likely have to file the necessary licensing
applications with the Attorney General, if it wished to operate the Hollywood
Park-Casino or the Crystal Park Casino.
Pursuant to the GCA, the operator of a card club casino, and its officers,
directors and certain stockholders are required to be registered by the Attorney
General and licensed by the municipality in which it is located. A permanent
registration will not be granted until the California Department of Justice
completes its review of the applications of the Company and its corporate
officers and directors. The Attorney General has broad discretion to deny a
gaming registration and may impose reasonably necessary conditions upon the
granting of a gaming registration. Grounds for denial include felony
convictions, criminal acts, convictions involving dishonesty, illegal gambling
activities, and false statements on a gaming application. Such grounds also
generally include having a financial interest in a business or organization that
engages in gaming activities that are illegal under California law. In addition,
the Attorney General possesses broad authority to suspend or revoke a gaming
registration on any of the foregoing grounds, as well as for violation of any
federal, state or local gambling law, failure to take reasonable steps to
prevent dishonest acts or illegal activities on the premises of the card club
casino, failure to cooperate with the Attorney General in its oversight of the
card club casino and failure to comply with any condition of the registration.
The City of Inglewood and the City of Compton have granted the operator of the
Hollywood Park-Casino and the Crystal Park Casino all municipal gaming licenses
necessary for operation of such facilities, and the operator has received
provisional registrations for both locations from the California Department of
Justice.
Argentina The Provincial Government of Neuquen, Argentina enacted a casino
- ---------
privatization program to issue twelve-year exclusive concession agreements to
operate existing casinos. The Company's two casinos are the only casinos in the
province of Neuquen, in west central Argentina, and are located in Neuquen City
and San Martin de los Andes. The casinos had previously been operated by the
provincial government. The Ministry of Finance of Argentina has adopted a
modified regulatory system for casinos, based somewhat on the regulatory system
utilized by the State of Nevada, and such regulatory system is being
administered by the Provincial Government of Neuquen. The Company cannot predict
what effect the enactment of other laws, regulations or pronouncements relating
to casino operations may have on the operations of Casino Magic Argentina.
Federal and State Income Tax Matters
The Company accounts for income taxes under Statement of Financial Accounting
Standards No. 109 Accounting for Income Taxes, whereby deferred tax assets and
liabilities are recognized for the future tax consequences attributable to
differences between the financial statement carrying amounts of existing assets
and liabilities and their respective tax bases (see Notes 1 and 12 to the Notes
to Consolidated Financial Statements).
24
As of December 31, 2001, the Company had federal net operating loss ("NOL") of
approximately $22,326,000 comprised principally of NOL carry-forwards acquired
in the acquisition of Casino Magic. The NOL carry-forwards expire on various
dates through 2018. Under the provision of Internal Revenue Code (Section 382)
and the regulations promulgated there-under, the utilization of NOL
carry-forwards 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. The 1998
acquisition of Casino Magic resulted in such limitation and, accordingly, the
Company's use of Casino Magic's NOL carry-forwards is subject to restrictions
imposed by Section 382 of the Internal Revenue Code. Section 382 of the Internal
Revenue Code generally provides that in each taxable year following an ownership
change with respect to a corporation, the corporation (or consolidated group of
which the corporation is a part) is subject to a limitation on the amount of the
corporation's pre-ownership change NOLs which may be used equal to the value of
the stock of the corporation (determined immediately prior to the ownership
change and subject to certain adjustments) multiplied by the "long term tax
exempt rate" which is in effect at the time of the ownership change. For
ownership changes occurring during October 1998 (Casino Magic), the long-term
tax exempt rate was 5.15%.
For California tax purposes, as of December 31, 2001, the Company had
approximately $9,967,000 of Los Angeles Revitalization Zone ("LARZ") tax
credits. The LARZ tax credits can only be used to reduce certain California tax
liabilities and cannot be used to reduce federal tax liabilities. A valuation
allowance has been recorded with respect to the LARZ tax credits because the
Company may not generate enough income subject to California tax to utilize the
LARZ tax credits before they expire.
Employees
The following is a summary of the Company's employees by property at December
31, 2001:
Permanent
Property Staff
- ------------------------- ---------
Belterra 1,200
Boomtown Reno 1,100
Boomtown New Orleans 1,082
Casino Magic Biloxi 1,069
Casino Magic Bossier City 1,124
Casino Magic Argentina 256
Corporate 35
-----
Total 5,866
=====
The Company does not employ the staff at the Hollywood Park-Casino or the
Crystal Park Casino. Additionally, during the busier summer months, each casino
property supplements its permanent staff with part-time employees.
The Company's staff is non-union. The Company believes that it has good
relationships with its employees.
Other Information
Information concerning backlog, sources and availability of raw materials is not
essential to an understanding of the Company's business.
The Company does not engage in material research activities relating to
development of new products or services or improvement of existing products or
services.
Compliance with federal, state and local provisions which have been enacted or
adopted regulating the discharge of materials into the environment or otherwise
relating to the protection of the environment have not had a material effect
upon capital expenditures, earnings or the competitive position of the Company.
25
The Company operates two land-based casinos in Argentina. Casino Magic
Argentina's contribution to the Company's net income is immaterial as compared
with the contributions of the Company's domestic gaming operations. Casino Magic
Argentina's assets held in Argentina were $11,376,000 at December 31, 2001, or
less than 2% of the Company's consolidated assets on that date.
Item 2. Properties
- ------------------
The following describes the Company's principal real estate properties:
Properties
Pinnacle Entertainment, Inc. The Company leases approximately 10,000 square feet
- ---------------------------
for its corporate offices in Glendale, California under a sublease agreement
that expires in May 2005.
Belterra Casino Resort Belterra Casino Resort is located on approximately 315
- ----------------------
acres in Switzerland County, Indiana, of which 167 acres are owned and 148 acres
are leased. The facility consists of a 15-story, 308-room hotel, a cruising
riverboat casino with 1,344 slot machines and 45 table games, an 18-hole
championship golf course, a 1,500-seat entertainment facility, six restaurants,
retail areas and other amenities. In addition, in October 1999, the Company
acquired the Ogle Haus Inn, a 54-room hotel operation in Vevay, for $2,500,000.
The Company utilized the facility principally for the Belterra Casino Resort's
pre-opening operations. Currently, the Ogle Haus provides housing for some
employees and is being renovated to be operated as a hotel facility providing
overflow capacity for the Belterra Casino Resort during peak visitation periods.
The restaurant and bar at the Ogle Haus are expected to be leased, for a nominal
amount, to an unrelated third party.
Boomtown Reno The Company owns 569 acres in Verdi, Nevada, with current
- -------------
operations presently utilizing approximately 61 acres. Of the 508 excess acres,
the Company considers approximately 250 as available for development. The
Company may seek to sell such excess acreage to interested developers or
investors. The Company owns all of the improvements and facilities at the
property, including the casino, hotel, truck stop, recreational vehicle park and
service station, along with the related water rights.
Boomtown New Orleans The Company owns approximately 54 acres in Harvey,
- --------------------
Louisiana which are utilized by Boomtown New Orleans. The Company owns the
facilities and associated improvements at the property, including the riverboat
casino.
Casino Magic Biloxi Casino Magic Biloxi is located on approximately 16 acres, of
- -------------------
which 4.5 acres are owned and approximately 11.5 acres are leased, inclusive of
approximately 6.4 acres of submerged tidelands leased from the state of
Mississippi. The tidelands are under a ten-year lease that expires on May 31,
2003, with an option to extend the term for five years under the same terms and
conditions, subject to the renegotiation of annual rent. The remaining leased
land is leased pursuant to leases that expire on June 30, 2003, each with
options to extend the terms thereof for additional five-year periods. The
Company owns the barge on which the casino is located and all of the land-based
facilities, including the hotel.
Casino Magic Bossier City The Company owns 23 acres on the banks of the Red
- -------------------------
River in Bossier City, Louisiana. The property contains a dockside riverboat
casino, hotel, parking structure and other land-based facilities, all of which
are owned by the Company. The Company also leases approximately one acre of
water bottoms from the State of Louisiana pursuant to a lease due to expire in
September 2006.
Casino Magic Argentina The Company operates two casinos in west central
- ----------------------
Argentina, in the cities of Neuquen and San Martin de los Andes. The Company
does not own any real property at these sites.
Hollywood Park-Casino As discussed in Note 11 to the Notes to Consolidated
- ---------------------
Financial Statements, upon the sale of the Hollywood Park-Casino to Churchill
Downs, the Company entered into a 10-year leaseback agreement with Churchill
Downs, and immediately subleased the facility to an unaffiliated third party
tenant to
26
operate the card club casino. The Hollywood Park-Casino contains approximately
30,000 square feet of card club gaming space and 30,000 square feet of retail
and restaurant space.
Undeveloped Land in St. Louis, Missouri The Company owns approximately 3.5 acres
- ---------------------------------------
of undeveloped land in St. Louis, Missouri. The undeveloped land was acquired by
Casino Magic in the event Casino Magic elected to proceed with a riverboat
gaming license in Missouri. The Company has no plans to develop such property
and will consider reasonable offers to sell such property.
Warehouse Leases The Company leases warehouse space at various locations close
- ----------------
to its operating properties. These are utilized to hold attic stock for hotel
and casinos, as well as the long-term retention of its various accounting files.
Properties and Assets Held For Sale
The Crystal Park Casino The Company owns the approximately twenty acres on which
- -----------------------
the casino facility, adjoining hotel and parking is located. Prior to February
2001, the Company leased the adjoining hotel and approximate 35 acres of
unimproved land from the city of Compton under a 50-year lease. In February
2001, in order to obtain full title to the property , the Company purchased the
hotel tower and approximately 14 acres of the leased land for approximately
$3,400,000. In the fourth quarter of 2001, the Company actively marketed the
property for sale, recorded an impairment loss of $20,358,000 on this property
and reclassified the net book value to "Assets held for sale" on the
Consolidated Balance Sheet (see Notes 4 and 5 to the Notes to Consolidated
Financial Statements).
Boomtown Belle I In the fourth quarter of 2001, under provisions of SFAS No.
- ----------------
121, the Company determined it would not be able to recover the net book value
of the Boomtown Belle I, the original cruising riverboat casino operated at
Boomtown New Orleans, based on recent offers to purchase the cruising riverboat
casino. As such, the Company recorded an impairment write-down of $1,808,000 and
reclassified the net book value of the Boomtown Belle I to "Assets held for
sale" on the Consolidated Balance Sheet (see Notes 4 and 5 to the Notes to
Consolidated Financial Statements).
Inglewood, California The Company owns approximately 97 acres of unimproved land
- ---------------------
adjacent to the Hollywood Park Race Track in Inglewood, California. In April
2000, the Company announced it had entered into an agreement for the sale of the
97 acres for $63,050,000 in cash. In April 2001, the Company announced the
prospective buyer had elected to terminate the agreement. The Company continues
to market the property to prospective buyers and has classified the land as an
"Asset held for sale" on the Consolidated Balance Sheets (see Note 5 to the
Notes to Consolidated Financial Statements).
Item 3. Legal Proceedings
- -------------------------
Astoria Entertainment Litigation In November 1998, Astoria Entertainment, Inc.
- --------------------------------
filed a complaint in the United States District Court for the Eastern District
of Louisiana. Astoria, an unsuccessful applicant for a license to operate a
riverboat casino in Louisiana, attempted to assert a claim under the Racketeer
Influenced and Corrupt Organizations ("RICO") statutes, seeking damages
allegedly resulting from its failure to obtain a license. Astoria named several
companies and individuals as defendants, including Hollywood Park, Inc. (the
predecessor to Pinnacle Entertainment), Louisiana Gaming Enterprises, Inc.
("LGE"), and an employee of Boomtown, Inc. The Company believed the RICO claim
against it had no merit and, indeed, Astoria voluntarily dismissed its RICO
claim against Hollywood Park, LGE, and the Boomtown employee.
On March 1, 2001, Astoria amended its complaint. Astoria's amended complaint
added new legal claims, and named Boomtown, Inc. and LGE as defendants. Astoria
claims that the defendants (i) conspired to corrupt the process for awarding
licenses to operate riverboat casinos in Louisiana, (ii) succeeded in corrupting
the process, (iii) violated federal and Louisiana antitrust laws, and (iv)
violated the Louisiana Unfair Trade Practices Act. The amended complaint asserts
that Astoria would have obtained a license to operate a riverboat casino in
Louisiana, but for these alleged improper acts. On August 21, 2001, the court
dismissed Astoria's federal
27
claims with prejudice and its state claims without prejudice. On September 21,
2001, Astoria appealed those dismissals to the U.S. Court of Appeals for the
Fifth Circuit. On October 3, 2001, Boomtown, Inc. and LGE filed a cross-appeal
on the grounds that the state claims should have been dismissed with prejudice.
Astoria subsequently voluntarily dismissed its appeal. Boomtown, Inc.'s and
LGE's appeal is currently pending before the court.
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 ("RICO"), 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 (the "Poulos/Ahern Lawsuit") 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 RICO and for state common law claims for fraud, unjust
enrichment and negligent misrepresentation.
At a December 13, 1996 status conference, the Poulos/Ahern Lawsuit was
consolidated with two other class action lawsuits (one on behalf of a smaller,
more defined class of plaintiffs and one against additional defendants)
involving allegations substantially identical to those in the Poulos/Ahern
Lawsuit (collectively, the "Consolidated Lawsuits") and all pending motions in
the Consolidated Lawsuits were deemed withdrawn without prejudice. The
plaintiffs in the Consolidated Lawsuits filed a consolidated amended complaint
on February 14, 1997, which the defendants moved to dismiss. On December 19,
1997, the court granted the defendants' motion to dismiss certain allegations in
the RICO claim, but denied the motion as to the remainder of such claim; granted
the defendants' motion to strike certain parts of the consolidated amended
complaint; denied the defendants' remaining motions to dismiss and to stay or
abstain; and permitted the plaintiffs to substitute one of the class
representatives. On January 9, 1998, the plaintiffs filed a second consolidated
amended complaint containing claims nearly identical to those in the previously
dismissed complaints. The defendants answered, denying the substantive
allegations of the second consolidated amended complaint. On March 19, 1998, the
magistrate judge granted the defendants' motion to bifurcate discovery into
"class" and "merits" phases. "Class" discovery was completed on July 17, 1998.
The magistrate judge recommended denial of the plaintiffs' motion to compel
further discovery from the defendants, and the court affirmed in part. "Merits"
discovery is stayed until the court decides the motion for class certification
filed by the plaintiffs on March 18, 1998, which motion the defendants opposed.
In January 2001, the plaintiffs filed a supplement to their motion for class
certification. On March 29, 2001, defendants filed their response to plaintiffs'
supplement to motion for class certification. The hearing on plaintiffs' Motion
for Class Certification was held November 15, 2001. The Court has not issued a
ruling on this motion.
The claims are not covered under the Company's insurance policies. While the
Company cannot predict the outcome of this litigation, management 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 Corp., and
28
James Edward Ernst, its then Chief Executive Officer. In the complaint, as
amended, the plaintiff claims, among other things, that the defendants (i)
breached the terms of an agreement they had with the plaintiff; (ii) tortuously
interfered with certain of the plaintiff's contracts and business relations; and
(iii) breached covenants of good faith and fair dealing they allegedly owed to
the plaintiff, and seeks compensatory damages in an amount to be proven at trial
as well as punitive damages. 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, as well as a
motion for partial summary judgment on damages issues. Thereafter, the
plaintiff, in July of 1998, filed a motion to reopen discovery. The court
granted the plaintiff's motion, in part, allowing the parties to conduct
additional limited discovery. On November 30, 1999, the matter was transferred
to the Circuit Court for the Second Judicial District for Harrison County,
Mississippi. On October 19, 2001, the Court denied defendant's motion for
summary judgment. On October 22, 2001, the Court granted defendant's motion for
partial summary judgment, in part, requiring plaintiff to modify its method of
calculating damages. On October 24, 2001, the defendants were granted a
continuance in order to allow additional discovery to be conducted on
plaintiff's revised damage claims. The trial has been set for November 12, 2002.
The Company's insurer has essentially denied coverage of the claim against Mr.
Ernst under the Company's directors and officers insurance policy, but has
reserved its right to review the matter as to tortious interference at or
following trial. The Company believes that the insurer should not be permitted
to deny coverage, although no assurances can be given that the insurer will
change its position. While the Company cannot predict the outcome of this
action, management believes the lawsuit will not have a material adverse effect
and intends to vigorously defend this action.
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 the
Boomtown Biloxi land based improvements in Biloxi, Mississippi (the "Project").
The lawsuit alleged 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 sought recovery in excess of $4,000,000 plus punitive
damages. 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. On February 7, 2002, the Mississippi
Supreme Court affirmed the judgment of the lower court.
Casino Magic Biloxi Patron Shooting Incident On January 13, 2001, three Casino
- --------------------------------------------
Magic Biloxi patrons were shot, sustaining serious injuries as a result of a
shooting incident involving another Casino Magic Biloxi patron, who then killed
himself. Several other patrons sustained minor injuries while attempting to exit
the casino. On August 1, 2001, two of the casino patrons shot during the January
13, 2001 incident filed a complaint in the Circuit Court of Harrison County,
Mississippi, Second Judicial District. The complaint alleges that Biloxi Casino
Corp. failed to exercise reasonable care to keep its patrons safe from
foreseeable criminal acts of third persons and seeks unspecified compensatory
and punitive damages. The Plaintiffs filed an amended complaint on August 17,
2001. The amended complaint added an allegation that Biloxi Casino Corp.
violated a Mississippi statute by serving alcoholic beverages to the perpetrator
who was allegedly visibly intoxicated and that Biloxi Casino Corp.'s violation
of the statute was the proximate cause of or contributing cause to Plaintiffs'
injuries. While the Company cannot predict the outcome of the litigation, the
Company believes that Biloxi Casino Corp. is not liable for any damages arising
from the incident and the Company, together with its applicable insurers,
intends to vigorously defend this lawsuit.
Actions by Greek Authorities In 1995, a Dutch subsidiary of Casino Magic Corp.,
- ----------------------------
Casino Magic Europe B.V. ("CME"), performed management services for Porto Carras
Casino, S.A. ("PCC"), a joint venture in which CME had a minority interest.
Effective December 31, 1995, CME with the approval of PCC, assigned its
interests and obligations under the PCC management agreement to a Greek
subsidiary, Casino Magic Hellas S.A. "(Hellas"). Hellas issued invoices to PCC
for management fees which accrued during 1995, but had not been billed by CME.
In September 1996, local Greek tax authorities in Thessaloniki assessed a
penalty of approximately $3,500,000 against Hellas, and an equal amount against
PCC, arising out of the presentation and payment of the
29
invoices. The Thessaloniki tax authorities asserted that the Hellas invoices
were fictitious, representing an effort to reduce the taxable income of PCC.
PCC and Hellas each appealed their respective assessments. The assessment of the
fine against PCC was overturned by the Administrative court of Thessaloniki on
December 11, 2000. The court determined that the actions taken by Hellas and PCC
were not fictitious but constituted a legitimate business transaction and
accordingly overturned the assessment of the fine. The taxing authorities may
appeal the court's decision. Hellas's appeal was dismissed for technical
procedural failures and has not been reinstated; presumably, however, the
rationale of the court in the PCC fine matter would apply equally to the Hellas
fine matter.
Under Greek law, shareholders are not liable for the liabilities of a Greek
company in which they hold shares, even if the entity is later liquidated or
dissolved, and assessments such as these generally are treated as liabilities of
the company. Additionally, all of PCC's stock was sold to an unrelated company
in December of 1996, and the buyer assumed all of PCC's liabilities. Therefore,
management does not expect that this matter will have a materially adverse
effect on the financial condition or results of operations of the Company.
In June 2000, Greek authorities issued a warrant to appear at a September 29,
2000 criminal proceeding to Marlin Torguson (a member of the Company's board of
directors and Chairman of the Board of Casino Magic since its inception) and
Robert Callaway (former Associate General Counsel for the Company and, prior to
its acquisition by the Company, Casino Magic's General Counsel). They were
charged under Greek law, and convicted in absentia, as being culpable criminally
for corporate misconduct based solely on their status as alleged executive board
members of PCC. The Company is advised that they are not, and have never been,
managing (active) executive directors of PCC. Accordingly, the Company believes
that they were improperly named in the proceedings. The defendants have a right
of appeal for a de novo trial under Greek law.
Upon being notified of the convictions, the Company's compliance committee
suspended Mr. Callaway and Mr. Torguson from their respective duties, other than
to assist in the investigation of actions described above, and sought the
resignation of Mr. Torguson from the Company board of directors. At the time
that the Greek court overturned the PCC fine, and based upon: (1) the
determination of the court that the Hellas/PCC transaction was a legitimate
transaction and (2) the fact that neither Mr. Torguson nor Mr. Callaway were
properly named, the compliance committee reinstated Messsrs. Torguson and
Callaway. In February 2001, Mr. Callaway left the employ of the Company.
During the first quarter of 2001, the Greek taxing authorities appealed the
December 11, 2000 decision by the Administrative Court of Thessaloniki
overturning the assessment of the fine against PCC. No hearing date on such
appeal has been set.
On March 30, 2001, appeals on behalf of Marlin Torguson and Robert Callaway were
filed. The hearing before the three-member Court of Misdemeanors of Thessaloniki
has been set for October 24, 2002.
The Company has been advised that the resolution of the related civil penalties
may sometimes resolve criminal issues in Greece. The Company is actively working
to resolve the civil and criminal actions related to this matter.
The Company is party to a number of other pending legal proceedings, though
management does not expect that the outcome of such proceedings, either
individually or in the aggregate, will have a material effect on the Company's
financial results.
30
Item 4. Submission of Matters to a Vote of Security Holders
- -----------------------------------------------------------
None
Part II
-------
Item 5. Market for the Registrant's Common Equity and Related Stockholder
- -------------------------------------------------------------------------
Matters
-------
The Company's common stock is listed on the New York Stock Exchange and is
traded under the name Pinnacle Entertainment, Inc., identified by the symbol
"PNK". Prior to February 28, 2000, the Company's common stock was traded on the
New York Stock Exchange under the name Hollywood Park, Inc., identified by the
symbol "HPK".
The following table sets forth the high and low closing sales prices per common
share of the Company's common stock on the New York Stock Exchange.
Price Range
----------------------
High Low
------ ------
2001
----
First Quarter $13.81 $ 9.70
Second Quarter 10.60 7.35
Third Quarter 8.99 5.95
Fourth Quarter 7.23 5.50
2000
----
First Quarter $23.50 $16.63
Second Quarter 20.81 18.63
Third Quarter 22.06 19.38
Fourth Quarter 22.81 12.69
As of March 22, 2002, there were 2,929 stockholders of record of the Company's
common stock.
Dividends The Company did not pay any dividends in 2001 or 2000. Payments of
future dividends would be at the discretion of the Company's Board of Directors
and would depend upon, among other things, future earnings, operational and
capital requirements, the overall financial condition of the Company and general
business conditions. The Board of Directors does not anticipate paying any cash
dividends on the Company's common stock in the foreseeable future.
31
Item 6. Selected Financial Data
- -------------------------------
The following selected financial information for the years 1997 through 2001 was
derived from the consolidated financial statements of the Company. In December
2001, the Company incurred asset impairment charges, primarily related to the
write-down of the Crystal Park Casino and Boomtown Belle I (see Notes 4 and 5 to
the Notes to Consolidated Financial statements). The Belterra Casino Resort was
built by the Company and opened in October 2000. Boomtown Biloxi and Casino
Magic Bay St. Louis were sold in August 2000, Turf Paradise was sold in June
2000, surplus land was sold in March 2000 and the Hollywood Park Race Track and
Hollywood Park-Casino were disposed of in September 1999 (see Note 11 to the
Notes to Consolidated Financial Statements). The Company leased the Hollywood
Park-Casino back from Churchill Downs California Company ("Churchill Downs"), a
wholly owned subsidiary of Churchill Downs Incorporated, and immediately
subleased the facility to an unaffiliated third party. Casino Magic was acquired
in October 1998 and Boomtown was acquired in June 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 (see Note 9 to
the Notes to Consolidated Financial Statements). The information set forth below
should be read in conjunction with "Management's Discussion and Analysis of
Financial Condition and Results of Operations", the financial statements and
related notes thereto.
Included in the table is a presentation of earnings before interest, taxes,
depreciation, amortization and non-recurring items ("EBITDA"). EBITDA is not a
measure of financial performance under accounting principles generally accepted
in the United States ("GAAP"), but is used by some investors to determine a
company's ability to service or incur indebtedness. EBITDA is not calculated in
the same manner by all entities and accordingly, may not be an appropriate
measure of comparable performance. EBITDA should not be considered in isolation
from, or as a substitute for, net income (loss), cash flows from operations or
cash flow data prepared in accordance with GAAP. EBITDA is calculated by adding
income taxes, minority interests, net interest expense, depreciation and
amortization, extraordinary items and non-recurring items to net income (loss).
Non-recurring items include: a) the asset impairment write-downs recorded in the
years ended December 31, 2001 and 1999; b) the gain (loss) on disposition of
assets recorded in the years ended December 31, 2001, 2000, 1999 and 1998; c)
the pre-opening expenses for Belterra Casino Resort recorded in the years ended
December 31, 2001, 2000, 1999 and 1998; d) the terminated merger costs recorded
in the years ended December 31, 2001 and 2000; e) the extraordinary item for the
early extinguishment of the Casino Magic 13% Notes (see Note 14 to the Notes to
Consolidated Financial Statements), net of income tax benefit, in the year ended
December 31, 2000; f) the Casino Magic Argentina minority interest in the years
ended December 31, 1999, 1998 and 1997; and g) the REIT restructuring expenses
recorded in the years ended December 31, 1998 and 1997.
32
Pinnacle Entertainment, Inc.
Selected Financial Data
For the years ended December 31,
---------------------------------------------------------------
2001 2000 1999 1998 1997
--------- --------- ---------- --------- --------
(in thousands, except per share data)
Statement of Operations Data:
Revenues:
Gaming $ 442,089 $ 461,901 $ 536,661 $ 277,593 $125,030
Food and beverage 30,952 31,920 39,817 30,510 19,894
Hotel, truck stop and service station 35,167 34,512 29,381 17,575 9,570
Other (including racing) 20,433 34,792 80,133 85,825 81,005
--------- --------- ---------- --------- --------
528,641 563,125 685,992 411,503 235,499
--------- --------- ---------- --------- --------
Expenses:
Gaming 259,573 258,346 288,643 146,085 62,104
Food and beverage 38,799 35,180 46,558 38,860 25,745
Hotel, truck stop and service station 28,872 26,963 22,219 14,492 8,325
General, administrative, racing and other 134,494 122,689 171,485 132,400 99,349
Depreciation and amortization 49,450 46,102 51,924 32,121 18,157
(Gain) loss on disposition of assets (500) (118,816) (62,507) 2,221 0
Asset impairment write-down 23,530 0 20,446 0 0
Pre-opening costs, Belterra Casino Resort 610 15,030 3,020 821 0
Terminated merger costs (464) 5,727 0 0 0
--------- --------- ---------- --------- -------
534,364 391,221 541,788 367,000 213,680
--------- --------- ---------- --------- -------
Operating (loss) income (5,723) 171,904 144,204 44,503 21,819
Interest expense, net 44,832 40,016 57,544 22,518 7,302
--------- --------- ---------- --------- -------
(Loss) income before income taxes, minority
interest and extraordinary item (50,555) 131,888 86,660 21,985 14,517
Minority interest 0 0 1,687 374 (3)
Income tax (benefit) expense (21,906) 52,396 40,926 8,442 5,850
--------- --------- ---------- --------- -------
Net (loss) income before extraordinary item (28,649) 79,492 44,047 13,169 8,670
Extraordinary item, net of income tax benefit 0 2,653 0 0 0
--------- --------- ---------- --------- -------
Net (loss) income ($28,649) $ 76,839 $ 44,047 $ 13,169 $ 8,670
========= ========= ========== ========= =======
===============================================================================================================
Dividends on convertible preferred stock $ 0 $ 0 $ 0 $ 0 $ 1,520
--------- --------- ---------- --------- --------
Net (loss) income (allocated) available to
common stockholders ($28,649) $ 76,839 $ 44,047 $ 13,169 $ 7,150
========= ========= ========== ========= ========
Net (loss) income per common share:
Basic ($1.11) $ 2.92 $ 1.70 $ 0.50 $ 0.33
Diluted ($1.11) $ 2.80 $ 1.67 $ 0.50 $ 0.32
Other Data:
EBITDA (see definition at prior page) $ 66,903 $ 119,947 $ 157,087 $ 80,085 $ 42,459
Cash flows (used in) provided by:
Operating activities $ 36,065 ($25,484) $ 74,207 $ 37,224 $ 14,365
Investing activities (43,304) 193,277 (51,063) (136,532) (16,226)
Financing activities (12,442) (118,287) 55,984 119,386 9,609
Capital expenditures 51,783 194,627 58,321 54,605 32,505
Balance Sheet Data (at December 31,):
Cash, cash equivalents and
short-term investments $ 156,639(a) $ 172,868 $ 246,790 $ 47,413 $ 24,156
Total assets 919,349 961,475 1,045,408 891,339 419,029
Current liabilities 83,654 93,375 145,008 128,592 57,317
Long term notes payable 493,493 497,162 618,698 527,619 132,102
Total liabilities 599,833 600,299 764,532 656,611 195,729
Stockholders' equity 319,516 361,176 280,876 230,976 221,354
(a) Includes $3,452 of cash in Argentina, which at December 31, 2001 could not
be transferred out of Argentina.
33
Item 7. Management's Discussion and Analysis of Financial Condition and Results
-----------------------------------------------------------------------
of Operations
-------------
The following discussion and analysis of financial condition, results of
operations, liquidity and capital resources should be read in conjunction with
the Company's audited Consolidated Financial Statements and the notes thereto.
Forward-Looking Statements
Except for the historical information contained herein, the matters addressed in
this Annual Report on Form 10-K may constitute "forward-looking statements"
within the meaning of Section 27A of the Securities Act of 1933, as amended, and
Section 21E of the Securities and Exchange Act of 1934, as amended. Words such
as, but not limited to, "believes," "expects," "anticipates," "estimates,"
"intends," "plans," and similar expressions are intended to identify
forward-looking statements. Such forward-looking statements, which may include,
without limitation, statements regarding the Company's expansion plans, cash
needs, cash reserves, liquidity, operating and capital expenses, financing
options, expense reductions and operating results, are subject to a variety of
risks and uncertainties that could cause actual results to differ materially
from those anticipated by the Company's management. Factors that may cause
actual performance of the Company to differ materially from that contemplated by
such forward-looking statements include, among others:
. approval of the Calcasieu parish referendum for the Lake Charles
project, compliance with the conditions negotiated with the Louisiana
Gaming Control Board, completion of the project on time and on budget
and the effect of expanded Indian gaming in Louisiana on the Company's
decision to proceed with the Lake Charles project (see Note 8 to the
Notes to Consolidated Financial Statements);
. the effectiveness of management at the Belterra Casino Resort in
containing costs without negatively affecting revenues, customer
service or efforts to expand the number of customers visiting the
property;
. changes in gaming legislation in each of the states in which the
Company operates;
. changes in gaming laws and regulations, including the expansion of
casino gaming in states in which the Company operates (or in states
bordering the states in which the Company operates), such as the
expansion of Indian gaming in California and Louisiana and the
introduction of casino gaming in Kentucky, Ohio or Arkansas;
. the effectiveness of the planned capital improvements at Casino Magic
Bossier City in drawing additional customers to the property despite
significant competition in the local market (see Note 8 to the Notes
to Consolidated Financial Statements);
. the effect of current and future weather conditions and other natural
events affecting the key markets in which the Company operates;
. the effect of current and future political and economic instability in
Argentina on the operations of Casino Magic Argentina and related
currency matters (see Note 3 to the Notes to Consolidated Financial
Statements);
. the amount and effect of future impairment charges under SFAS No. 142
and SFAS No. 144 (see Note 1 to the Notes to Consolidated Financial
Statements);
. overall economic conditions, including the effects of the September
11, 2001 terrorist attacks (and any future terrorist attacks) on
travel and leisure expenditures by the Company's customers, as well as
increased costs of insurance and higher self-insurance reserves;
. the failure to sell any of the assets held for sale (see Note 5 to the
Notes to Consolidated Financial Statements);
34
. the failure to obtain adequate financing to meet strategic goals,
including financing for the Lake Charles project;
. the failure to obtain or retain gaming licenses or regulatory
approvals;
. risks associated with substantial indebtedness, leverage, debt service
and liquidation;
. loss or retirement of any key executives;
. risks related to pending litigation;
. increased competition by casino operators who have more resources and
have built or are building competitive casino properties;
. increases in existing taxes or the imposition of new taxes on gaming
revenues or gaming devices;
. other adverse changes in the gaming markets in which Pinnacle
Entertainment, Inc. operates;
. the other risks described or referred to in "-Risk Factors" and
"-Factors Affecting Future Operating Results".
The Private Securities Litigation Reform Act of 1995 (the "Act") provides
certain "safe harbor" provisions for forward-looking statements. All
forward-looking statements made in this Annual Report on Form 10-K are made
pursuant to the Act. For more information on the potential factors which could
affect the Company's financial results, please see "-Risk Factors" and "-Factors
Affecting Future Operating Results" below and review the Company's filings with
the Securities and Exchange Commission.
Risk Factors
In addition to the other information set forth in this Annual Report on Form
10-K for the fiscal year ended December 31, 2001, one should carefully consider
the following factors.
All of the Company's properties are dependent upon retaining existing and
attracting new customers within their respective geographical markets.
The Company is continually developing new and different marketing programs
to retain existing and attract new customers to its properties. Such
programs include mailing coupons and other direct mail offers to customers,
providing complimentary rooms, food and beverage based on the amount
wagered in the casino to frequent players, sponsoring gaming tournaments
that provide significant rewards to the winners, and other offers that both
provide incentives to existing customers and attract new customers. The
cost of such programs can be significant and can reduce the overall
profitability of the specific location and the Company as a whole. In
addition, certain programs may not generate incremental revenue if the
customer merely takes advantage of the marketing program for the short-term
and does not become a frequent customer.
In addition to competing with other gaming operators in the various markets
the Company operates, the Company is competing for customers, and their
available discretionary spending resources, with other entertainment and
leisure companies and attractions. Such companies and attractions may also
offer rewards and incentives that would reduce the number of visits to and/
or the amount spent by new and existing customers at the Company's
properties.
Finally, further terrorist attacks on the United States or its interests,
such as that of September 11, 2001, could have a material adverse effect on
the desire of existing and future customers to want to travel and frequent
the Company's facilities.
35
There can be no assurance that the Company will be able to continue to
attract a sufficient number of customers necessary to make its operations
profitable.
The Company faces intense competition in all the markets which it operates.
See "Item 1 - Description of Business/ Competition" for a description of
competition faced by the Company.
Loss of land-based, riverboat or dockside facilities from service would
adversely affect the Company's operations.
The Company's riverboat and dockside gaming facilities in Indiana,
Louisiana and Mississippi, as well as any additional riverboat casino
properties that might be developed or acquired, are subject to risks in
addition to those associated with land-based casinos, including loss of
service due to casualty, mechanical failure, extended or extraordinary
maintenance, flood, hurricane, snow and ice storms or other severe weather
conditions. For cruising riverboats there are additional risks associated
with the movement of vessels on waterways, including risks of casualty due
to river turbulence and severe weather conditions.
In addition, the Company's Boomtown Reno, Nevada facility is subject to
severe winter weather conditions that can cause the closure of Interstate
80 and reduce the amount of customers visiting the property.
Finally, the Company's Casino Magic Argentina operation is subject to
continued political and economic instability.
In July 2000, the Miss Belterra was struck by a barge while en route to
Vevay, Indiana. The incident caused the opening of the Belterra Casino
Resort to be delayed from August 2000 to October 2000. There can be no
assurance that the Company's water-based facilities will not be struck by
other vessels while on the waterways.
In September 1998, a hurricane struck the Gulf Coast region and Boomtown
Biloxi, Boomtown New Orleans, Casino Magic Biloxi, and Casino Magic Bay St.
Louis were forced to shut down operations for approximately one week,
though none of the properties sustained significant damage. If any of the
Company's casinos, be it riverboat, dockside or land-based, cease
operations for any period of time, it could adversely affect the Company's
results of operations.
Although the Company carries property and business interruption insurance
for these types of items, there can be no assurances similar, or other,
events will not occur in the future that could cause the loss of service of
the Company's facilities.
The substantial amount of debt of the Company could materially adversely affect
the Company's business.
As of December 31, 2001, the Company had $497,147,000 of debt, including
$350,000,000 of unsecured 9.25% Notes due February 2007 and $125,000,000 of
unsecured 9.5% Notes due August 2007 (see Note 14 to the Notes to
Consolidated Financial Statements). In 2001, cash flow to service the
Company's debt was $45,720,000 (see Note 2 to the Notes to Consolidated
Financial Statements), including $44,250,000 related to the 9.25% and 9.5%
Notes. While the Company currently believes that there are sufficient cash
and cash-generating resources to meet its debt service obligations during
the next year, there can be no assurance that in the future the Company
will generate sufficient cash flow from operations or through asset sales
to meet its long-term debt service obligations. No assurance can be given
that the Company will be able to refinance any of its indebtedness on terms
favorable to the Company, or at all. Such debt and the related debt service
obligations could have important adverse consequences to the Company,
including but not limited to: a) limiting the Company's ability to obtain
additional financing; b) requiring a substantial portion of the Company's
cash flow from operations to be used for payments on the debt and related
interest; c) reducing the Company's ability to use cash flow to fund
working capital, capital expenditures and general
36
corporate requirements; d) limiting the Company's flexibility in planning
for, or reacting to, changes in the business and the industry; and, e)
restricting the Company's activities compared to those of competitors with
less debt or greater resources.
Limited operating history at the Belterra Casino Resort does not allow the
Company to effectively measure various improvements the Company has implemented
at the facility.
The Belterra Casino Resort opened in October 2000 and, through December 31,
2001, has generated a net loss in excess of $24,500,000, including an
EBITDA loss in excess of $9,300,000 (see "Item 6 - Selected Financial Data"
for a definition of EBITDA). The Company attributes the poor performance
to, among other things: a) a location that is not easily accessible from
local interstate freeways, b) over-staffing in anticipation of higher
revenue and a greater number of customers frequenting the property than did
in fact visit the facility, c) additional marketing costs to promote the
facility (which is customary for new gaming facilities), d) opening the
property in October 2000, which is traditionally the slowest period of the
year, and e) severe winter weather conditions in the fourth quarter of 2000
and first quarter of 2001.
In an attempt to improve the overall financial performance of the facility,
during the fourth quarter of 2001, the Company undertook an aggressive cost
containment program at the property, including reducing the property's
labor levels (including management positions) to be more consistent with
its business levels, eliminating certain marketing programs and reducing
operating costs by eliminating and/ or combining certain operations. In
addition, changes were made in the casino, including the slot machine mix,
to become more appealing to the customer. Results of these efforts appear
to be positive, however, there can be no assurances such actions will
materially improve the long-term profitability of the Belterra Casino
Resort.
In addition, there is currently planned the construction of a 3.5 mile
roadway from Interstate 71, a main thoroughfare in northern Kentucky, to
the Ohio river, which ending point would be approximately 1 mile from the
Belterra Casino Resort. It is anticipated the construction would begin in
2003 and be completed in 2004. The cost of the construction is to be borne
by the state of Kentucky, which currently has the funds set aside for such
construction. In the event the construction is completed, the Company
believes this roadway will improve access to its facility; however, there
can be no assurances the roadway will be constructed, and if constructed,
that such roadway would materially increase the number of customers
visiting the Belterra Casino Resort, and therefore improve the financial
results of the property.
Development of the Lake Charles project could exhaust all of the Company's
available capital and not provide for a sufficient return.
The Company has been selected to receive the fifteenth and final gaming
license for a proposed project in Lake Charles, Louisiana. Issuance of the
license is subject to a number of conditions, which conditions were
finalized by the Company and the Gaming Control Board in November 2001 (the
"Lake Charles Conditions"). The Lake Charles Conditions include, but are
not limited to, the approval of the voters of Calcasieu Parish, where the
Lake Charles project is located, currently scheduled for April 6, 2002.
There are no assurances such referendum will not be delayed beyond April
2002, and if held, that it will pass.
In addition to the April 6, 2002 Calcasieu Parish vote noted above, other
Lake Charles Conditions include, but are not limited to, building a
facility consistent with the July 2000 presentation, meeting certain
construction milestone dates and satisfying the financing requirements to
complete the project (including segregating $22,500,000 in a refundable
"escrow" account upon the voter approval of the project in Calcasieu Parish
and demonstrating the Company has available financial resources in cash and
credit facility access for the full project amount of $225,000,000 once
construction commences). Construction is scheduled to commence in late
2002. The Company anticipates it will continue to meet each of the Lake
Charles Conditions, however
37
there can be no assurances the Company will do so, in which event the
Company would not be licensed to operate a casino in Lake Charles,
Louisiana.
The proposed project is the construction and operation of a $225,000,000
(excluding capitalized interest) dockside riverboat casino, hotel and golf
course resort complex in Lake Charles, Louisiana. The Company is
considering various financing options for the development of the proposed
project (and therefore compliance with the financing requirement of the
Lake Charles Conditions), including, but not limited to, utilizing the
Company's existing credit facility (see Note 14 to the Notes to
Consolidated Financial Statements), a new credit facility or other senior
debt, leasing arrangements and joint venture arrangements.
In February 2002, the Governor of Louisiana signed a compact with the Jena
Band of Choctaw Indians (the "Choctaw Indians") to allow for the
development and operation of a land-based casino in the city of Vinton,
Louisiana (which city is in Calcasieu Parish and is 20 miles closer to
Houston, Texas, the major marketing area for casinos in Lake Charles, than
the Company's proposed Lake Charles project). In March 2002, such compact
was disapproved by the U.S. Department of the Interior. There can be no
assurances the Choctaw Indians will not seek to amend the compact,
negotiate a revised compact with the state of Louisiana and seek to
resubmit with the Department of the Interior. In the event the Choctaw
Indians are successful in obtaining the approval of the Department of the
Interior for a new compact for their site in Vinton, Louisiana, the Company
believes such facility would have a material adverse effect upon the
Company's decision to develop it's proposed Lake Charles project. In the
absence of an additional Indian gaming facility in Calcasieu Parish (as one
currently exists to the east of the Company's proposed Lake Charles
project), the Company anticipates building a facility similar in design and
scope to that of Belterra Casino Resort.
In the event the Company elects to proceed with the Lake Charles project,
the capital required to complete the project is significant. Depending on
the source of funding to develop the project (credit facility, leasing
arrangements, joint venture partner, etc.), such capital requirement to the
Company may exhaust all available capital of the Company. There can be no
assurance that, in the event the project is commenced, there will be
sufficient capital for other business activities of the Company. In
addition, there are risks that, once completed, the revenue generated from
the new development is not sufficient to pay its expenses, and the Company
is required to infuse cash to pay its bills. There can be no assurance such
new facility will be able to cover its own cash flow requirements.
Adverse regulatory changes or changes in the gaming environment in any of the
jurisdictions could have a material adverse effect on the Company's operations.
See "Item 1 - Description of Business/ Government Regulation and Gaming
Issues" and "- / Competition".
For more information on the potential factors which could affect the Company's
financial results, please see "-Forward-Looking Statements" and "-Factors
Affecting Future Operating Results" and review the Company's filings with the
Securities and Exchange Commission.
Critical Accounting Policies
The Company's significant accounting policies are discussed in Note 1 to the
Notes to Consolidated Financial Statements. The preparation of consolidated
financial statements in conformity with accounting principles generally accepted
in the United States requires management to apply significant judgment in
defining the estimates and assumptions. Our accounting policies that require
significant judgment in determining the appropriate assumptions include policies
for insurance reserves, asset disposition reserves, allowances for doubtful
accounts, asset impairment and other reserves; valuation of goodwill and
long-lived assets; depreciable lives of various assets and the calculation of
income tax liabilities. These judgments are subject to an inherent degree of
uncertainty. The Company's judgments are based on historical experience of the
Company, terms of various past and present agreements and contracts, industry
trends, and information available from other sources, as appropriate. There can
be no assurance that actual results will not differ from the estimates.
38
Factors Affecting Future Operating Results
Goodwill Amortization In June 2001, the Financial Accounting Standards Board
issued Statements of Financial Accounting Standards No. 141 "Business
Combinations" ("SFAS No. 141") and No. 142 "Goodwill and Other Intangible
Assets" ("SFAS No. 142") which are effective July 1, 2001 and January 1, 2002,
respectively, for the Company (see Note 1 - "Goodwill" to the Notes to
Consolidated Financial Statements). SFAS 141 requires that the purchase method
of accounting be used for all business combinations initiated after June 30,
2001. With the adoption of SFAS No. 142 on January 1, 2002 (earlier adoption is
not permitted), goodwill is no longer amortized over its estimated useful life,
which, for the years ended December 31, 2001, 2000 and 1999, was $2,846,000,
$3,030,000 and $2,859,000, respectively. Rather, goodwill will be subject to at
least an annual assessment for impairment by applying a fair-value-based test.
The Company is in the process of completing its evaluation of the financial
statement impact of adoption of SFAS No. 142 and anticipates there will be an
impairment charge recorded in the first quarter of 2002 related to its Casino
Magic locations (which unamortized goodwill was $49,169,000 as of December 31,
2001 - see Note 1 - "Goodwill" to the Notes to Consolidated Financial
Statements). In accordance with SFAS No. 142, any such transition related
impairment charge would be classified as a cumulative effect of a change in
accounting principle. In addition, under the new rules, any future acquired
intangible asset will be separately recognized if the benefit of the intangible
is obtained through contractual or other legal rights, or if the intangible
asset can be sold, transferred, licensed, rented, or exchanged, regardless of
the acquirer's intent to do so. Intangible assets with definitive lives will be
amortized over their useful lives.
Argentina During the second half of 2001, the political and economic condition
of Argentina deteriorated, including an increase in the risk of being unable to
repatriate funds out of the country, the fall of international reserves,
continuous fiscal imbalance, and a decrease in the financial system deposits. In
December 2001, these events culminated in the resignation of the then President
of the country, the imposition of restrictions on cash withdrawals, the delaying
of payment of wages to government employees, and the closing of the banking
system from late December to early January 2002. In an effort to stabilize the
country, the new government of Argentina decided to devalue the Argentine Peso
in early January 2002 (which had been pegged to the U.S. dollar for over ten
years), as well as stop all transfers of U.S. dollars out of the country. As a
result of the actions taken, pursuant to Statement of Financial Accounting
Standards No. 52 Foreign Currency Translation ("SFAS No. 52"), the Company
recorded a translation loss in a separate component of stockholders' equity in
the amount of $4,430,000 as of December 31, 2001 (see Note 3 to the Notes to
Consolidated Financial Statements). At December 31, 2001, total assets of the
Company in Argentina were $11,376,000 or less than 2% of the Company's
consolidated assets. The Company anticipates the cumulative translation loss
will fluctuate in the future based on changes in the currency exchange rate
between the U.S. dollar and the Argentine peso. In addition, the Company
reclassified the cash ($3,452,000) maintained in Argentina as restricted cash at
December 31, 2001, until such time as the Argentine government amends its
position regarding transferring funds out of the country, as such cash can only
be utilized by Casino Magic Argentina and not by Pinnacle Entertainment or any
of its other subsidiaries. In February 2002, the government authorized the
Central Bank of Argentina to review and approve transfers of cash (after
converting pesos to U.S. dollars). There is no assurance the Central Bank will
continue to authorize such transfers for Casino Magic Argentina.
The impact of these events to Casino Magic Argentina include a significant
reduction in revenue resulting from a decline in customer counts and lower
discretionary spending by customers. The Company anticipates the economic
instability will continue in 2002 and will therefore continue to adversely
impact Casino Magic Argentina operating results in 2002.
Belterra Casino Resort In October 2000, the Company opened the Belterra Casino
Resort located on 315 acres adjacent to the Ohio River in Switzerland County,
Indiana, which is approximately 45 miles southwest of downtown Cincinnati, Ohio.
The Belterra Casino Resort features a 15-story, 308-room hotel, a cruising
riverboat casino (the "Miss Belterra") with 1,344 slot machines and 45 table
games, an 18-hole Tom Fazio-
39
designed championship golf course, which opened in July 2001, six restaurants, a
1,500-seat entertainment venue, a spa, retail areas and other amenities.
Prior to August 2001, the Company owned a 97% interest in the Belterra Casino
Resort, with the remaining 3% held by a non-voting local partner. In November
2000, the Company entered into an agreement with the local partner whereby the
local partner had the right to require the Company to purchase, for a purchase
price determined in accordance with the agreement, its entire ownership interest
in the Belterra Casino Resort at any time on or after January 1, 2001. A
$100,000 deposit toward such ultimate purchase price was made by the Company to
the partner at that time. In July 2001, the local partner exercised the right to
require the Company to purchase the remaining 3% ownership interest held by the
partner for approximately $1,600,000 as calculated in accordance with the
agreement. In August 2001, the remaining payment of approximately $1,500,000 was
made to the partner and the Belterra Casino Resort is now wholly owned by the
Company.
Legislation Regarding Dockside Gaming in Louisiana In March 2001, the state
legislature passed a law enabling riverboat casinos to remain dockside at all
times and increased the gaming taxes paid to the state of Louisiana from 18.5%
to 21.5% of net gaming proceeds effective April 1, 2001 for the nine riverboats
in the southern region of the state, including the Company's Boomtown New
Orleans property. The gaming tax increase to 21.5% of net gaming proceeds will
be phased in over an approximately two-year period for the riverboats operating
in parishes bordering the Red River, including the Company's Casino Magic
Bossier City property. The phase in included a 1% increase on April 1, 2001,
with another 1% on each of April 1, 2002 and 2003.
The Company believes this change in the law will benefit its Boomtown New
Orleans operations in the long-term, as increased revenues are expected from
casino patrons who will no longer be required to arrange their plans to coincide
with a cruising schedule. The Company also believes the new legislation would
benefit the proposed Lake Charles project (see below), as it would enable the
Company to build a riverboat casino that would remain dockside at all times and
thus compete more effectively with existing operators. Finally, during the nine
months ended December 31, 2001, the Company believes the increased gaming taxes
had a negative impact at Casino Magic Bossier City, as gaming was already being
conducted on a dockside riverboat casino prior to the new legislation.
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 "Gaming Control Board"). In July 2000, the Company was one of three
groups that presented their proposed projects to the Gaming Control Board. On
October 16, 2001, the Company was selected by the Gaming Control Board to
receive the license. In connection with the 1999 application, Pinnacle
Entertainment 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 ending January 2000, with three
six-month renewal options (all of which have been exercised), at a cost of
$62,500 per six-month renewal option. In June 2001 and again in January 2002,
the District agreed to extend the option period for additional six-month terms
at a cost of $62,500 per six-month term. In the event the local referendum noted
above is not held prior to the expiration of the current option extension, the
Company anticipates requesting an additional lease option extension from the
District. These lease option payments are expensed over the option periods. If
the lease option were exercised, the annual rental payment would be $815,000,
with a maximum annual increase of 5%, commencing upon opening of the facility.
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. All costs incurred by the Company related to obtaining this
license have been expensed as incurred.
Assets Held for Sale Assets held for sale of $18,285,000 at December 31, 2001
consist primarily of 97 acres of surplus land in Inglewood, California and the
Crystal Park Casino card club casino in Compton, California (see "California
Card Clubs" below and Note 5 to the Notes to Consolidated Financial Statements).
Assets held for sale at December 31, 2000 consist of the 97 acres of surplus
land. The Company is marketing the properties to prospective buyers.
40
California Card Clubs By California state law, a corporation may operate a
gambling enterprise in California only if every officer, director and
shareholder holds a state gambling license. Only 5% or greater shareholders of a
publicly traded racing association, however, must hold a state gambling license.
As a practical matter, therefore, public corporations that are not qualified
racing associations may not operate gambling enterprises in California. As a
result, the Hollywood Park-Casino and Crystal Park Casino, are leased to, and
operated by, an unrelated third party. In May 2001, the California Senate passed
a bill, the effect of which would have been to permit the Company to operate the
Hollywood Park-Casino in Inglewood, California, which was subsequently passed by
the California State Assembly. The bill was vetoed by the Governor of California
in October 2001. Therefore, the Company anticipates leasing the Hollywood
Park-Casino and the Crystal Park Casino to the current operator for the
foreseeable future.
In November 2001, the operator of the Crystal Park Casino requested, and the
Company granted, a reduction in rent to $20,000 per month from $100,000 per
month, due to increased card club competition and the overall slowdown in the
U.S. economy. In addition, in the fourth quarter 2001, the Company began
aggressively seeking buyers for the facility; and accordingly, reclassified the
assets as held for sale (see Note 5 to the Notes to Consolidated Financial
Statements).
Overall U.S. Economic Conditions During the year ended December 31, 2001, the
U.S. economy experienced a significant economic slowdown. These economic
conditions were further impacted by the tragic events of September 11, 2001. The
impact of these adverse conditions to the Company's operations includes fewer
guests visiting the properties and spending less while visiting. The Company
developed cost control programs at its various locations, including labor and
marketing spending reductions, and began implementing those programs in late
2001 at the various locations.
Results of Operations
Accounting for Customer "Cash-back" Loyalty Programs In January 2001, the
Emerging Issues Task Force ("EITF") reached consensus on Issue 3 addressed in
Issue No. 00-22 Accounting for "Points" and Certain Other Time-Based Sales
Incentive Offers, and Offers for Free Products or Services to Be Delivered in
the Future. This EITF pronouncement requires that the cost of the cash back
component of the Company's customer loyalty programs be treated as a reduction
in revenues. The Company rewards customers with cash, based upon their level of
play on certain casino games (primarily slot machines). These costs were
previously recorded as a casino expense. The consensus reached on Issue 3 is
effective beginning in fiscal quarters ending after February 15, 2001 and was
adopted by the Company in the quarter ended March 31, 2001. In connection with
the adoption of Issue 3, the Company reclassified (i.e., reduced gaming revenue
and gaming expenses) the cash back component of its customer loyalty programs in
the amount of $21,497,000 and $20,865,000 related to the year ended December 31,
2000 and 1999, respectively, to be consistent with the year ended December 31,
2001.
Terminated Merger Agreement On April 17, 2000, the Company entered into a
definitive agreement with PH Casino Resorts ("PHCR"), a newly formed subsidiary
of Harveys Casino Resorts, and Pinnacle Acquisition Corporation ("Pinnacle Acq
Corp"), a newly formed subsidiary of PHCR, pursuant to which PHCR would have
acquired by merger (the "Merger") all of the outstanding capital stock of
Pinnacle Entertainment for cash consideration (the "Merger Agreement").
Consummation of the Merger was subject to numerous conditions, including PHCR
obtaining the necessary financing for the transaction and regulatory approvals,
as well as other conditions. On January 23, 2001, the Company announced that it
had been notified by PHCR that PHCR did not intend to extend further the outside
closing date (previously extended to January 31, 2001) of the Merger. Since all
of the conditions to consummation of the Merger would not be met by such date,
the Company, PHCR and Pinnacle Acq Corp mutually agreed that the Merger
Agreement would be terminated. The Company does not expect to incur additional
costs relating to the terminated Merger Agreement.
Redemption of Casino Magic 13% Notes and Extraordinary Item On August 15, 2000,
the Company redeemed all $112,875,000 in aggregate principal amount of its then
outstanding Casino Magic 13% Notes at
41
the redemption price of 106.5%. Upon deposit of principal, premium and accrued
interest for such redemption, Casino Magic Bossier City satisfied all conditions
required to discharge its obligations under the indenture. In connection with
the redemption, the Company recorded an extraordinary loss, net of federal and
state income taxes, of $2,653,000. The extraordinary loss represents the payment
of the redemption premium and the write-off of deferred finance and premium
costs, net of the related federal and state income tax benefits (see Note 14 to
the Notes to Consolidated Financial Statements).
Assets Sold On August 8, 2000, the Company completed the sale of Casino Magic
Bay St. Louis and Boomtown Biloxi (the "Mississippi Casinos") and on June 13,
2000, the Company completed the sale of Turf Paradise (see Note 11 to the Notes
to Consolidate Financial Statements). The results of operations of the
Mississippi Casinos and Turf Paradise are included in the results of operations
only until such respective dates.
Revenue, operating results and interest expense has been and will continue to be
materially different following the sale of the Mississippi Casinos and Turf
Paradise, the redemption of the Casino Magic 13% Notes, the opening of the
Belterra Casino Resort and the early termination of the HP Yakama promissory
note and related lease agreements.
Year ended December 31, 2001 compared to the year ended December 31, 2000
-------------------------------------------------------------------------
Revenues Total revenues for the year ended December 31, 2001 decreased by
- --------
$34,484,000, or 6.1%, as compared to the year ended December 31, 2000.
Contribution to revenues in the year ended December 31, 2000 from the
Mississippi Casinos and Turf Paradise properties sold in 2000 was $104,333,000.
When excluding such revenue for the year ended December 31, 2000, total revenues
in the year ended December 31, 2001 increased by $69,849,000, or 15.2%, when
compared to the year ended December 31, 2000 due primarily to the revenue at the
Belterra Casino Resort, which did not open until late October 2000.
Gaming revenues decreased $19,812,000, or 4.3%, including $81,305,000 due to the
timing of the sale of the Mississippi Casinos in August 2000. When excluding the
results of the Mississippi Casinos from the year-ended December 31, 2000
results, gaming revenues increased by $61,493,000, or 16.2%. Gaming revenues
increased at Belterra Casino Resort by $79,850,000 and at Boomtown New Orleans
by $6,182,000, while gaming revenues declined at Boomtown Reno by $2,291,000, at
Casino Magic Biloxi by $1,577,000, at Casino Magic Bossier City by $18,875,000
and at Casino Magic Argentina by $1,796,000. The increase in gaming revenues at
Belterra Casino Resort is due to the opening of the property in late October
2000 and therefore just over 2 months of operations in the prior year. The
increase in gaming revenues at Boomtown New Orleans is primarily attributed to
increased coin-in (volume of slot play) and resultant slot revenue in the year
ended December 31, 2001, compared to the prior year. During 2001, Boomtown New
Orleans renovated the 3rd deck of its dockside riverboat casino and installed
300 new slot machines, and built a new high limit table games area; as well as
benefited from dockside legislation that became effective April 1, 2001, which
no longer requires the customers to coordinate their schedules with the cruising
times of the boat. The decrease in gaming revenue at Boomtown Reno is primarily
attributed to an overall reduction in customer volume for the year (including a
substantial reduction in September 2001 due to the adverse impact of September
11, 2001 to the Reno market), combined with a reduction in guest spending while
visiting the property (although hotel occupancy and food covers were not
substantially lower). The decrease in Casino Magic Bossier City gaming revenue
is due primarily to lower guest counts, which translated into lower table game
drop (volume of table game play) and slot coin-in levels. The reduced guests
counts are due primarily to: i) increased competition from the opening of a new
casino hotel in December 2000 and the opening of a new hotel tower at another
competitor in January 2001; ii) severe winter rainfall in late February and
early March, which flooded the first level of the property's multi-level parking
garage until mid-May 2001; and iii) construction disruption to its casino
operations from the installation of new slot machines. The decrease in gaming
revenue at Casino Magic Argentina is primarily due to the economic and political
instability that began in the third quarter of 2001 and culminated in December
2001 with the resignation of the then President of the country, the imposition
of restrictions on cash withdrawals by its citizens and the delaying of payment
of wages to government employees. These factors, as well as other adverse
economic conditions in Argentina, severely impacted the
42
operations in the fourth quarter of 2001 for Casino Magic Argentina, as fewer
customers visited the facility and spent less while visiting.
Food and beverage revenues decreased by $968,000, or 3.0%, including $7,242,000
due to the timing of the sale of the Mississippi Casinos and Turf Paradise. When
excluding the results of the sold operations from the December 31, 2000 year-end
results, food and beverage revenue increased $6,274,000, or 25.4%. Food and
beverage revenues increased at Belterra Casino Resort by $7,055,000, offset by
reduced revenues at other of the casino properties due to lower guest counts the
various properties experienced.
Truck stop and service station revenue generated at Boomtown Reno decreased by
$1,592,000, or 7.3%, primarily due to a decrease in fuel prices and lower volume
in diesel fuel sold in the twelve-month period of 2001 compared to the same
period of 2000.
Hotel and recreational vehicle park revenues increased by $2,247,000, or 17.7%.
Contributing to hotel and recreational vehicle park revenues in the December 31,
2000 year-end results was $1,273,000 due to the timing of the sale of Casino
Magic Bay St. Louis in August 2000. When excluding the results of Casino Magic
Bay St. Louis from the December 31, 2000 year-end results, hotel and
recreational vehicle park revenues increased $3,520,000, or 30.7%. A majority of
the increase, $3,316,000, is attributed to a full twelve months of operations at
the Belterra Casino Resort, which did not open until late October 2000.
Other income decreased by $4,907,000, or 19.4%, including $5,061,000 due to the
timing of the sale of the Mississippi Casinos and Turf Paradise. When excluding
the results of the sold operations from the December 31, 2000 year-end results,
other income increased by $154,000, or less than 1.0%.
Racing revenues declined by $9,452,000, or 100%, entirely due to the sale of
Turf Paradise in June 2000.
Expenses Total expenses for the year ended December 31, 2001 increased by
- --------
$143,143,000, or 36.6%, as compared to the year ended December 31, 2000.
Included in the total expenses for the year ended December 31, 2001 are asset
impairment losses of $23,530,000 and asset disposition gains of $500,000, while
included in total expenses for the year ended December 31, 2000 is a gain on the
sale of the Mississippi Casinos, Turf Paradise and land in Inglewood, California
(see Note 11 to the Condensed Notes to Consolidated Financial Statements) of
$118,816,000. In addition, included in total expenses in 2000 are expenses of
the Mississippi Casinos and Turf Paradise of $84,045,000. Excluding such items
from both periods, total expenses for the year ended December 31, 2001 increased
by $85,342,000, or 20.0%, as compared to the year ended December 31, 2000, due
primarily to expenses at Belterra Casino Resort, which did not open until late
October 2000.
Gaming expenses increased by $1,227,000, or less than 1.0%. Contributing to the
gaming expenses in the December 31, 2000 results was $43,981,000 due to the
timing of the sale of the Mississippi Casinos in August 2000. When excluding the
results of the Mississippi Casinos from the results of operations for the
December 31, 2000 year-end, gaming expenses increased by $45,208,000, or 21.1%.
Gaming expenses increased $42,505,000 at Belterra Casino Resort, $5,187,000 at
Boomtown New Orleans and $1,034,000 at Casino Magic Bossier City, while gaming
expenses decreased at Boomtown Reno by $1,168,000, at Casino Magic Biloxi by
$1,553,000 and at Casino Magic Argentina by $797,000. The increase in gaming
expenses at Belterra Casino Resort is due to the property opening in late
October 2000, and therefore just over two months of operations in the year ended
December 31, 2000. The increase in gaming expenses at Boomtown New Orleans is
consistent with the increased gaming revenues beginning on April 1, 2001,
increased gaming taxes (see Note 7 to the Notes to Consolidated Financial
Statements) and increased marketing expenses. The increase in gaming expenses at
Casino Magic Bossier City is due primarily to the additional marketing costs
associated with the intense competition noted above. The decrease in gaming
expenses at Boomtown Reno is due primarily to reduced revenue and marketing
costs, while the decrease in gaming expenses at Casino Magic Biloxi is
consistent with a reduction in gaming revenue, as well as a reduction of
approximately 160 employees in the fourth quarter of 2001. The reduction in
gaming expenses at Casino Magic Argentina is due primarily to the reduced taxes
from the reduced gaming revenue.
43
Food and beverage expenses increased by $3,619,000, or 10.3%. Contributing to
food and beverage expenses in the year ended December 31, 2000 was $7,690,000
due to the timing of the sale of the Mississippi Casinos and Turf Paradise. When
excluding the results of the sold operations from the results of operations for
the year ended December 31, 2000, food and beverage expenses increased
$11,309,000, or 41.1%. Food and beverage expenses increased at Belterra Casino
Resort by $12,913,000 due to the opening of the property in late October 2000,
partially offset by decreases at the Company's other casinos.
Truck stop and service station expenses at Boomtown Reno decreased by
$1,597,000, or 7.9%, due primarily to fewer gallons of gasoline and diesel fuel
purchased in the period, as well as reduced fuel costs.
Hotel and recreational vehicle park expenses increased by $3,506,000, or 52.6%,
including $710,000 due to the timing of the sale of Casino Magic Bay St. Louis.
When excluding the results of Casino Magic Bay St. Louis from the results of
operations for the year ended December 31, 2000, hotel and recreational vehicle
park expenses increased by $4,216,000, or 70.8%, the majority of which is
attributed to Belterra Casino Resort, which opened in late October 2000.
Racing expenses decreased by $4,133,000, or 100%, entirely due to the sale of
Turf Paradise in June 2000.
Selling, general and administrative expenses increased by $12,357,000, or 11.4%.
Contributing to general and administrative expenses in the year ended December
31, 2000 was $19,440,000 due to the timing of the sale of the Mississippi
Casinos and Turf Paradise. When excluding the results of the sold operations
from the results of operations for year ended December 31, 2000, selling,
general and administrative expenses increased $31,797,000, or 35.9%, of which,
$27,563,000, is attributed to Belterra Casino Resort and $4,664,000 was
attributed to Casino Magic Bossier City. During the second quarter of 2001,
Casino Magic Bossier City took a charge of approximately $2,600,000 for certain
reserves and write-downs related to inventory, accounts receivable and other
working capital valuation matters.
Depreciation and amortization increased by $3,348,000, or 7.3%, due primarily to
additional depreciation expense from Belterra Casino Resort, which opened in
late October 2000, offset by reduced depreciation expense from the sale of the
Mississippi Casinos and Turf Paradise in 2000.
Other operating expenses increased $3,581,000, or 33.9%, including $2,501,000
due to the timing of the sale of the Mississippi Casinos and Turf Paradise in
2000. When excluding the results of the sold operations from the results of
operations for the year ended December 31, 2000, other operating expenses
increased $6,082,000, or 57.5%, including $5,669,000 related to the Belterra
Casino Resort.
Pre-opening expenses decreased by $14,420,000, or 95.9%, for the year ended
December 31, 2001 from the same period in 2000. Pre-opening costs in 2001 for
the Belterra Casino Resort were due to the continuing construction of the Tom
Fazio-designed championship golf course, which opened in July 2001.
The gain on disposition of assets of $500,000 for the year ended December 31,
2001 includes the gain from the early pay-off of the HP Yakama promissory note
of $639,000 (see Note 6 to the Notes to Consolidated Financial Statements),
offset by the loss on disposition of other assets in the period. The gain on
disposition of assets of $118,816,000 for the year ended December 31, 2000 is
due primarily to the sale of the Mississippi Casinos in August 2000, Turf
Paradise Race Track in June 2000 and the land sales in March 2000 (see Note 11
to the Notes to Consolidated Financial Statements).
The asset impairment loss of $23,530,000 for the year ended December 31, 2001 is
due primarily to the write down of the Crystal Park Casino card club assets of
$20,358,000, the write down of the Boomtown Belle I riverboat casino of
$1,800,000 and assets at Casino Magic Biloxi of $1,372,000 (see Note 4 to the
Notes to Consolidated Financial Statements). The net book values of these assets
are classified as "Assets held for sale" on the Consolidated Balance Sheet at
December 31, 2001.
44
Terminated merger costs of $5,727,000 for the year ended December 31, 2000
relate to the terminated merger with PHCR (see Note 10 to the Notes to
Consolidated Financial Statements). Purported class action lawsuits related to
the terminated merger were settled in the second quarter of 2001 resulting in a
reversal of accrued expenses of $464,000 for these lawsuits in the year ended
December 31, 2001.
Interest income decreased by $7,583,000, or 60.2%, primarily due to lower
investable funds and lower interest rates during the year ended December 31,
2001 compared to the same period of 2000. Interest expense, net of capitalized
interest decreased by $2,767,000, or 5.3%, due primarily to the redemption of
the Casino Magic 13% Notes in August 2000 (see Note 14 to the Notes to
Consolidated Financial Statements). Capitalized interest was $482,000 in the
year ended December 31, 2001 compared to $8,148,000 in the year ended December
31, 2000, a decrease of $7,666,000, or 94.1%, due primarily to the completion of
the Belterra Casino Resort in October 2000, while the golf course at Belterra
Casino Resort was not completed until early July 2001.
Due to the pre-tax losses for the year ended December 31, 2001, as well as the
settlement of certain U.S. Federal income tax matters that were under
examination by the I.R.S. relating to Casino Magic and its subsidiaries prior to
1997, resulting in the recording of an income tax benefit of approximately
$3,700,000 in the third quarter 2001, the Company recorded an income tax benefit
of $21,906,000, compared to an income tax expense of $52,396,000 for the year
ended December 31, 2000 (which 2000 amount includes taxes associated with the
asset dispositions in 2000 - see Note 11 to the Notes to Consolidated Financial
Statements).
The extraordinary loss of $2,653,000 recorded for the year ended December 31,
2000 related to the early redemption of the Casino Magic 13% Notes (see Note 14
to the Notes to Consolidated Financial Statements).
Year ended December 31, 2000, compared to the year ended December 31, 1999
--------------------------------------------------------------------------
Revenues Total revenues for the year ended December 31, 2000 decreased by
- --------
$122,867,000, or 17.93%, as compared to the year ended December 31, 1999.
Contribution to revenues in the year ended December 31, 2000 from the
Mississippi Casinos and Turf Paradise was $107,868,000. Contribution to revenues
in the year ended December 31, 1999 from the Mississippi Casinos, Turf Paradise,
Hollywood Park Race Track and Hollywood Park-Casino was $260,615,000. When
excluding such revenues for both periods, total revenues in the year ended
December 31, 2000 increased by $30,060,000, or 6.8%, when compared to the year
ended December 31, 1999.
Gaming revenues decreased by $74,760,000, or 13.9%, including a decrease of
$87,338,000 due to the timing of the various casino dispositions in 2000 and
1999. When excluding the results of the casino properties sold, gaming revenues
increased by $12,578,000, or 2.8%. Gaming revenues increased at Belterra Casino
Resort by $13,614,000, at Boomtown Reno by $6,000,000 and at Casino Magic
Bossier City by $2,663,000, while gaming revenues declined at Boomtown New
Orleans by $5,766,000 and at Casino Magic Biloxi by $3,210,000. The increase in
gaming revenue at Belterra Casino Resort is due to the opening of the property
in October 2000. Boomtown Reno's higher gaming revenue was primarily due to
increased hotel occupancy (occupancy was 87% in 2000 compared to 66% in 1999)
and new marketing programs, which translated into an increase in slot coin-in
(volume of slot play) and table game drop (volume of table game play), as well
as the better than normal winter weather (less snow and fewer road closures due
to snow conditions) during the first and fourth quarters of 2000. Casino Magic
Bossier City's gaming revenue improved in the first three quarters of the year,
primarily due to upgrading the slot machine product mix and to a change in the
overall marketing programs at the property. However, gaming revenue at Casino
Magic Bossier City declined in the fourth quarter of 2000, primarily due to
severe winter storms. The decline in gaming revenues at the New Orleans and
Biloxi locations reflects new competition in October 1999 and March 1999,
respectively, in each of the markets. At Boomtown New Orleans, gaming revenue
was down for the first three quarters of 2000 compared to 1999. However, gaming
revenue increased in the fourth quarter of 2000 compared to the fourth quarter
of 1999, primarily due to improved slot revenue from recapturing market share
lost to competition. Casino Magic Biloxi gaming revenues were down primarily due
to table game drop and slot coin-in being down 6.8% and 3.7%, respectively, in
2000 compared to 1999.
45
Food and beverage revenues decreased by $7,897,000, or 19.8%, including a
decrease of $12,720,000 due to the timing of the various casino and race track
dispositions in 2000 and 1999. When excluding the results of the casino and race
track properties disposed of, food and beverage revenues increased by
$4,823,000, or 24.3%. Food and beverage revenues increased at Belterra Casino
Resort by $1,444,000, at Boomtown Reno by $2,516,000 and Casino Magic Biloxi by
$1,008,000, while food and beverage revenue decreased at Casino Magic Bossier
City by $442,000. The increase in food and beverage revenue at Belterra Casino
Resorts is due to the property opening in October 2000. The increase in food and
beverage revenue at Boomtown Reno is attributed to the improved hotel occupancy,
as well as remodels to certain of the restaurants at the property. The increase
in food and beverage revenue at Casino Magic Biloxi is attributed to increased
volume from the addition of a deli restaurant in May 2000, to the refurbishing
of an existing venue in May 2000 and to some pricing increases. The decline in
food and beverage revenue at Casino Magic Bossier City is primarily due to the
overall change in marketing programs, including new programs which increased the
amount of complimentary food and beverage provided to customers.
Truck stop and service station revenue at Boomtown Reno increased by $4,138,000,
or 23.5%, primarily due to increased fuel prices.
Hotel and recreational vehicle park revenues increased by $993,000, or 8.5%,
including a decrease of $524,000 due to the timing of the sale of Casino Magic
Bay St. Louis. Hotel and recreational vehicle park revenue increased by $480,000
at the Belterra Casino Resort (which property opened in October 2000), by
$399,000 at Boomtown Reno (consistent with improved hotel occupancy noted above)
and by $1,062,000 at Casino Magic Biloxi (hotel occupancy increased to 86% in
2000 compared to 82% in 1999), while such revenues decreased by $424,000 at
Casino Magic Bossier City. The decline in hotel revenue at Casino Magic Bossier
City is primarily due to the overall change in marketing programs, which new
programs increased the number of complimentary hotel rooms provided to
customers.
Other income increased by $416,000, or 1.7%, including a decrease of $3,268,000
due to the timing of the various casino and race track dispositions in 2000 and
1999. When excluding the results of the casino and race track properties
disposed of, other income increased by $3,684,000, or 22.2%, primarily due to an
increase in the percentage of net revenues (as defined in the relevant
agreements between the Company and the Yakama Indian Nation) received from the
Yakama Indian Nation, as well as to proceeds from the settlement of a 1998
business interruption insurance claim.
Racing revenues declined by $45,757,000, or 82.9%, entirely due to the
disposition of Turf Paradise in June 2000 and Hollywood Park Race Track in
September 1999.
Expenses Total expenses for the year ended December 31, 2000 decreased by
- --------
$150,567,000, or 26.8%, as compared to the year ended December 31, 1999.
Included in total expenses for the twelve months ended December 31, 2000, is a
gain on the disposition of assets of $118,816,000 (see Note 11 to the Notes to
Consolidated Financial Statements), as well as expenses of $87,580,000
associated with the operations of such assets sold. Included in total expenses
for the twelve months ended December 31, 1999, is a gain on the disposition of
assets of $62,507,000, an impairment loss of $20,446,000 (see Note 11 to the
Notes to Consolidated Financial Statements) and expenses of $214,529,000
associated with the operations of the properties sold or disposed of in 2000 and
1999. When excluding such gains, impairment write-down and other expenses, total
expenses for the twelve months ended December 31, 2000 increased by $53,137,000,
or 14.4%, as compared to the twelve months ended December 31, 1999.
Gaming expenses decreased by $30,297,000, or 10.5%, including $47,537,000 due to
the timing of the various casino dispositions in 2000 and 1999. When excluding
the gaming expenses attributed to such casino properties disposed of, gaming
expenses increased $17,240,000, or 7.2%. Gaming expenses increased at the
Belterra Casino Resort by $9,421,000, at Boomtown Reno by $2,622,000, at Casino
Magic Bossier City by $3,068,000, at Casino Magic Biloxi by $1,558,000 and at
Boomtown New Orleans by $1,011,000. The increased gaming expense at Belterra
Casino Resort reflects the opening of the facility in October 2000, while
46
at Boomtown Reno and Casino Magic Bossier City, the increases are consistent
with the increased gaming revenue. The increased gaming expenses at Casino Magic
Biloxi and Boomtown New Orleans reflect the competitive environments within
which each operate, and the costs to compete in their respective markets.
Food and beverage expenses decreased by $11,378,000, or 24.4%, including
$16,269,000 due to the timing of the various casino and race track dispositions
in 2000 and 1999. When excluding food and beverage expenses attributed to such
casino and race track properties disposed of, food and beverage expenses
increased by $4,891,000, or 21.6%. Food and beverage expenses increased at
Belterra Casino Resort by $2,842,000 (consistent with the October 2000 opening
of the property) and at Boomtown Reno by $1,296,000, consistent with the overall
increase in food and beverage revenue. At Casino Magic Biloxi, food and beverage
expenses increased by $1,197,000, primarily due to the overall increase in
revenue, as well as an increase in marketing costs to compete in the Biloxi
gaming market. At Casino Magic Bossier City, food and beverage costs declined
$627,000, which was primarily due to the lower food and beverage revenue.
Truck stop and service station expenses at Boomtown Reno increased by
$4,004,000, or 24.6%, primarily due to increased fuel costs.
Hotel and recreational vehicle park expenses increased by $740,000, or 12.5%,
primarily due to increased costs at Belterra Casino Resort of $1,169,000 (which
property opened in October 2000), offset by reduced costs at Casino Magic
Bossier City of $354,000, consistent with the lower hotel revenue.
Racing expenses decreased by $18,561,000, or 81.8%, entirely due to the
disposition of Turf Paradise in June 2000 and Hollywood Park Race Track in
September 1999.
Selling, general and administrative expenses decreased by $26,892,000, or 19.9%,
including a reduction in expenses of $32,674,000 due to the timing of the
various casino and race track dispositions in 2000 and 1999. When excluding
selling, general and administrative expenses attributed to such casino and race
track dispositions in 2000 and 1999, selling, general and administrative
expenses increased $5,782,000, or 7.0%, including $6,113,000 attributed to the
Belterra Casino Resort, which opened in October 2000.
Depreciation and amortization decreased by $5,822,000, or 11.2%, including
$8,304,000 due to the timing of the various casino and race track dispositions
in 2000 and 1999. When excluding such casino and race track properties from
depreciation and amortization expenses, depreciation and amortization increased
by $2,482,000, or 6.5%, including $2,294,000 attributed to the Belterra Casino
Resort.
Other operating expenses decreased by $3,343,000, or 24.0%, including a
reduction in other operating expenses of $3,420,000 due to the timing of the
various casino and race track dispositions in 2000 and 1999.
Pre-opening costs for the Belterra Casino Resort increased $12,010,000, from
$3,020,000 to $15,030,000, primarily due to the pre-opening costs incurred for a
new gaming facility, including hiring and training employees and marketing
costs.
The gain on disposition of assets of $118,816,000 in 2000 is primarily due to
the sale of the Mississippi Casinos in August 2000, the sale of Turf Paradise in
June 2000 and the sale of surplus land in March 2000 (see Note 11 to the Notes
to Consolidated Financial Statements), partially offset by a loss of $902,000 on
the disposition of assets. The gain on disposition of assets of $62,507,000 and
impairment write-down of $20,446,000 in the year ended December 31, 1999 is
primarily due to the disposition of the Hollywood Park Race Track and Hollywood
Park-Casino in September 1999 (see Note 11 to the Notes to Consolidated
Financial Statements).
Terminated merger costs of $5,727,000 relate to the terminated merger with PHCR
including the proposed settlement of litigation relating to the merger (see Note
10 to the Notes to Consolidated Financial Statements).
Interest income increased by $4,677,000, or 59.0%, primarily due to higher
investable funds and higher interest rates during the year ended December 31,
2000 compared to the same period of 1999. Interest
47
expense, net of capitalized interest, decreased by $12,851,000, or 19.6%, due
primarily to additional capitalized interest in 2000 for Belterra Casino Resort
and lower interest expense in 2000 from the redemption of the Casino Magic 13%
Notes in August 2000 (see Note 14 to the Notes to Consolidated Financial
Statements).
Income tax expense increased $11,470,000, or 28.0%, including income tax of
approximately $48,021,000 recorded in 2000 associated with asset dispositions,
compared to income tax of approximately $22,000,000 recorded in 1999 associated
with asset dispositions (see Note 11 to the Notes to Consolidated Financial
Statements).
The extraordinary loss of $2,653,000 for the year ended December 31, 2000
relates to the redemption of the Casino Magic 13% Notes in August 2000 (see Note
14 to the Notes to Consolidated Financial Statements).
Liquidity, Capital Resources and Other Factors Influencing Future Results
At December 31, 2001, the Company had cash and cash equivalents, all of which
had original maturities of less than ninety days, of $153,187,000 compared to
$172,868,000 at December 31, 2000. The Consolidated Statements of Cash Flows
detailing changes in the cash balances is on page 66.
Operating activities generated net cash of $36,065,000 in the year ended
December 31, 2001 compared with net cash uses of $25,484,000 in the twelve
months of 2000. In the twelve-month period ending December 31, 2001, the net
cash flow from operations was generated primarily from: i) earnings before
interest, taxes, depreciation, amortization and non-recurring items ("EBITDA"
see "Item 6 - Selected Financial Data" for a definition of EBITDA) of
$66,903,000, ii) cash income tax refunds in excess of $24,000,000, and iii) cash
provided by receivables, prepaids and other assets of $4,542,000; offset by uses
of cash for: i) interest payments on the 9.5% and 9.25% Notes of approximately
$44,250,000, ii) the restriction of cash in Argentina of $3,452,000 (see Note 3
to the Notes to Consolidated Financial Statements), and iii) cash used for
accounts payable and accrued liabilities of $12,735,000. In the same
twelve-month period last year, the cash used in operations was $25,484,000,
which included additional EBITDA from operations sold in 2000 (see Note 11 to
the Notes to Consolidated Financial Statements), offset by cash interest
payments (the 9.5% Notes, 9.25% Notes and Casino Magic Bossier City 13% Notes -
see Note 14 to the Notes to Consolidated Financial Statements), income taxes in
2000 and 1999 on asset dispositions, pre-opening costs attributed to Belterra
Casino Resort (which opened in October 2000) and terminated merger costs.
Net cash used by investing activities of $43,304,000 in the year ended December
31, 2001 is primarily attributed to the addition of property, plant and
equipment of $51,783,000. The additions during the year ended December 31, 2001
include completion of the Tom Fazio-championship golf course at Belterra Casino
Resort (which opened in July 2001), construction costs associated with the build
out of the high-limit table games area, purchase of new slot machines and
remodeling of the pavilion building at Boomtown New Orleans, purchase of player
tracking systems at various of the Company properties and the purchase of
approximately 14 acres of leased land at Crystal Park Casino. Net cash provided
by investing activities of $193,277,000 in the year ended December 31, 2000
includes proceeds of $123,428,000 from the maturity of short term investments
and the receipt of $266,925,000 from the sale of property, plant and equipment
(such receipts primarily from the various asset sales in 2000 - see Note 11 to
the Notes to Consolidated Financial Statements), offset by the use of cash of
$194,627,000 for the additions of property, plant and equipment (the primary
additions attributed to the Belterra Casino Resort, which opened in October
2000).
Net cash used in financing activities of $12,442,000 in the year ended December
31, 2001 is due primarily to the payment of $9,820,000 for the purchase of the
Company's common stock (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; in February 2001, the Company announced its intention to continue
to make purchases under this program - see Note 3 to the Notes to Consolidated
Financial Statements). The net cash used in financing activities in the twelve
months of 2000 of $118,287,000 is primarily due to the redemption of the Casino
Magic Bossier City 13% Notes in August 2000 (see Note 14 to the Notes to
Consolidated Financial Statements).
48
As discussed in Note 14 to the Notes to Consolidated Financial Statements, the
Company has a bank credit facility with a syndicate of banks in the amount of
$110,000,000, with scheduled commitment reductions of $6,667,000 on March 31,
2003 and $16,667,000 on each of June 30 and September 30, 2003 and which expires
December 31, 2003 (the "Credit Facility"). As of December 31, 2001, the Company
had no outstanding borrowings under the Credit Facility, and has not utilized
the Credit Facility since February 1999. The Company does not anticipate making
any borrowing under this facility in 2002 and maintains the facility to satisfy
the requirements of the Louisiana Gaming Control Board that the Company has
financing available to complete the Lake Charles project (see Note 8 to the
Notes to Consolidated Financial Statements).
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. Presently,
the Company does not use such financial instruments.
In November 2001, the Company and the bank syndicate executed Amendment No. 6 to
the Credit Facility, which, among other things, (i) amended various financial
covenant ratios to be more consistent with current operations, (ii) allowed for
certain capital expenditures, including $25,000,000 related to Casino Magic
Bossier City, (iii) suspended any additional stock repurchase activity until
April 1, 2002 and, (iv) required the Company to utilize its cash (other than
working capital and casino cash) prior to drawing on the facility. In July 2001,
the Company and the bank syndicate executed Amendment No. 5 to the Credit
Facility, which, among other things, (i) amended various financial covenant
ratios to be more consistent with operations (therefore reflective of the
operations sold in 1999 and 2000, as well as the opening of the Belterra Casino
Resort in October 2000), and (ii) allowed for the necessary capital spending for
the Lake Charles opportunity. An additional amendment to the Credit Facility
will be necessary to obtain approval from the bank syndicate for capital
projects not specifically provided for in either Amendment No. 5 or Amendment
No. 6 to the Credit Facility.
As noted above, the Company was selected by the Gaming Control Board to receive
a license for the construction and operation of a dockside riverboat casino in
Lake Charles, Louisiana, and must stay in compliance with the Lake Charles
Conditions, including satisfying certain financing requirements throughout the
project. Currently, the Company anticipates it will not meet all of the
financial covenant ratios specified in the Credit Facility in June 2002 and
therefore will need to seek another amendment to the Credit Facility. In the
event the Company is not successful in negotiating an amendment to the Credit
Facility, the Company anticipates it will terminate the Credit Facility and
secure a new bank credit agreement; however, there are no assurances the Company
will be able to secure such new facility under terms and conditions favorable to
the Company. In the event the Company is not successful in securing a new bank
credit facility, the Company will need to secure an alternative source of
financing for its Lake Charles project. There is no assurance the Louisiana
Gaming Control Board will approve such alternative method of financing.
The Company believes available cash, cash to be generated by potential asset
sales, cash flow from operations and availability under the Credit Facility is
sufficient to build the Lake Charles facility (subject to statements above
regarding the need to amend the Credit Facility and, if the Company is unable to
effect such amendment, then subject to the Company's ability to secure a new
bank credit agreement), should the Company move forward with the project. As
part of the Credit Facility, the Company is contractually obligated to utilize
cash other than working capital and casino cash before drawing on the Credit
Facility.
In addition to the Credit Facility, the Company is considering various financing
options for the development of the proposed Lake Charles project, including, but
not limited to, a new credit facility or other senior debt, leasing arrangements
and joint venture arrangements.
Regardless of future changes to the Credit Facility, the Company currently
believes that its available cash and cash equivalents at December 31, 2001 of
over $153,000,000 and cash flow from operations in 2002 will be sufficient to
finance working capital needs, make necessary debt service payments and finance
the capital
49
spending requirements for at least the next twelve months and fund the
$22,500,000 "escrow" requirement for the Lake Charles project (see Note 8 to the
Notes to Consolidated Financial Statements). In addition, the Company also
currently believes that cash requirements of its existing operations beyond the
next twelve months will consist of debt service requirements and capital
spending (including continued capital spending for the Lake Charles project, if
commenced), which the Company expects to be met by then-existing cash, cash
flows from operations and borrowing capacity under the existing Credit Facility
(subject to statements above regarding the need to amend the Credit Facility
and, if the Company is unable to effect such amendment, then subject to the
Company's ability to secure a new bank credit agreement).
In addition to the above anticipated uses of resources, the Company may use a
portion of existing resources to (i) reduce its outstanding debt obligations
prior to their scheduled maturities, (ii) make capital improvements at other
existing properties, and/or (iii) develop or acquire other casino properties or
companies. To the extent cash is used for these purposes, the Company's cash
reserves will be diminished and the Company may require additional capital to
finance any such activities, including the debt service and capital
improvements. Additional capital may be generated through internally generated
cash flow, future borrowings (including amounts available under the Credit
Facility), asset sales and/or lease transactions. There can be no assurance,
however, that such capital will be available on terms acceptable to the Company.
Item 7A. Quantitative and Qualitative Disclosures About Market Risk
- -------------------------------------------------------------------
The Company's primary exposures to market risk (or the risk of loss arising from
adverse changes in market rates and prices, such as interest rates and foreign
currency exchange rates) are with respect to the foreign currency exchange rate
with Argentina due to the devaluation of the Argentine Peso in January 2002 (see
Note 3 to the Notes to Consolidated Financial Statements), as well as potential
interest rate risk associated with the long-term floating interest rate on
borrowings under the Credit Facility (see Note 14 to the Notes to Consolidated
Financial Statements). Total assets of Casino Magic Argentina at December 31,
2001 were $14,287,000 (including $3,452,000 of Argentine Peso cash translated to
U.S. Dollars), or less than 2% of consolidated assets of the Company. The
Company does not anticipate that these assets will significantly increase in the
next twelve months. At December 31, 2001, the Company had no outstanding
borrowings under the Credit Facility.
As of December 31, 2001, the Company did not hold any investments in market risk
sensitive instruments of the type described in Item 305 of Regulation S-K.
Item 8. Financial Statements
- ----------------------------
Financial statements and accompanying footnotes are attached hereto.
Item 9. Changes in and Disagreements with Accountants on Accounting and
- -----------------------------------------------------------------------
Financial Disclosure
--------------------
None
50
PART III
Item 10. Directors and Executive Officers of the Registrant
- -----------------------------------------------------------
The information required under this Item is incorporated by reference herein
from the Company's definitive 2002 proxy statement anticipated to be filed with
the Securities and Exchange Commission within 120 days after December 31, 2001.
Item 11. Executive Compensation
- -------------------------------
The information required under this Item is incorporated by reference herein
from the Company's definitive 2002 proxy statement anticipated to be filed with
the Securities and Exchange Commission within 120 days after December 31, 2001.
Item 12. Security Ownership of Certain Beneficial Owners and Management
- -----------------------------------------------------------------------
The information required under this Item is incorporated by reference herein
from the Company's definitive 2002 proxy statement anticipated to be filed with
the Securities and Exchange Commission within 120 days after December 31, 2001.
Item 13. Certain Relationships and Related Transactions
- -------------------------------------------------------
The information required under this Item is incorporated by reference herein
from the Company's definitive 2002 proxy statement anticipated to be filed with
the Securities and Exchange Commission within 120 days after December 31, 2001.
PART IV
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K
- -------------------------------------------------------------------------
(a) Documents filed as a part of this report.
1. The consolidated financial statements are set forth in the index to
Consolidated Financial Statements attached hereto.
2. Exhibits
Exhibit
Number Description of Exhibit
- ------ ----------------------
2.1 Agreement and Plan of Merger, by and among Hollywood Park, Inc., HP Acquisition,
Inc. and Boomtown, Inc., dated April 23, 1996, is hereby incorporated by
reference to Exhibit 2.1 to the Company's Current Report on Form 8-K, filed May
3, 1996.
2.2 Agreement and Plan of Merger, dated as of February 19, 1998, among Casino Magic
Corp., Hollywood Park, Inc. and HP Acquisition II, Inc., is hereby incorporated
by reference to Exhibit 2.1 to the Company's Current Report on Form 8-K, filed
February 26, 1998.
2.3 Agreement and Plan of Merger, dated as of April 17, 2000, among Pinnacle
Entertainment, Inc., PH Casino Resorts, Inc., and Pinnacle Acquisition
Corporation, is hereby incorporated by reference to Exhibit 2.1 to the Company's
Current Report on Form 8-K filed May 1, 2000.
2.4 Letter Agreement dated August 22, 2000, among Pinnacle Entertainment, Inc., PH
Casino Resorts, Inc., and Pinnacle Acquisition Corporation, is hereby
incorporated by reference to Annex A1 to the Company's Definitive Proxy
Statement filed August 23, 2000.
2.5 Second Amendment to Agreement and Plan of Merger, dated as of September 15,
2000, among Pinnacle Entertainment, Inc., PH Casino Resorts, Inc., and Pinnacle
Acquisition Corporation, is hereby incorporated by reference to Annex A to the
Company's Proxy Statement Supplement filed September 19, 2000.
51
2.6 Letter Agreement dated January 22, 2001, among Pinnacle Entertainment, Inc., PH
Casino Resorts, Inc., and Pinnacle Acquisition Corporation, terminating the PHCR
Merger Agreement, is hereby incorporated by reference from Exhibit (d)(8) to
Amendment No. 7 to the Schedule 13E-3 filed January 25, 2001 by Pinnacle
Entertainment, Inc., R.D. Hubbard, G. Michael Finnigan, Paul R. Alanis, J.
Michael Allen, Loren S. Ostrow, Bruce C. Hinckley, PH Casino Resorts, Inc.,
Harveys Casino Resorts and Colony HCR Voteco, LLC.
3.1 Certificate of Incorporation of Hollywood Park, Inc., is hereby incorporated by
reference to Exhibit 3.1 to the Company's Amendment No. 1 to Form S-4
Registration Statement dated March 26, 1999.
3.2 Restated By-laws of Hollywood Park, Inc. are hereby incorporated by reference to
Exhibit 3.2 to the Company's Amendment No. 1 to Form S-4 Registration Statement
dated March 26, 1999.
3.3 Certificate of Ownership and Merger, dated February 23, 2000, merging Pinnacle
Entertainment, Inc. into Hollywood Park, Inc., is hereby incorporated by
reference to Exhibit 3.3 to the Company's Annual Report on Form 10-K filed March
29, 2000.
3.4 Articles of Incorporation of HP/Compton, Inc., are hereby incorporated by
reference to Exhibit 3.9 to the Company's Amendment No. 1 to Form S-4
Registration dated October 30, 1997.
3.5 By-laws of HP/Compton, Inc., are hereby incorporated by reference to Exhibit
3.10 to the Company's Amendment No. 1 to Form S-4 Registration Statement dated
October 30, 1997.
3.6 Articles of Organization of Crystal Park Hotel and Casino Development Company,
LLC, are hereby incorporated by reference to Exhibit 3.11 to the Company's
Amendment No. 1 to Form S-4 Registration Statement dated October 30, 1997.
3.7 Operating Agreement of Crystal Park Hotel and Casino Development Company, LLC,
are hereby incorporated by reference to Exhibit 3.12 to the Company's Amendment
No. 1 to Form S-4 Registration Statement dated October 30, 1997.
3.8 Restated Articles of Incorporation of Turf Paradise, Inc., are hereby
incorporated by reference to Exhibit 3.13 to the Company's Amendment No. 1 to
Form S-4 Registration Statement dated October 30, 1997.
3.9 By-laws of Turf Paradise, are hereby incorporated by reference to Exhibit 3.14
to the Company's Amendment No. 1 to Form S-4 Registration Statement dated
October 30, 1997.
3.10 Certificate of Incorporation of HP Yakama, Inc., is hereby incorporated by
reference to Exhibit 3.15 to the Company's Amendment No. 1 to Form S-4
Registration Statement dated October 30, 1997.
3.11 By-laws of HP Yakama, Inc., are hereby incorporated by reference to Exhibit 3.16
to the Company's Amendment No. 1 to Form S-4 Registration Statement dated
October 30, 1997.
3.12 Amended and Restated Certificate of Incorporation of Boomtown, Inc., is hereby
incorporated by reference to Exhibit 3.17 to the Company's Amendment No. 1 to
Form S-4 Registration Statement dated October 30, 1997.
3.13 By-laws of Boomtown, Inc., are hereby incorporated by reference to Exhibit 3.18
to the Company's Amendment No. 1 to Form S-4 Registration Statement dated
October 30, 1997.
3.14 Certificate of Amended and Restated Articles of Incorporation of Boomtown Hotel
& Casino, Inc., are hereby incorporated by reference to Exhibit 3.19 to the
Company's Amendment No. 1 to Form S-4 Registration Statement dated October 30,
1997.
3.15 Revised and Restated By-laws of Boomtown Hotel & Casino, Inc., are hereby
incorporated by reference to Exhibit 3.20 to the Company's Amendment No. 1 to
Form S-4 Registration Statement dated October 30, 1997.
3.16 Articles of Incorporation of Bayview Yacht Club, Inc., are hereby
incorporated by reference to Exhibit 3.21 to the Company's Amendment No. 1
to Form S-4 Registration Statement dated October 30, 1997.
3.17 By-laws of Bayview Yacht Club, Inc., are hereby incorporated by reference
to Exhibit 3.22 to the Company's Amendment No. 1 to Form S-4 Registration
Statement dated October 30, 1997.
3.18 Certificate of Mississippi Limited Partnership of Mississippi - I Gaming,
L.P., are hereby incorporated by reference to Exhibit 3.23 to the Company's
Amendment No. 1 to Form S-4 Registration Statement dated October 30, 1997.
3.19 Amended and Restated Agreement of Limited Partnership of Mississippi - I
Gaming, L.P., is hereby incorporated by reference to Exhibit 10.31 to the
Company's Quarterly Report on Form 10-Q for quarter ended June 30, 1997.
52
3.20 Articles of Incorporation of Louisiana Gaming Enterprises, Inc., are hereby
incorporated by reference to Exhibit 3.25 to the Company's Amendment No. 1
to Form S-4 Registration Statement dated October 30, 1997.
3.21 Second Amended and Restated Partnership Agreement of Louisiana - I Gaming,
a Louisiana Partnership in Commendam, is hereby incorporated by reference
to Exhibit 3.26 to the Company's Amendment No. 1 to Form S-4 Registration
Statement dated March 26, 1999.
3.22 Certificate of Incorporation of HP Yakama Consulting, Inc., is hereby
incorporated by reference to Exhibit 3.27 to the Company's Amendment No. 1
to Form S-4 Registration Statement dated March 26, 1999.
3.23 By-laws of HP Yakama Consulting, Inc., are hereby incorporated by reference
to Exhibit 3.28 to the Company's Amendment No. 1 to Form S-4 Registration
Statement dated March 26, 1999.
3.24 Articles of Incorporation of Casino Magic Corp., are hereby incorporated by
reference to Exhibit 3.29 to the Company's Amendment No. 1 to Form S-4
Registration Statement dated March 26, 1999.
3.25 Amended By-laws of Casino Magic Corp., are hereby incorporated by reference
to Exhibit 3.30 to the Company's Amendment No. 1 to Form S-4 Registration
Statement dated March 26, 1999.
3.26 Articles of Incorporation of Casino Magic American Corp., are hereby
incorporated by reference to Exhibit 3.31 to the Company's Amendment No. 1
to Form S-4 Registration Statement dated March 26, 1999.
3.27 By-laws of Casino Magic American Corp., are hereby incorporated by
reference to Exhibit 3.32 to the Company's Amendment No. 1 to Form S-4
Registration Statement dated March 26, 1999.
3.28 Articles of Incorporation of Biloxi Casino Corp., are hereby incorporated
by reference to Exhibit 3.33 to the Company's Amendment No. 1 to Form S-4
Registration Statement dated March 26, 1999.
3.29 By-laws of Biloxi Casino Corp., are hereby incorporated by reference to
Exhibit 3.34 to the Company's Amendment No. 1 to Form S-4 Registration
Statement dated March 26, 1999.
3.30 Articles of Incorporation of Casino Magic Finance Corp., are hereby
incorporated by reference to Exhibit 3.35 to the Company's Amendment No. 1
to Form S-4 Registration Statement dated March 26, 1999.
3.31 By-laws of Casino Magic Finance Corp., are hereby incorporated by reference
to Exhibit 3.36 to the Company's Amendment No. 1 to Form S-4 Registration
Statement dated March 26, 1999.
3.32 Articles of Incorporation of Casino One Corporation, are hereby
incorporated by reference to Exhibit 3.37 to the Company's Amendment No. 1
to Form S-4 Registration Statement dated March 26, 1999.
3.33 By-laws of Casino One Corporation, are hereby incorporated by reference to
Exhibit 3.38 to the Company's Amendment No. 1 to Form S-4 Registration
Statement dated March 26, 1999.
3.34 Articles of Incorporation of Bay St. Louis Casino Corp., are hereby
incorporated by reference to Exhibit 3.39 to the Company's Amendment No. 1
to Form S-4 Registration Statement dated March 26, 1999.
3.35 By-laws of Bay St. Louis Casino Corp., are hereby incorporated by reference
to Exhibit 3.40 to the Company's Amendment No. 1 to Form S-4 Registration
Statement dated March 26, 1999.
3.36 Articles of Incorporation of Mardi Gras Casino Corp., are hereby
incorporated by reference to Exhibit 3.41 to the Company's Amendment No. 1
to Form S-4 Registration Statement dated March 26, 1999.
3.37 By-laws of Mardi Gras Casino Corp., are hereby incorporated by reference to
Exhibit 3.42 to the Company's Amendment No. 1 to Form S-4 Registration
Statement dated March 26, 1999.
3.38 Articles of Incorporation of Boomtown Hoosier, Inc., are hereby
incorporated by reference to Exhibit 3.43 to the Company's Amendment No. 1
to Form S-4 Registration Statement dated March 26, 1999.
3.39 By-laws of Boomtown Hoosier, Inc., are hereby incorporate by reference to
Exhibit 3.44 to the Company's Amendment No. 1 to Form S-4 Registration
Statement dated March 26, 1999.
3.40 Articles of Organization of Indiana Ventures, LLC (subsequently renamed
Belterra Resort Indiana, LLC), are hereby incorporated by reference to
Exhibit 3.45 to the Company's Amendment No. 1 to Form S-4 Registration
Statement dated March 26, 1999.
53
3.41 Operating Agreement of Indiana Ventures, LLC (subsequently renamed Belterra
Resort Indiana, LLC), is hereby incorporated by reference to Exhibit 3.46 to the
Company's Amendment No. 1 to Form S-4 Registration Statement dated March 26,
1999.
3.42 Articles of Incorporation of HP Casino, Inc., are hereby incorporated by
reference to Exhibit 3.51 to the Company's Amendment No. 1 to Form S-4
Registration Statement dated March 26, 1999.
3.43 By-laws of HP Casino, Inc., are hereby incorporated by reference to Exhibit 3.52
to the Company's Amendment No. 1 to Form S-4 Registration Statement dated March
26, 1999.
3.44 Articles of Incorporation of Casino Magic of Louisiana, Corporation are hereby
incorporated by reference to Exhibit 3.44 to the Company's Annual Report on Form
10-K for the year ended December 31, 2000.
3.45 By-laws of Casino Magic of Louisiana, Corporation are hereby incorporated by
reference to Exhibit 3.45 to the Company's Annual Report on Form 10-K for the
year ended December 31, 2000.
3.46 Articles of Incorporation of Jefferson Casino Corporation are hereby
incorporated by reference to Exhibit 3.46 to the Company's Annual Report on Form
10-K for the year ended December 31, 2000.
3.47 By-laws of Jefferson Casino Corporation are hereby incorporated by reference to
Exhibit 3.47 to the Company's Annual Report on Form 10-K for the year ended
December 31, 2000.
4.1 Hollywood Park 1996 Stock Option Plan is hereby incorporated by reference to
Exhibit 10.24 to the Company's Registration Statement on Form S-4 dated
September 18, 1996.
4.2 Hollywood Park 1993 Stock Option Plan is hereby incorporated by reference to
Exhibit 4.2 to the Company's Amendment No. 1 to Form S-4 Registration Statement
dated March 26, 1999.
4.3 Pinnacle Entertainment, Inc. 2001 Stock Option Plan is hereby incorporated by
reference to Appendix A to the Company's Definitive Proxy Statement filed April
11, 2001.
4.4 Indenture, dated August 1, 1997, governing the 9.5% Senior Subordinated Notes
due 2007 by and among the Company, Hollywood Park Operating Company, Hollywood
Park Food Services, Inc., Hollywood Park Fall Operating Company, HP/Compton,
Inc., Crystal Park Hotel and Casino Development Company, LLC, HP Yakama, Inc.,
Turf Paradise, Inc., Boomtown, Inc., Boomtown Hotel & Casino, Inc., Louisiana -
I Gaming, Louisiana Gaming Enterprises, Inc., Mississippi - I Gaming, L.P.,
Bayview Yacht Club, Inc. and The Bank of New York, as trustee, is hereby
incorporated by reference to Exhibit 10.37 to the Company's Quarterly Report on
Form 10-Q for the quarter ended June 30, 1997.
4.5 First Supplemental Indenture, dated as of February 5, 1999, to Indenture dated
as of August 1, 1997 governing the 9.5% Senior Subordinated Notes due 2007, by
and among the Company and Hollywood Park Operating Company, as co-issuers, and
Bayview Yacht Club, Inc., Boomtown Hotel & Casino, Inc., Boomtown, Inc., Crystal
Park Hotel and Casino Development Company, LLC, Hollywood Park Fall Operating
Company, Hollywood Park Food Services, Inc., Hollywood Park Operating Company,
HP/Compton, Inc., HP Yakama, Inc., Louisiana Gaming Enterprises, Inc., Louisiana
- I Gaming, a Louisiana Partnership in Commendam, Mississippi - I Gaming, LP,
and Turf Paradise, Inc. as guarantors, and The Bank of New York, as trustee, is
hereby incorporated by reference to Exhibit 4.4 to the Company's S-4
Registration dated March 2, 1999.
4.6 Form of Series B 9.5% Senior Subordinated Notes due 2007 (included in Exhibit
4.4), is hereby incorporated by reference to the Company's Amendment No.1 to
Registration Statement on Form S-4 dated October 30, 1997.
4.7 Indenture, dated as of February 18, 1999, governing the 9.25% Senior
Subordinated Notes due 2007, by and among the Company as issuer, and Bay St.
Louis Casino Corp., Bayview Yacht Club, Inc., Biloxi Casino Corp., Boomtown
Hoosier, Inc., Boomtown Hotel & Casino, Inc., Boomtown, Inc., Casino Magic
American Corp., Casino Magic Corp., Casino Magic Finance Corp., Casino One
Corporation, Crystal Park Hotel and Casino Development Company, LLC, Hollywood
Park Fall Operating Company, Hollywood Park Food Services, Inc., Hollywood Park
Operating Company, HP Casino, Inc., HP/Compton, Inc., HP Yakama, Inc., HP Yakama
Consulting, Inc., Indiana Ventures LLC, Louisiana Gaming Enterprises, Inc.,
Louisiana - I Gaming, a Louisiana Partnership in Commendam, Mardi Gras Casino
Corp., Mississippi - I Gaming, L.P., Pinnacle Gaming Development Corp.,
Switzerland County Development Corp., and Turf Paradise, Inc. as initial
guarantors, and The Bank of New York, as trustee, is hereby incorporated by
reference to Exhibit 4.6 to the Company's S-4 Registration Statement dated March
2, 1999.
54
4.8 Form of Series B 9.25% Senior Subordinated Notes due 2007 (included in Exhibit
4.7), is hereby incorporated by reference to Exhibit 4.7 to the Company's S-4
Registration Statement dated March 2, 1999.
10.1 Directors Deferred Compensation Plan for Hollywood Park, Inc. is hereby
incorporated by reference to Exhibit 10.1 to the Company's Amendment No. 1 to
Form S-4 Registration Statement dated March 26, 1999.
10.2 Aircraft Time Sharing Agreement dated June 2, 1998, by and between Hollywood
Park, Inc. and R.D. Hubbard Enterprises, Inc. is hereby incorporated by
reference to Exhibit 10.2 to the Company's Amendment No.1 to Form S-4
Registration Statement dated March 26, 1999.
10.3* Amended and Restated Disposition and Development Agreement of Purchase and Sale,
and Lease with Option to Purchase, dated August 2, 1995, by and between The
Community Redevelopment Agency of the City of Compton and Compton Entertainment,
Inc.
10.4* Guaranty, dated July 31, 1995, by Hollywood Park, Inc., in favor of the
Community Redevelopment Agency of the City of Compton.
10.5* Assignment, Assumption and Consent Agreement, by and among HP/Compton, Inc., and
Crystal Park Hotel and Casino Development Company LLC, Hollywood Park, Inc. and
The Community Redevelopment Agency of the City of Compton, dated July 18, 1996.
10.6* Operating Agreement for Crystal Park Hotel and Casino Development Company, LLC,
a California Limited Liability Company, dated July 18, 1996, effective August
28, 1996.
10.7 Lease, by and between Crystal Park Hotel and Casino Development Company, LLC and
California Casino Management, Inc., dated December 19, 1997, is hereby
incorporated by reference to Exhibit 10.41 to the Company's Annual Report on
Form 10-K for the year ended December 31, 1997.
10.8 Addendum to the Lease Agreement dated December 19, 1997, by and between Crystal
Park Hotel and Casino Development Company, LLC and California Casino Management,
Inc., dated June 30, 1998, is hereby incorporated by reference to Exhibit 10.46
of the Company's Quarterly Report on Form 10-Q for the quarter ended June 30,
1998.
10.9 Blue Diamond Swap Agreement by and among Boomtown, Inc., Blue Diamond Hotel &
Casino, Inc., Hollywood Park, Inc., Edward P. Roski, Jr., IVAC and Majestic
Realty Co., dated August 12, 1996, is hereby incorporated by reference to
Exhibit 10.22 to the Company's Registration Statement on Form S-4 filed
September 18, 1996.
10.10 Stock Purchase Agreement, by and between Hollywood Park, Inc. and Edward P.
Roski, Jr., dated August 12, 1996, is hereby incorporated by reference to
Exhibit 10.23 to the Company's Registration Statement on Form S-4 filed
September 18, 1996.
10.11 Second Addendum to the Lease Agreement dated December 19, 1997, by and between
Crystal Park Hotel and Casino Development Company, LLC and California Casino
Management, Inc. dated March 8, 1999, is hereby incorporated by reference to
Exhibit 10.11 to the Company's Amendment No.1 to Form S-4 Registration Statement
dated March 26, 1999.
10.12 Ground Lease, dated October 19, 1993, between Raphael Skrmetta as Landlord and
Mississippi - I Gaming, L.P. as Tenant, is hereby incorporated by reference to
Exhibit 10.33 to the Company's Quarterly Report on Form 10-Q for the quarter
ended June 30, 1997.
10.13 First Amendment to Ground Lease dated October 19, 1993, between Raphael Skrmetta
and Mississippi - I Gaming, L.P., is hereby incorporated by reference to Exhibit
10.34 to the Company's Quarterly Report on Form 10-Q for the quarter ended June
30, 1997.
10.14 Second Amendment to Ground Lease dated October 19, 1993, between Raphael
Skrmetta and Mississippi - I Gaming, L.P., is hereby incorporated by reference
to Exhibit 10.35 to the Company's Quarterly Report on Form 10-Q for the quarter
ended June 30, 1997.
10.15 Profit Participation Agreement, by and between Hollywood Park, Inc., and North
American Sports Management, Inc., dated July 14, 1997, is hereby incorporated by
reference to Exhibit 10.40 to the Company's Quarterly Report on Form 10-Q for
the quarter ended September 30, 1997.
10.16 Loan Agreement, by and between Yakama Tribal Gaming Corporation and HP Yakama,
Inc., dated September 11, 1997, is hereby incorporated by reference Exhibit
10.41 to the Company's Quarterly Report on Form 10-Q for the quarter ended
September 30, 1997.
55
10.17 Security Agreement, by and between Yakama Tribal Gaming Corporation and HP
Yakama, Inc., dated September 11, 1997, is hereby incorporated by reference to
Exhibit 10.42 to the Company's Quarterly Report on Form 10-Q for the quarter
ended September 30, 1997.
10.18 Master Lease, by and between The Confederated Tribes and Bands of the Yakama
Indian Nation and HP Yakama, Inc., dated September 11, 1997, is hereby
incorporated by reference to Exhibit 10.43 to the Company's Quarterly Report on
Form 10-Q for the quarter ended September 30, 1997.
10.19 Sublease, by and between HP Yakama, Inc. and Yakama Tribal Gaming Corporation,
dated September 11, 1997, is hereby incorporated by reference to Exhibit 10.44
to the Company's Quarterly Report on Form 10-Q for the quarter ended September
30, 1997.
10.20 Construction and Development Agreement, by and between Yakama Tribal Gaming
Corporation and HP Yakama Consulting, Inc., dated September 11, 1997, is hereby
incorporated by reference to Exhibit 10.45 to the Company's Quarterly Report on
Form 10-Q for the quarter ended September 30, 1997.
10.21 Voting Agreement, dated as of February 25, 1998, by and between Hollywood Park,
Inc., and Marlin F. Torguson, is hereby incorporated by reference to Exhibit
10.1 to the Company's Current Report on Form 8-K, filed February 26, 1998.
10.22 Option agreement, by and among The Webster Family Limited Partnership and The
Diuguid Family Limited Partnership, and Pinnacle Gaming Development Corp., dated
June 2, 1998, is hereby incorporated by reference to Exhibit 10.47 of the
Company's Quarterly Report on Form 10-Q for the quarter ended June 30, 1998.
10.23 Memorandum of Option Agreement, by and between the Webster Family Limited
Partnership and The Duiguid Family Limited Partnership, and Pinnacle Gaming
Development Corp., dated June 2, 1998, is hereby incorporated by reference to
Exhibit 10.48 of the Company's Quarterly Report on Form 10-Q for the quarter
ended June 30, 1998.
10.24 Amended and Restated Option Agreement, by and among Daniel Webster, Marsha S.
Webster, William G. Duiguid, Sara T. Diuguid, J.R. Showers, III and Carol A.
Showers, and Pinnacle Gaming Development Corp., dated June 2, 1998, is hereby
incorporated by reference to Exhibit 10.49 of the Company's Quarterly Report on
Form 10-Q for the quarter ended June 30, 1998.
10.25 Memorandum of Amended and Restated Option Agreement, by and between Daniel
Webster, Marsha S. Webster, William Diuguid, Sara T. Diuguid, J.R. Showers, III
and Carol A. Showers, and Pinnacle Gaming Development Corp., dated June 4, 1998,
is hereby incorporated by reference to Exhibit 10.50 of the Company's Quarterly
Report on Form 10-Q for the quarter ended June 30, 1998.
10.26 Assignment of Option Agreement, by Daniel Webster and Marsha S. Webster, and
Pinnacle Gaming Development Corp., dated June 2, 1998, is hereby incorporated by
reference to Exhibit 10.51 of the Company's Quarterly Report on Form 10-Q for
the quarter ended June 30, 1998.
10.27 Employment Agreement, dated December 23, 1998, by and between Hollywood Park,
Inc. and G. Michael Finnigan, is hereby incorporated by reference to Exhibit
10.36 to the Company's Amendment No. 1 to Form S-4 Registration Statement dated
March 26, 1999.
10.28 Employment Agreement, dated September 10, 1998, by and between Hollywood Park,
Inc. and Paul Alanis, is hereby incorporated by reference to Exhibit 10.37 to
the Company's Amendment No. 1 to Form S-4 Registration Statement dated March 26,
1999.
10.29 Employment Agreement, dated September 10, 1998, by and between Hollywood Park,
Inc. and Mike Allen, is hereby incorporated by reference to Exhibit 10.38 to the
Company's Amendment No. 1 to Form S-4 Registration Statement dated March 26,
1999.
10.30 Employment Agreement, dated September 10, 1998, by and between Hollywood Park,
Inc. and Loren Ostrow is hereby incorporated by reference to Exhibit 10.33 to
the Company's Annual Report on Form 10-K for the year ended December 31, 2000.
10.31 Purchase Agreement, dated as of February 25, 1998, among Hilton Gaming
(Switzerland County) Corporation and Boomtown Hoosier, Inc., is hereby
incorporated by reference to Exhibit 10.40 to the Company's Amendment No. 1 to
Form S-4 Registration Statement dated March 26, 1999.
10.32 Asset Purchase Agreement, dated May 5, 1999, among Hollywood Park, Inc. and
Churchill Downs Incorporated, is hereby incorporated by reference to Exhibit
10.41 to the Company's Quarterly Report on Form 10-Q for the quarter ended June
30, 1999.
56
10.33 Amended and Restated Reducing Revolving Loan Agreement, dated October 14, 1998,
among Hollywood Park, Inc., and the banks named therein, Societe Generale and
Bank of Scotland (as Managing Agents), First National Bank of Commerce (as
Co-Agent), and Bank of America National Trust and Savings Association (as
Administrative Agent), is hereby incorporated by reference to Exhibit 2 of the
Company's Current Report on Form 8-K, filed October 30, 1998.
10.34 Amendment No. 1 to Amended and Restated Reducing Revolving Loan Agreement, dated
June 2, 1999, is hereby incorporated by reference to Exhibit 10.42 to the
Company's Quarterly Report on Form 10-Q for the quarter ended June 30, 1999.
10.35 Amendment No. 2 to Amended and Restated Reducing Revolving Loan Agreement, dated
September 24, 1999, is hereby incorporated by reference to Exhibit 10.43 to the
Company's Quarterly Report on Form 10-Q for the quarter ended September 30,
1999.
10.36* Amendment No. 3 to Amended and Restated Reducing Revolving Loan Agreement, dated
September 15, 2000.
10.37* Amendment No. 4 to Amended and Restated Reducing Revolving Loan Agreement, dated
March 16, 2001.
10.38 Amendment No. 5 to Amended and Restated Reducing Revolving Credit Loan Agreement
and Waiver, dated July 23, 2001 is hereby incorporated by reference to the
Company's Quarterly Report on Form 10-Q for the Quarter ended June 30, 2001.
10.39 Amendment No. 6 to Amended and Restated Reducing Revolving Credit Loan Agreement
and Waiver, dated November 7, 2001 is hereby incorporated by reference to the
Company's Quarterly Report on From 10-Q for the Quarter ended September 30,
2001.
10.40 Asset Purchase Agreement, dated as of December 9, 1999, between BSL, Inc., and
Casino Magic Corp. is hereby incorporated by reference to Exhibit 10.1 to the
Company's Current Report on Form 8-K filed December 21, 1999.
10.41 Asset Purchase Agreement, dated as of December 9, 1999, between BTN, Inc. and
Boomtown, Inc. is hereby incorporated by reference to Exhibit 10.2 to the
Company's Current Report on Form 8-K filed December 21, 1999.
10.42 First Amendment to Asset Purchase Agreement, dated December 17, 1999, between
BSL, Inc. and Casino Magic Corp. is hereby incorporated by reference to Exhibit
10.3 to the Company's Current Report on Form 8-K filed December 21, 1999.
10.43 First Amendment to Asset Purchase Agreement, dated December 17, 1999, between
BTN, Inc. and Boomtown, Inc. is hereby incorporated by reference to Exhibit 10.4
to the Company's Current Report on Form 8-K filed December 21, 1999.
10.44 Guaranty issued by Penn National in favor of Casino Magic Corp. entered into as
of December 9, 1999 is hereby incorporated by reference to Exhibit 10.5 to the
Company's Current Report on Form 8-K filed December 21, 1999.
10.45 Guaranty issued by Penn National in favor of Boomtown, Inc. entered into as of
December 9, 1999 is hereby incorporated by reference to Exhibit 10.6 to the
Company's Current Report on Form 8-K filed December 21, 1999.
10.46 Guaranty issued by Hollywood Park in favor of BSL, Inc. entered into as of
December 9, 1999 is hereby incorporated by reference to Exhibit 10.7 to the
Company's Current Report on Form 8-K filed December 21, 1999.
10.47 Guaranty issued by Hollywood Park in favor of BTN, Inc. entered into as of
December 9, 1999 is hereby incorporated by reference to Exhibit 10.8 to the
Company's Current Report on Form 8-K filed December 21, 1999.
10.48 Executive Deferred Compensation Plan for Hollywood Park, Inc., is hereby
incorporated by reference to Exhibit 10.48 to the Company's Annual Report on
Form 10-K filed March 29, 2000.
10.49 Agreement for Purchase and Sale of Assets, dated as of February 24, 2000,
between Pinnacle Entertainment, Inc. and Jerry Simms, is hereby incorporated by
reference to Exhibit 10.49 to the Company's Annual Report on Form 10-K filed
March 29, 2000.
10.50 First Amendment to Lease and Agreement by and between Pinnacle Entertainment,
Inc. and Century Gaming Management, Inc. dated September 6, 2000, is hereby
incorporated by reference to the Company's Quarterly Report on Form 10-Q filed
November 14, 2000.
57
10.51 Option Agreement for the buyout of Full House, LLC's 3% non-voting interest in
Belterra Resort Indiana, LLC, dated as of November 6, 2000, between Pinnacle
Entertainment, Inc. and Full House, LLC is hereby incorporated by reference to
Exhibit 10.50 to the Company's Annual Report on Form 10-K for the year ended
December 31, 2000.
10.52 Agreement and Joint Escrow Instructions dated as of January 24, 2001 between
Crystal Park Hotel and Casino Development Company, LLC, and The Community
Redevelopment Agency of the City of Compton is hereby incorporated by reference
to Exhibit 10.51 to the Company's Annual Report on Form 10-K for the year ended
December 31, 2000.
10.53 Termination of Master Lease and Sublease Agreements dated as of June 28, 2001 by
and between the Confederated Tribes and Bands of the Yakama Nation, the Yakama
Tribal Gaming Corporation and HP Yakama, Inc. is hereby incorporated by
reference to the Company's Quarterly Report on Form 10-Q for the Quarter ended
June 30, 2001.
10.54 * Employment Agreement dated September 1, 2001, by and between Pinnacle
Entertainment, Inc. and Wade Hundley.
10.55* First Amendment to the Pinnacle Entertainment, Inc. (formerly Hollywood Park,
Inc.) Executive Deferred Compensation Plan dated March 15, 2000.
10.56* Second Amendment to the Pinnacle Entertainment, Inc. Executive Compensation Plan
dated January 1, 2001.
10.57* Statement of Conditions to Riverboat Gaming License of PNK (Lake Charles), LLC
dated November 20, 2001.
11.1 * Statement re: Computation of Per Share Earnings
21.1 * Subsidiaries of Pinnacle Entertainment, Inc.
23.1 * Consent of Arthur Andersen LLP
99.1 * Letter responsive to Temporary Note 3T to Article 3 of Regulation S-X
-----
* Filed herewith
(b) Reports on Form 8-K
None
58
Signatures
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the Registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.
PINNACLE ENTERTAINMENT, INC.
(Registrant)
By: /s/ Paul R. Alanis Dated: March 26, 2002
---------------------------------------
Paul R. Alanis
Chief Executive Officer and President
(Principal Executive Officer)
By: /s/ Bruce C. Hinckley Dated: March 26, 2002
---------------------------------------
Bruce C. Hinckley
Senior Vice President
and Chief Financial Officer
(Principal Financial and
Accounting Officer)
59
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the registrant and
it the capacities and on the dates indicated:
PINNACLE ENTERTAINMENT, INC.
/s/ R.D. Hubbard Dated: March 26, 2002
- --------------------------------------------
R.D. Hubbard - Director
/s/ Paul Alanis Dated: March 26, 2002
- --------------------------------------------
Paul Alanis - Director
/s/ Robert T. Manfuso Dated: March 26, 2002
- --------------------------------------------
Robert T. Manfuso - Director
/s/ James Martineau Dated: March 26, 2002
- --------------------------------------------
James Martineau - Director
/s/ Gary Miller Dated: March 26, 2002
- --------------------------------------------
Gary Miller - Director
/s/ Michael Ornest Dated: March 26, 2002
- --------------------------------------------
Michael Ornest - Director
/s/ Timothy J. Parrott Dated: March 26, 2002
- --------------------------------------------
Timothy J. Parrott - Director
/s/ Lynn P. Reitnouer Dated: March 26,2002
- --------------------------------------------
Lynn P. Reitnouer - Director
/s/ Marlin Torguson Dated: March 26, 2002
- --------------------------------------------
Marlin Torguson - Director
60
Pinnacle Entertainment, Inc.
Index to Consolidated Financial Statements
Report of Independent Public Accountants
Report of Arthur Andersen LLP...............................................62
Consolidated Statements of Operations for the years
ended December 31, 2001, 2000 and 1999...................................63
Consolidated Balance Sheets as of December 31, 2001 and 2000..................64
Consolidated Statements of Changes in Stockholders' Equity
for the years ended December 31, 2001, 2000 and 1999.....................65
Consolidated Statements of Cash Flows for the years
ended December 31, 2001, 2000 and 1999...................................66
Notes to Consolidated Financial Statements....................................67
Other Financial Data..........................................................97
61
Report of Independent Public Accountants
To the Board of Directors and Stockholders of
Pinnacle Entertainment, Inc.:
We have audited the accompanying consolidated balance sheets of Pinnacle
Entertainment, Inc., (a Delaware corporation, formerly Hollywood Park, Inc.) and
subsidiaries (the "Company") as of December 31, 2001 and 2000, and the related
consolidated statements of operations, shareholders' equity and cash flows for
each of the three years in the period ended December 31, 2001. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States. Those standards require that we plan and perform the
audits to obtain reasonable assurance about whether the financial statements are
free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements. An
audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Pinnacle Entertainment, Inc.
and subsidiaries as of December 31, 2001 and 2000, and the results of their
operations and their cash flows for each of the three years in the period ended
December 31, 2001 in conformity with accounting principles generally accepted in
the United States.
ARTHUR ANDERSEN LLP
Los Angeles, California
February 4, 2002
62
Pinnacle Entertainment, Inc.
Consolidated Statements of Operations
For the years ended December 31,
------------------------------------
2001 2000 1999
--------- --------- --------
(in thousands, except per share data)
Revenues:
Gaming $ 442,089 $ 461,901 $536,661
Food and beverage 30,952 31,920 39,817
Truck stop and service station 20,190 21,782 17,644
Hotel and recreational vehicle park 14,977 12,730 11,737
Other income 20,433 25,340 24,924
Racing 0 9,452 55,209
--------- --------- --------
528,641 563,125 685,992
--------- --------- --------
Expenses:
Gaming 259,573 258,346 288,643
Food and beverage 38,799 35,180 46,558
Truck stop and service station 18,703 20,300 16,296
Hotel and recreational vehicle park 10,169 6,663 5,923
Racing 0 4,133 22,694
Selling, general and administrative 120,335 107,978 134,870
Depreciation and amortization 49,450 46,102 51,924
Other operating expenses 14,159 10,578 13,921
Pre-opening costs, Belterra Casino Resort 610 15,030 3,020
Gain on disposition of assets, net of losses (500) (118,816) (62,507)
Asset impairment write-down 23,530 0 20,446
Terminated merger costs (464) 5,727 0
--------- --------- --------
534,364 391,221 541,788
--------- --------- --------
Operating (loss) income (5,723) 171,904 144,204
Interest income (5,021) (12,604) (7,927)
Interest expense, net 49,853 52,620 65,471
--------- --------- --------
(Loss) income before minority interest, income taxes and
extraordinary item (50,555) 131,888 86,660
Minority interest 0 0 1,687
Income tax (benefit) expense (21,906) 52,396 40,926
--------- --------- --------
Net (loss) income before extraordinary item (28,649) 79,492 44,047
Extraordinary item, net of income tax benefit 0 2,653 0
--------- --------- --------
Net (loss) income ($28,649) $ 76,839 $ 44,047
========= ========= ========
==============================================================================================
Net (loss) income per common share - basic
Net (loss) income before extraordinary item ($1.11) $ 3.02 $ 1.70
Extraordinary item, net of income tax benefit 0.00 (0.10) 0.00
--------- --------- --------
Net (loss) income per common share - basic ($1.11) $ 2.92 $ 1.70
========= ========= ========
Net (loss) income per common share - diluted
Net (loss) income before extraordinary item ($1.11) $ 2.90 $ 1.67
Extraordinary item, net of income tax benefit 0.00 (0.10) 0.00
--------- --------- --------
Net (loss) income per common share - diluted ($1.11) $ 2.80 $ 1.67
========= ========= ========
Number of shares - basic 25,814 26,335 25,966
Number of shares - diluted 25,814 27,456 26,329
- ----------
See accompanying notes to the consolidated financial statements.
63
Pinnacle Entertainment, Inc.
Consolidated Balance Sheets
December 31, December 31,
2001 2000
------------ ------------
Assets
(in thousands, except share data)
Current Assets:
Cash and cash equivalents $153,187 $172,868
Restricted cash 3,452 0
Receivables, net of allowance for doubtful accounts of $2,365 and $2,737 as of
December 31, 2001 and 2000, respectively 9,194 19,007
Income tax receivable 10,587 0
Prepaid expenses and other assets 18,407 18,425
Deferred income taxes 4,712 0
Assets held for sale 18,285 12,164
Current portion of notes receivable 1,000 2,393
-------- --------
Total current assets 218,824 224,857
Notes receivable 0 6,604
Property, plant and equipment, net 576,299 593,718
Goodwill, net of amortization 68,727 71,263
Gaming licenses, net of amortization 36,588 38,934
Debt issuance costs, net of amortization 12,334 15,847
Other assets 6,577 10,252
-------- --------
$919,349 $961,475
======== ========
=====================================================================================================================
Liabilities and Stockholders' Equity
Current Liabilities:
Accounts payable $ 16,953 $ 19,349
Accrued interest 17,423 17,997
Accrued compensation 13,737 16,668
Other accrued liabilities 31,887 31,594
Deferred income taxes 0 4,335
Current portion of notes payable 3,654 3,432
-------- --------
Total current liabilities 83,654 93,375
Notes payable, less current maturities 493,493 497,162
Deferred income taxes 22,686 9,762
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;
25,443,444 and 26,434,302 shares issued and outstanding in 2001 and 2000 2,545 2,644
Capital in excess of par value 219,613 228,095
Accumulated other comprehensive loss (4,430) 0
Retained earnings 101,788 130,437
-------- --------
Total stockholders' equity 319,516 361,176
-------- --------
$919,349 $961,475
======== ========
- ----------
See accompanying notes to the consolidated financial statements.
64
Pinnacle Entertainment, Inc.
Consolidated Statements of Changes in Stockholders' Equity
For the years ended December 31, 2001, 2000 and 1999
Retained
Capital in Earnings Total
Common Excess of Comprehensive (Accumulated Stockholders'
Stock Par Value (loss)/ income Deficit) Equity
------ ---------- -------------- ------------ -------------
(in thousands)
Balance as of December 31, 1998 $2,580 $218,375 $ 470 $ 9,551 $230,976
Net income 0 0 0 44,047 44,047
Executive stock option compensation 0 828 0 0 828
Common stock options exercised 44 4,335 0 0 4,379
Tax benefit associated with exercised
common stock options 0 1,116 0 0 1,116
Investment in stock - unrealized holding gain 0 0 (470) 0 (470)
------ -------- -------- -------- --------
Balance as of December 31, 1999 2,624 224,654 0 53,598 280,876
Net income 0 0 0 76,839 76,839
Executive stock option compensation 0 414 0 0 414
Common stock options exercised 20 2,302 0 0 2,322
Tax benefit associated with exercised
common stock options 0 725 0 0 725
------ -------- -------- -------- --------
Balance as of December 31, 2000 2,644 228,095 0 130,437 361,176
Net (loss) income 0 0 0 (28,649) (28,649)
Repurchase and retirement of common stock (110) (9,710) 0 0 (9,820)
Executive stock option compensation 0 414 0 0 414
Common stock options exercised 11 469 0 0 480
Foreign currency translation loss 0 0 (4,430) 0 (4,430)
Tax benefit associated with exercised
common stock options 0 345 0 0 345
------ -------- -------- -------- --------
Balance as of December 31, 2001 $2,545 $219,613 ($4,430) $101,788 $319,516
====== ======== ======== ======== ========
- ----------
See accompanying notes to the consolidated financial statements.
65
Pinnacle Entertainment, Inc.
Consolidated Statements of Cash Flows
For the years ended December 31,
-----------------------------------
2001 2000 1999
--------- --------- ---------
(in thousands)
Cash flows from operating activities:
Net (loss) income ($28,649) $ 76,839 $ 44,047
Adjustments to reconcile net (loss) income to net cash provided
by (used in) operating activities:
Depreciation and amortization 49,450 46,102 51,924
Net gain on disposition of assets (500) (118,816) (62,507)
Asset impairment writedown 23,530 0 20,446
Other changes that (used) provided cash, net of the effects
of the purchase and disposition of businesses:
Restricted cash (3,452) 0 0
Receivables, net 6,991 (2,017) (2,242)
Income tax receivable (10,587) 0 0
Prepaid expenses and other assets (2,495) (7,168) (4,780)
Accounts payable (2,396) (1,747) (10,948)
Accrued liabilities (10,339) (8,351) (16,254)
Accrued interest (574) (8,083) 9,344
Income taxes 14,556 (6,271) 38,393
All other, net 530 4,028 6,784
--------- --------- ---------
Net cash provided by (used in) operating activities 36,065 (25,484) 74,207
--------- --------- ---------
Cash flows from investing activities:
Additions to property, plant and equipment (51,783) (194,627) (58,321)
Capitalized interest (481) (8,148) (1,359)
Receipts from disposition of property, plant and equipment, net 324 266,925 140,083
Principal collected on notes receivable 8,636 5,699 5,283
Proceeds from (purchase of) short term investments 0 123,428 (120,249)
Payment to buy-out minority interest in subsidiaries 0 0 (16,500)
--------- --------- ---------
Net cash (used in) provided by investing activities (43,304) 193,277 (51,063)
--------- --------- ---------
Cash flows from financing activities:
Redemption of Casino Magtic 13% Notes 0 (112,875) 0
Write-off of unamortized premium and debt costs
associated with the Casino Magic 13% Notes, net 0 (3,340) 0
Payment of notes payable (3,447) (5,119) (15,566)
Proceeds from secured Bank Credit Facility 0 0 17,000
Payment of secured Bank Credit Facility 0 0 (287,000)
Proceeds from issuance of 9.25% Notes 0 0 350,000
Increase in debt issuance costs 0 0 (15,309)
Common stock repurchase and retirement (9,820) 0 0
Other financing activities, net 825 3,047 6,859
--------- --------- ---------
Net cash (used in) provided by financing activities (12,442) (118,287) 55,984
--------- --------- ---------
(Decrease) increase in cash and cash equivalents (19,681) 49,506 79,128
Cash and cash equivalents at the beginning of the period 172,868 123,362 44,234
--------- --------- ---------
Cash and cash equivalents at the end of the period $ 153,187 $ 172,868 $ 123,362
========= ========= =========
- ----------
See accompanying notes to the consolidated financial statements.
66
Pinnacle Entertainment, Inc.
Notes to Consolidated Financial Statements
Note 1 - Summary of Significant Accounting Policies
General Pinnacle Entertainment, Inc. (the "Company" or "Pinnacle Entertainment")
is a diversified gaming company that owns and operates seven casinos (four with
hotels) in Indiana, Louisiana, Mississippi, Nevada and Argentina and is pursing
the development of a hotel and casino resort in Lake Charles, Louisiana.
Pinnacle Entertainment owns and operates through a subsidiary, the Belterra
Casino Resort, a hotel and cruising riverboat casino resort in Switzerland
County, Indiana, in which the Company owned a 97% interest, until August 2001,
at which time the remaining 3% held by a non-voting local partner was purchased
by the Company (see Note 9). The Company also owns and operates, through its
Boomtown, Inc. ("Boomtown") subsidiary, land-based gaming operations in Verdi,
Nevada ("Boomtown Reno") and dockside riverboat gaming operations in Harvey,
Louisiana ("Boomtown New Orleans"). On April 1, 2001, legislation became
effective in Louisiana that requires cruising riverboat casinos in southern
Louisiana, including the Company's Boomtown New Orleans operations, to remain
dockside at all times (see Note 7). The Company also owns and operates, through
its Casino Magic Corp. ("Casino Magic") subsidiary, dockside gaming operations
in Biloxi, Mississippi ("Casino Magic Biloxi"); dockside riverboat gaming
operations in Bossier City, Louisiana ("Casino Magic Bossier City"); and two
land-based casinos in Argentina ("Casino Magic Argentina"). The Company is also
pursing the development of a luxury hotel and dockside riverboat casino resort
in connection with the 15th and final gaming license to be issued in Louisiana
at a site in Lake Charles (see Note 8). Pinnacle Entertainment receives lease
income from two card clubs - the Hollywood Park-Casino and Crystal Park Hotel
and Casino. The Hollywood Park-Casino is leased from Churchill Downs California
Company ("Churchill Downs"), a wholly owned subsidiary of Churchill Downs
Incorporated, and subleased to an unaffiliated third party operator. The Crystal
Park Hotel and Casino ("Crystal Park Casino") is owned by the Company and is
leased to the same card club operator that leases and operates the Hollywood
Park-Casino. In the fourth quarter of 2001, in connection with the
reclassification of the net book value to "Assets held for sale" on the
Consolidated Balance Sheet and reductions to rent payable to the Company from
the third-party operator, the Company wrote-down the Crystal Park Casino card
club asset to its estimated fair value (see Notes 4 and 5).
Prior to August 2000, the Company owned and operated dockside gaming facilities
in Biloxi, Mississippi ("Boomtown Biloxi") and in Bay St. Louis, Mississippi
("Casino Magic Bay St. Louis"). In August 2000, the Company completed the sale
of these facilities (see Note 11). Prior to June 2000, the Company owned and
operated Turf Paradise, Inc. ("Turf Paradise"), a horse racing facility in
Phoenix, Arizona. In June 2000, the Company completed the sale of Turf Paradise
(see Note 11). Prior to September 1999, the Hollywood Park-Casino was owned and
operated by the Company. In September 1999, the Company completed the sale of
the Hollywood Park Race Track in Inglewood, California to Churchill Downs (see
Note 11).
Principles of Consolidation The consolidated financial statements include the
accounts of Pinnacle Entertainment and its subsidiaries. All significant
inter-company accounts and transactions have been eliminated.
Goodwill Goodwill consists of the excess of the acquisition cost over the fair
value of the net assets acquired in business combinations and is being amortized
on a straight-line basis over 40 years, except for the goodwill related to the
acquisition of the 49% minority partner in Casino Magic Argentina, which is
being amortized over the extended life of the concession agreement (see "-Gaming
Licenses" below). Unamortized goodwill as of December 31, 2001 was $68,727,000,
including $10,709,000 attributed to the Casino Magic Argentina minority partner
purchase in October 1999, $38,460,000 attributed to the Casino Magic Corp
purchase in October 1998 and $19,558,000 attributed to the Boomtown, Inc.
purchase in June 1997 (see Note 9). Accumulated amortization as of December 31,
2001 and 2000 was $13,863,000 and $11,017,000, respectively. In August 2000, in
connection with the sale of the two casinos in Mississippi (see Note 11), the
Company wrote off approximately $13,128,000 of unamortized goodwill associated
with these properties.
67
In June 2001, the Financial Accounting Standards Board issued Statements of
Financial Accounting Standards No. 141 "Business Combinations" ("SFAS No. 141")
and No. 142 "Goodwill and Other Intangible Assets" ("SFAS No. 142") which are
effective July 1, 2001 and January 1, 2002, respectively, for the Company. SFAS
141 requires that the purchase method of accounting be used for all business
combinations initiated after June 30, 2001. With the adoption of SFAS No. 142 on
January 1, 2002 (earlier adoption is not permitted), goodwill is no longer
amortized over its estimated useful life, which, for the years ended December
31, 2001, 2000 and 1999, was $2,846,000, $3,030,000 and $2,859,000,
respectively. Rather, goodwill will be subject to at least an annual assessment
for impairment by applying a fair-value-based test. The Company is in the
process of completing its evaluation of the financial statement impact of
adoption of SFAS No. 142 and anticipates there will be an impairment charge
recorded in the first quarter of 2002 related to its Casino Magic locations. In
accordance with SFAS No. 142, any such transition related impairment charge
would be classified as a cumulative effect of a change in accounting principle.
In addition, under the new rules, any future acquired intangible asset will be
separately recognized if the benefit of the intangible is obtained through
contractual or other legal rights, or if the intangible asset can be sold,
transferred, licensed, rented, or exchanged, regardless of the acquirer's intent
to do so. Intangible assets with definitive lives will be amortized over their
useful lives.
Gaming Licenses In 1994, Casino Magic acquired a twelve-year concession
agreement to operate two casinos in Argentina, and capitalized the costs related
to obtaining the concession agreement. Such costs are being amortized, based on
the straight-line method, over the extended life of the concession agreement.
The exclusive concession contract with the Province of Neuquen, Argentina was
originally scheduled to expire in December 2006; however in August 2001, the
Company and the Province entered into an agreement whereby the concession
contract will be extended for an additional fifteen years if Casino Magic
Argentina invests in the development of a new casino facility and related
amenities in accordance with the terms of the agreement. In connection with such
extension, in August 2001, the Company reclassified a $2,276,000 receivable from
the Province of Neuquen to Gaming Licenses on the Consolidated Balance Sheet, as
the Company agreed to not pursue the collection of such receivable as additional
consideration for the fifteen-year extension. Such additional concession
agreement cost will be amortized over the extended life of the concession
agreement. In the event the Company determines not to proceed with the capital
improvements, the amortization period for the concession agreement will be
reduced to be consistent with a December 2006 expiration date. The Company has
not made any change to the planned capital improvements at this time. The
unamortized gaming license costs related to Casino Magic Argentina as of
December 31, 2001 and 2000 were $4,949,000 (which amount reflects the
translation adjustment for Casino Magic Argentina assets and liabilities
pursuant to SFAS No. 52 as of December 31, 2001 - see Note 3) and $5,693,000,
respectively, and amortization expense was $1,006,000, $952,000 and $949,000 for
the years ended December 31, 2001, 2000 and 1999, respectively.
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, through December 31, 2001, was
amortizing the cost, based on the straight-line method, over twenty-five years.
Accumulated amortization as of December 31, 2001 and 2000 was $8,423,000 and
$6,821,000, respectively. In connection with the implementation of SFAS 142,
effective January 1, 2002, the Company no longer amortizes the gaming license as
the Company has classified such asset as a non-amortizing intangible asset. As
such, pursuant to FAS 142, the gaming license asset maintained by Casino Magic
Bossier City will be subject to at least an annual assessment for impairment by
applying a fair-value-based test. The unamortized gaming license costs related
to Casino Magic Bossier City as of December 31, 2001 and 2000 were $31,639,000
and $33,241,000, respectively, and amortization expense was $1,602,000 for each
of the years ended December 31, 2001, 2000 and 1999.
Amortization of Debt Issuance Costs Debt issuance costs incurred in connection
with long-term debt and bank financing are capitalized and amortized, based on
the straight-line method which approximates the effective interest method, to
interest expense during the period the debt or loan commitments are outstanding.
Accumulated amortization as of December 31, 2001 and 2000 was $11,472,000 and
$8,967,000, respectively. During the twelve months ended December 31, 2000, the
Company wrote off $2,429,000 of unamortized debt
68
issuance costs associated with the Casino Magic 13% Notes in connection with the
redemption of such notes (see Note 14).
Amortization of debt issuance costs included in interest expense was $3,742,000,
$3,062,000 and $2,449,000 for the years ended December 31, 2001, 2000 and 1999,
respectively.
Gaming Revenues and Promotional Allowances Gaming revenues at the Belterra,
Boomtown and Casino Magic properties consist of the difference between gaming
wins and losses, and in 1999 while the Company operated 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) was $50,216,000, $45,713,000
and $41,341,000 for the years ended December 31, 2001, 2000 and 1999,
respectively.
Racing Revenues and Expenses During the period in which the Company operated
horse race tracks, 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 racing expenses
were recognized as they occurred throughout the year.
Use of Estimates The preparation of consolidated financial statements in
conformity with accounting principles generally accepted in the United States
requires management to make estimates and assumptions that affect (i) the
reported amounts of assets and liabilities, (ii) the disclosure of contingent
assets and liabilities at the date of the 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, reserves associated
with asset sales, and in determining litigation and other obligations. Actual
results could differ from those estimates.
Property, Plant and Equipment Additions to property, plant and equipment are
recorded at cost. Projects in excess of $10,000,000 include capitalized
interest. Capitalized interest is based on project costs at an imputed rate and
was $481,000, $8,148,000 and $1,359,000 in fiscal 2001, 2000 and 1999,
respectively. Depreciation and amortization are provided based on the
straight-line method over the assets' 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, repairs and assets purchased below $2,500 (or a group of like-type
assets purchased below $5,000) are charged to expense, and betterments are
capitalized. The costs of property sold or otherwise disposed of and their
associated accumulated depreciation are eliminated from both the property and
accumulated depreciation accounts.
Cash and Cash Equivalents Cash and cash equivalents consist of cash,
certificates of deposit and short-term investments with original maturities of
90 days or less.
Restricted Cash Restricted cash at December 31, 2001 consists of the cash of
Casino Magic Argentina maintained in Argentina, translated from the Argentine
peso to the U.S. dollar. As discussed below in Note 3, Argentina experienced
political and economic disruption in the latter part of 2001, including the
devaluation of its currency and the governmental restriction of transferring any
cash out of the country. As such, all assets, including cash, have been
translated to U.S. dollars from the Argentine peso, and, until such time as the
restriction of transferring funds out of the country has been lifted, cash of
Casino Magic Argentina maintained
69
in Argentina will be classified as Restricted Cash on the Consolidated Balance
Sheet as it can only be utilized by Casino Magic Argentina and not by Pinnacle
Entertainment or any of its other subsidiaries.
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 Financial 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 beginning after December 15, 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, the Company reports information under a
single gaming segment.
Pre-opening Costs The Company's policy has been to expense pre-opening costs as
incurred, in accordance with Statement of Position 98-5 Reporting on the Costs
of Start-Up Activities.
Foreign Currency Translation Statement of Financial Accounting Standards No. 52
Foreign Currency Translation ("SFAS No. 52") requires all assets and liabilities
of a company's foreign subsidiaries be translated into U.S. dollars at the
exchange rate in effect at the end of the period, and revenues and expenses are
translated at average exchange rates prevailing during the period. The resulting
translation adjustments are reflected in a separate component of stockholders'
equity. Prior to December 31, 2001, the Company had no such translation
adjustments, as the Argentine peso, the local currency for the Company's Casino
Magic Argentina subsidiary, was pegged to the U.S. dollar. Effective with the
devaluation of the Argentine peso in early January 2002, the Company recorded a
translation loss at December 31, 2001 as a separate component of stockholders'
equity - see Note 3.
Revenue Recognition In December 1999, Staff Accounting Bulletin 101 Revenue
Recognition in Financial Statements ("SAB 101"), issued by the Securities and
Exchange Commission ("SEC"), was issued and became effective beginning the
fourth quarter of fiscal years beginning after December 15, 1999. SAB 101
summarizes certain of the SEC staff's views in applying accounting principles
generally accepted in the United States to revenue recognition in financial
statements. Implementation of SAB 101 did not have a material impact on the
Company's financial position and results of operations.
Derivative Instruments and Hedging Activities In June 1998, Statement of
Financial Accounting Standards No. 133 Accounting for Derivative Instruments and
Hedging Activities ("SFAS No. 133") was issued. SFAS No. 133 establishes
accounting and reporting standards for derivative instruments, including certain
derivative instruments embedded in other contracts, and for hedging activities.
In June 1999, Statement of Financial Accounting Standards No. 137 Accounting for
Derivative Instruments and Hedging Activities - Deferral of the Effective Date
of FASB Statement No. 133 ("SFAS No. 137") was issued. SFAS No. 133, as amended
by SFAS No. 137, is effective for all fiscal quarters of fiscal years beginning
after June 15, 2000. The Company did not have any derivative or hedging
instruments during the years ended December 31, 2001, 2000 and 1999.
Accounting for Customer "Cash-back" Loyalty Programs In January 2001, the
Emerging Issues Task Force ("EITF") reached consensus on Issue 3 addressed in
Issue No. 00-22 Accounting for "Points" and Certain Other
70
Time-Based Sales Incentive Offers, and Offers for Free Products or Services to
Be Delivered in the Future. This EITF pronouncement requires that the cost of
the cash back component of the Company's customer loyalty programs be treated as
a reduction in revenues. The Company rewards customers with cash, based upon
their level of play on certain casino games (primarily slot machines). These
costs were previously recorded as a casino expense. The consensus reached on
Issue 3 was effective beginning in fiscal quarters ending after February 15,
2001 and was adopted by the Company in the quarter ended March 31, 2001. In
connection with the adoption of Issue 3, the Company reclassified (i.e., reduced
gaming revenue and gaming expense) the cash back component of its customer
loyalty programs in the amount of $21,497,000 and $20,865,000 related to the
years ended December 31, 2000 and 1999 to be consistent with the year ended
December 31, 2001.
Accounting for Asset Retirement Obligations In June 2001, Statement of Financial
Accounting Standards No. 143 Accounting for Asset Retirement Obligations ("SFAS
No. 143) was issued. SFAS No. 143 addresses the diversity in practice for the
recognizing asset retirement obligations ("ARO"). SFAS No. 143 requires that
obligations associated with the retirement of a tangible long-lived asset be
recorded as a liability when those obligations are incurred, with the amount of
the liability initially measured at fair value. Upon initially recognizing a
liability for ARO's, an entity must capitalize the cost by recognizing an
increase in the carrying amount of the related long-lived asset. Over time, the
liability is accreted to its present value each period, and the capitalized cost
is depreciated over the useful life of the related asset. Upon settlement of the
liability, an entity either settles the obligation for its recorded amount or
incurs a gain or loss upon settlement. SFAS No. 143 will be effective for
financial statements for fiscal years beginning after June 15, 2002, although
early adoption is encouraged. The Company believes the adoption of SFAS No. 143
will not have a material impact on its financial position or results of
operations.
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 to the estimates of useful
lives. This evaluation consists of comparing asset carrying values to the
Company's projection of the undiscounted cash flows over the remaining lives of
the assets, in accordance with Statement of Financial Accounting Standards No.
121 Accounting for the Impairment of Long-lived Assets and for Long-lived Assets
to Be Disposed Of ("SFAS No. 121"). Based on its review, other than the asset
impairment write-downs noted in Note 4, the Company believes that, as of
December 31, 2001 and 2000, 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 11).
Accounting for the Impairment or Disposal of Long-lived Assets In August 2001,
Statement of Financial Accounting Standards No. 144 Accounting for the
Impairment or Disposal of Long-lived Assets ("SFAS No. 144") was issued. SFAS
No. 144 addresses financial accounting and reporting for the impairment or
disposal of long-lived assets. This statement supercedes SFAS No. 121 and the
accounting and reporting provisions of APB Opinion No. 30 Reporting the Results
of Operations - Reporting the Effects of Disposal of a Segment of a Business,
and Extraordinary, Unusual and Infrequently Occurring Events and Transactions
for the disposal of a segment of a business. Because SFAS No. 121 did not
address the accounting for a segment of a business accounted for as a
discontinued operation under APB Opinion No. 30, two accounting models existed
for long-lived assets to be disposed. The FASB decided to establish a single
accounting model, based on the framework established in SFAS No. 121, for
long-lived assets to be disposed of by sale. The FASB also decided to resolve
significant implementation issues related to SFAS No. 121. The provisions of the
statement are effective for financial statements issued for fiscal years
beginning after December 31, 2001, and interim periods within those fiscal
years, with early application encouraged. The provisions of SFAS No. 144
generally are to be applied prospectively. The Company believes that the
adoption of SFAS No. 144 will not have a material impact on its financial
position or results of operations.
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 (those options with exercise prices at or
71
below weighted average market price for the periods presented) outstanding at
the beginning of the year or at the date of the issuance, unless the assumed
exercises are antidilutive.
Reclassifications Certain reclassifications have been made to the 2000 and 1999
amounts to be consistent with the 2001 financial statement presentation.
Note 2 - Supplemental Disclosure of Cash Flow Information
For the years ended December 31,
--------------------------------
2001 2000 1999
------- ------- -------
(in thousands)
Cash paid during the year for:
Interest $45,720 $56,248 $58,943
Income taxes 1,996 64,600 (a) 6,223
(a) The increase in taxes paid in 2000 is due primarily to the gain on asset
dispositions in 2000 and 1999 (see Note 11).
Note 3 - Stockholders' Equity and Casino Magic Argentina Currency Devaluation
During the second half of 2001, the political and economic condition of
Argentina deteriorated, including an increase in the risk of being unable to
repatriate funds out of the country, the fall of international reserves, the
continuous fiscal imbalance, and the decrease in the financial system deposits.
In December 2001, these events culminated in the resignation of the then
President of the country, the imposition of restrictions on cash withdrawals,
the delaying of payment of wages to government employees and the closing of the
banking system from late December 2001 to January 11, 2002. In an effort to
stabilize the country, the new government of Argentina elected to devalue the
Argentine Peso in early January 2002 (which had been pegged to the U.S. dollar
for over ten years), as well as stop all transfers of U.S. dollars out of the
country.
As a result of the actions taken, the Company recorded a translation loss in the
amount of $4,430,000 and reflected such loss as Accumulated Other Comprehensive
Loss, a separate component of stockholders' equity, as of December 31, 2001. In
accordance with EITF Topic 0-12, Foreign Currency Translation - Selection of an
Exchange Rate When Trading is Temporarily Suspended, the Company recorded a
translation loss based upon applying the open market exchange rate of 1.65 pesos
to the U.S. Dollar, the approximate rate when the foreign exchange markets
opened on January 11, 2002, to the assets and liabilities as of December 31,
2001. (Total assets of Casino Magic Argentina at December 31, 2001 were
$14,287,000, including the $3,452,000 of restricted cash maintained in Argentina
and $2,911,000 of cash maintained outside the country). The Company anticipates
such translation loss will fluctuate in the future based on changes in the
currency exchange rate between the Argentine Peso and the U.S. Dollar.
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 17) 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. As the employment service period for the
executives expired in 2001, there will be no future charges. Compensation
related to these options for the years ended December 31, 2001, 2000 and 1999,
was $414,000, $414,000 and $828,000, respectively.
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. In February 2001,
the Company announced its intention to continue to make purchases under this
program. During the year ended December 31, 2001, the Company repurchased
1,103,000 shares at a
72
cost of approximately $9,820,000. Over the life of the program, the Company has
repurchased 1,603,000 shares at a total cost of approximately $15,360,000.
Effective with Amendment No. 6 to the Credit Facility (see Note 14), the Company
agreed to suspend additional stock repurchase activity until April 1, 2002.
Under the Company's most restrictive debt covenants, approximately $3,000,000 is
otherwise available to continue the stock buyback program at December 31, 2001.
Note 4 - Asset Impairment Write-downs
During the fourth quarter of 2001, under provisions of SFAS No. 121, the Company
determined that it would not be able to recover the net book value of the
Crystal Park Casino card club on an undiscounted cash flow basis, as it agreed
to reduce the rent payable to the Company to $20,000 per month from $100,000 a
month, effective October 1, 2001. As such, the Company recorded an impairment
write-down of the long-lived assets comprising the Crystal Park Casino card club
of $20,358,000 representing the difference between its net book value of
$26,358,000 and its estimated fair value less estimated costs to sell. Fair
value was determined by management based on current real estate and market
conditions in Compton, California. In addition, as the Company has begun
aggressively seeking a buyer of Crystal Park Casino, the Company reclassified
the net book value to "Assets held for sale" as of December 31, 2001, as the
Company committed to a disposal plan in the fourth quarter of 2001 (see Note 5).
In addition, during the fourth quarter of 2001, under provisions of SFAS No.
121, the Company determined it would not be able to recover the net book value
of the Boomtown Belle I (the original cruising riverboat casino operated at
Boomtown New Orleans) based on recent offers to purchase the cruising riverboat
casino. As such, the Company recorded an impairment write-down of approximately
$1,808,000, representing the difference between its net book value of $1,932,000
and its estimated fair value less estimated selling costs. Fair value was based
on the most recent offer to purchase the asset for salvage value. In addition,
the Company reclassified the net book value to "Assets held for sale" as of
December 31, 2001, as the Company committed to a disposal plan in the fourth
quarter of 2001 (see Note 5).
Also, during the fourth quarter of 2001, the Company committed to a sale of a
breakwater asset at Casino Magic Biloxi to a local fishery entity for a nominal
amount, as well as wrote-down certain other assets at Casino Magic Biloxi, and
as such recorded asset impairment charges of approximately $1,364,000.
Note 5 - Assets Held For Sale
Assets held for sale at December 31, 2001 consists primarily of 97 acres of
surplus land in Inglewood, California and the Crystal Park Casino in Compton,
California (see Note 4), and at December 31, 2000 consists of the 97 acres of
surplus land in Inglewood, California.
As noted below (see Note 11), in September 1999, the Company sold 240 acres of
land in conjunction with the sale of the Hollywood Park Race Track and Casino in
Inglewood, California and in March 2001, sold another 42 acres of surplus land.
As of December 31, 2001, the Company continues to seek a buyer of the remaining
97 acres of land owned in Inglewood, California, and as such, has classified the
land as held for sale on the Consolidated Balance Sheets since December 2000. In
April 2000, the Company announced it had entered into an agreement for the sale
of the 97 acres for $63,050,000 in cash. In April 2001, the Company announced
the prospective buyer had elected to terminate the agreement. The Company
continues to market the property to prospective buyers.
Note 6 - HP Yakama
In 1998, the Company, through its wholly owned subsidiary HP Yakama, Inc. ("HP
Yakama"), loaned approximately $9,618,000 to the Tribal Gaming Corporation (the
"Tribal Corporation") to construct the Legends Casino in Yakima, Washington. The
Tribal Corporation gave HP Yakama a promissory note for the $9,618,000, payable
in 84 equal monthly installments at a 10% rate of interest.
73
Pursuant to a seven year Master Lease between HP Yakama and the Confederated
Tribes and Bands of the Yakama Indian Nation (the "Tribes"), HP Yakama was
required to pay the Tribes monthly rent of $1,000. HP Yakama and the Tribal
Corporation concurrently entered into a corresponding seven-year Sublease, under
which the Tribal Corporation owed rent to HP Yakama. Such rent under the
Sublease was initially set at 28% of Net Revenues (as defined in the relevant
agreements), and decreased to 22% over the seven-year term of the lease.
In June 2001, the Company received an early pay-off of the promissory note
(which amount was approximately $6,300,000 at such time) and related Master
Lease and Sublease agreements for a cumulative amount of approximately
$8,490,000. After deducting for cash participation receivables through June 30,
2001, and certain closing costs, the Company's pre-tax gain from the transaction
(which was recorded in the second quarter of 2001) was approximately $639,000.
Effective with this early termination of the promissory note and related lease
agreement, the Company no longer receives interest income nor cash flow
participation income for the sublease agreements.
Note 7 - Louisiana Dockside Gaming Legislation
In March 2001, the Louisiana state legislature passed a law enabling riverboat
casinos to remain dockside at all times and increased the gaming taxes paid to
the state of Louisiana from 18.5% to 21.5% of net gaming proceeds effective
April 1, 2001 for the nine riverboats in the southern region of the state,
including the Company's Boomtown New Orleans property. The gaming tax increase
to 21.5% of net gaming proceeds will be phased in over an approximately two-year
period for the riverboats operating in parishes bordering the Red River,
including the Company's Casino Magic Bossier City property. The phase-in
included a 1% increase on April 1, 2001, with another 1% on each of April 1,
2002 and 2003.
Note 8 - Expansion and Development
Casino Magic Bossier City In the third quarter of 2001, based on continued
competitive market conditions and the slower than anticipated growth of the
Shreveport/ Bossier City gaming market, the Company elected to amend its prior
expansion plans for the Casino Magic Bossier City facility. Such construction
now consists of a $25,000,000 renovation and expansion project and includes
remodeling of the existing pavilion building and dockside riverboat casino, all
new restaurants and a new multi-purpose showroom. In addition, the Company's
Credit Facility was amended in November 2001 (see Note 14) to allow for such
$25,000,000 improvement. Such renovation and expansion commenced in December
2001 and is expected to be substantially completed in early July 2002.
Concurrently with the completion of the renovation and expansion project, the
Company anticipates re-branding the facility to "Boomtown Bossier City".
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 "Gaming Control Board"). In July 2000, the Company was one of three
groups that presented their proposed projects to the Gaming Control Board. On
October 16, 2001, the Company was selected by the Gaming Control Board to
receive the license. Issuance of the license is subject to a number of
conditions, which conditions were finalized by the Company and the Gaming
Control Board in November 2001 (the "Lake Charles Conditions"). The Lake Charles
Conditions include, but are not limited to, the approval of the voters of
Calcasieu Parish, where the Lake Charles project is located, currently scheduled
for April 6, 2002. There are no assurances such referendum will not be delayed
beyond April 2002, and if held, that it will pass.
In addition to the April 6, 2002 Calcasieu Parish vote noted above, other Lake
Charles Conditions include, but are not limited to, building a facility
consistent with the July 2000 presentation, meeting certain construction
milestone dates and satisfying the financing requirements to complete the
project (including segregating $22,500,000 in a refundable "escrow" account upon
the voter approval of the project in Calcasieu Parish and demonstrating the
financial resources in cash and available credit facility access for the full
project amount of $225,000,000 once construction commences in the second half of
2002). The Company anticipates it will
74
continue to meet each of the Lake Charles Conditions, however there can be no
assurances the Company will do so, in which event the Company would not be
licensed to operate a casino in Lake Charles, Louisiana.
The proposed project is the construction and operation of a $225,000,000
(excluding capitalized interest) dockside riverboat casino, hotel and golf
course resort complex in Lake Charles, Louisiana. The Company is considering
various financing options for the development of the proposed project (and
therefore compliance with the financing requirement of the Lake Charles
Conditions), including, but not limited to, utilizing the Company's existing
credit facility (see Note 14 to the Notes to Consolidated Financial Statements),
a new credit facility or other senior debt, leasing arrangements and joint
venture arrangements.
In February 2002, the Governor of Louisiana signed a compact with the Jena Band
of Choctaw Indians (the "Choctaw Indians") to allow for the development and
operation of a land-based casino in the city of Vinton, Louisiana (which city is
in Calcasieu Parish and is 20 miles closer to Houston, Texas, the major
marketing area for casinos in Lake Charles, than the Company's proposed Lake
Charles project). In March 2002, such compact was disapproved by the U.S.
Department of the Interior. In the absence of an additional Indian gaming
facility in Calcasieu Parish (as one currently exists to the east of the
Company's proposed Lake Charles project), the Company anticipates building a
facility similar in design and scope to that of Belterra Casino Resort.
In connection with the 1999 application noted above, Pinnacle Entertainment
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 ending January 2000, with three six-month
renewal options (all of which have been exercised), at a cost of $62,500 per
six-month renewal option. In June 2001 and again in January 2002, the District
agreed to extend the option period for additional six-month terms at a cost of
$62,500 per six-month term. In the event the local referendum noted above is not
held prior to the expiration of the current option extension, the Company
anticipates requesting an additional lease option extension from the District.
These lease option payments are expensed over the option periods. If the lease
option were exercised, the annual rental payment would be $815,000, with a
maximum annual increase of 5%, commencing upon opening of the facility. 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. All costs incurred by the Company related to obtaining this license
have been expensed as incurred.
Note 9 - Acquisitions
Purchase of Belterra Casino Resort Minority Interest Prior to August 2001, the
Company owned a 97% interest in the Belterra Casino Resort which opened in
October 2000, with the remaining 3% held by a non-voting local partner. In
November 2000, the Company entered into an agreement with the local partner
whereby the local partner had the right to require the Company to purchase, for
a purchase price determined in accordance with the agreement, its entire
ownership interest in the Belterra Casino Resort at any time on or after January
1, 2001. A $100,000 deposit toward such ultimate purchase price was made by the
Company to the partner at that time. In July 2001, the local partner exercised
the right to require the Company to purchase the remaining 3% ownership interest
held by the partner for approximately $1,600,000 as calculated in accordance
with the agreement. In August 2001, the remaining payment of approximately
$1,500,000 was made to the partner and, as such, the Belterra Casino Resort is
now wholly owned by the Company.
Purchase of Casino Magic Argentina Minority Interest 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 $12,300,000 purchase price paid in
October 1999 in excess of the then minority interest was allocated to goodwill
and, through December 31, 2001, was being amortized over the extended life of
the concession agreement, as described in Note 1 "-Goodwill". Consistent with
the implementation of SFAS No. 142 (see Note 1 "-Goodwill"), goodwill will no
longer be amortized, but instead will be subject to at least an annual
assessment for impairment by applying a fair-value-based test. In the case of
the goodwill recorded for the
75
Casino Magic Argentina minority interest purchase, and to the extent there
remains any goodwill after implementation of SFAS No. 142, such fair-value-based
test will be impacted in the event the Company elects to not invest capital in
Casino Magic Argentina and, as such, the concession contract is not extended
beyond December 2006 (see Note 1 "-Gaming Licenses").
Casino Magic Acquisition On October 15, 1998, the Company acquired Casino Magic,
Corp. (the "Casino Magic Merger"). As a result of the Casino Magic Merger,
Casino Magic became a wholly owned subsidiary of the Company. 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 certain excess
acquisition costs over the fair value of the net assets acquired, which was
recorded as goodwill and was being amortized over 40 years. Pursuant to the
implementation of SFAS No. 142 (see Note 1 "-Goodwill"), the remaining
unamortized goodwill of $38,460,000 will no longer be amortized. As noted above,
the Company is in the process of completing its evaluation of the financial
statement impact of adoption of SFAS No. 142 and anticipates there will be an
impairment charge recorded in the first quarter of 2002 related to its Casino
Magic locations.
Boomtown Acquisition On June 30, 1997, the Company acquired Boomtown, Inc. (the
"Boomtown Merger"). As a result of the Boomtown Merger, Boomtown became a wholly
owned subsidiary of the Company. 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. 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 Boomtown Merger generated certain excess acquisition cost over
the fair value of the net assets acquired, which was recorded as goodwill and
was being amortized over 40 years. Pursuant to the implementation of FAS 142
(see Note 1 "-Goodwill"), the remaining unamortized goodwill of $19,558,000 will
no longer be amortized. As noted above, the Company is in the process of
completing its evaluation of the financial statement impact of adoption of SFAS
No. 142 and does not anticipate there will be an impairment charge recorded
related to its Boomtown locations. As such, the remaining unamortized goodwill
will be subject to at least an annual assessment for impairment by applying a
fair-value-based test.
Note 10 - Terminated Merger Agreement
In April 2000, the Company entered into a definitive agreement with PH Casino
Resorts ("PHCR"), a newly formed subsidiary of Harveys Casino Resorts, and
Pinnacle Acquisition Corporation ("Pinnacle Acq Corp"), a newly formed
subsidiary of PHCR, pursuant to which PHCR would have acquired by merger (the
"Merger") all of the outstanding capital stock of Pinnacle Entertainment for
cash consideration (the "Merger Agreement"). Consummation of the Merger was
subject to numerous conditions, including PHCR obtaining the necessary financing
for the transaction and regulatory approvals.
In January 2001, the Company announced that it had been notified by PHCR that
PHCR did not intend to further extend the outside closing date (previously
extended to January 31, 2001) of the Merger. Since all of the conditions to
consummation of the Merger would not be met by such date, the Company, PHCR and
Pinnacle Acq Corp mutually agreed that the Merger Agreement would be terminated.
76
Note 11 - Assets Sold
Casino Sales In August 2000, the Company completed the sale of two of its
casinos in Mississippi, Casino Magic Bay St. Louis and Boomtown Biloxi, to
subsidiaries of Penn National Gaming, Inc. ("Penn National") for $195,000,000 in
cash. The after-tax gain from these sales was approximately $35,538,000.
Condensed results of operations before income taxes for the Casino Magic Bay St.
Louis and Boomtown Biloxi casinos from January 1, 2000 to August 8, 2000 (the
date of sale) and for the year ended December 31, 1999 were:
For the 221 For the year
days ended ended
August 8, December 31,
2000 1999
----------- ------------
(in thousands)
Revenues (a) $93,668 $150,897
Expenses 76,417 125,408
------- --------
Operating income 17,251 25,489
Interest expense, net 90 86
------- --------
Income before income taxes $17,161 $ 25,403
======= ========
(a) Revenues for the 221 days ended August 8, 2000 include proceeds from the
settlement of a business interruption claim of approximately $1,204,000
related to hurricane damage and casino closure in September 1998.
Turf Paradise Sale In June 2000, the Company completed the sale of Turf Paradise
to a company owned by a private investor for $53,000,000 in cash. The after-tax
gain from this sale was approximately $21,262,000. The condensed results of
operations before income taxes for Turf Paradise from January 1, 2000 to June
13, 2000 (the date of sale) and for the year ended December 31, 1999 were:
For the 165 For the year
days ended ended
June 13, December 31,
2000 1999
----------- ------------
(in thousands)
Revenues $10,665 $17,644
Expenses 7,628 13,819
------- -------
Operating income 3,037 3,825
Interest expense, net 49 --
------- -------
Income before income taxes $ 3,086 $ 3,825
======= =======
Land Sale In March 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 after tax gain from this sale was
approximately $15,322,000.
77
Dispositions of Hollywood Park Race Track and Hollywood Park-Casino In September
1999, the Company completed the dispositions of the Hollywood Park Race Track
and Hollywood Park-Casino to Churchill Downs for $117,000,000 in cash and
$23,000,000 in 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 initial term of the sublease was for a one-year period.
In September 2000, the Company renewed the sublease until the earlier of
December 31, 2001 or the expiration or early termination of the Company's lease
with Churchill Downs. In December 2001, the Company further renewed the sublease
until December 31, 2002.
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.
During the third quarter of 1999, under the provisions of SFAS No. 121, the
Company determined that it would not be able to recover the net book value of
the Hollywood Park-Casino on an undiscounted cash flow basis. The Company
recorded an impairment write-down of the long-lived assets comprising the
Hollywood Park-Casino of $20,446,000 representing the difference between its net
book value of $43,400,000 and its estimated fair value. Fair value was
determined based on an independent appraisal. Due to competitive conditions in
the California casino market, sublease rentals were projected to decline over
the ten-year lease term. Pursuant to accounting guidelines, the Company recorded
a long-term debt obligation of $23,000,000 for the Hollywood Park-Casino (see
Note 14). The Hollywood Park-Casino building will continue to be depreciated
over its estimated useful life.
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 years
ended December 31, 2001 and 2000 for these facilities. As discussed above,
effective with the disposition of the Hollywood Park-Casino, the Company
receives lease income from the operator of the facility, which was $6,000,000 in
2001 and 2000 and is included in other revenue.
The condensed results of operations before income taxes for the Hollywood Park
Race Track and Hollywood Park-Casino from January 1, 1999 to September 10, 1999
(the date of sale) was:
For the 253
days ended
September 10,
1999
------------
(in thousands)
Revenues $86,235
Expenses 73,019
-------
Operating income 13,216
Interest expense (a) 0
-------
Income before income taxes $13,216
=======
(a) No interest expense was specifically identified for these operations.
78
Note 12 - Income Taxes
The composition of the Company's income tax expense (benefit) for the years
ended December 31, 2001, 2000 and 1999 was as follows:
Current Deferred Total
-------- --------- ---------
(in thousands)
Year ended December 31, 2001:
U.S. Federal ($3,866) ($16,200) ($20,066)
State (607) (2,546) (3,153)
Foreign 1,313 0 1,313
-------- --------- ---------
($3,160) ($18,746) ($21,906)
-------- --------- ---------
Year ended December 31, 2000:
U.S. Federal $ 52,545 ($10,119) $ 42,426
State 8,249 (2,125) 6,124
Foreign 2,353 0 2,353
-------- --------- ---------
$ 63,147 ($12,244) $ 50,903 (a)
======== ========= =========
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
======== ========= =========
(a) Includes $1,493,000 of tax benefit of extraordinary item.
The following table reconciles the Company's income tax expense to the federal
statutory tax rate of 35%:
For the years ended December 31,
--------------------------------
2001 2000 1999
-------- ------- -------
(in thousands)
Federal income tax expense (benefit) at the statutory rate ($17,694) $46,161 $29,741
State income taxes, net of federal tax benefits (2,781) 6,124 5,529
Non-deductible impairment write-down on Hollywood
Park-Casino (see Note 11) 0 0 7,157
Other expenses (income) 3,173 111 (1,501)
Reduction in valuation allowance (4,604) 0 0
-------- ------- -------
Income tax expense (benefit) before extraordinary item (21,906) 52,396 40,926
Tax benefit of extraordinary item 0 (1,493) 0
-------- ------- -------
Income tax (benefit) expense ($21,906) $50,903 $40,926
======== ======= =======
79
At December 31, 2001 and 2000, the tax effects of temporary differences that
gave rise to significant portions of the deferred tax assets and deferred tax
liabilities were:
2001 2000
---------- ---------
Current deferred tax assets (liabilities): (in thousands)
Workers' compensation insurance reserve $ 487 $ 819
General liability insurance reserve 75 436
Vacation and sick pay accrual 1,390 2,230
Sale of Hollywood Park Race Track & Casino 0 1,739
Sale of Mississippi Casinos and Turf Paradise 0 (12,555)
Legal and merger reserves 1,840 2,146
Other 920 850
---------- ---------
Net current deferred tax assets/ (liabilities) $ 4,712 ($4,335)
========== =========
Non-current deferred tax assets (liabilities):
Net operating loss carry-forwards $ 9,042 $ 19,969
Excess tax basis over book value of acquired assets 11,736 11,736
Asset impairment writedowns 9,454 0
Los Angeles revitalization zone tax credits 9,967 11,717
Less valuation allowance (27,396) (32,000)
Depreciation, amortization and pre-opening expenses (38,223) (30,042)
Other 2,734 8,858
---------- ---------
Net non-current deferred tax liabilities ($22,686) ($9,762)
========== =========
Prior to 2000, the Company earned a substantial amount of California tax credits
related to the ownership and operation of the Hollywood Park Race Track and
Hollywood Park-Casino as well as the ownership of the Crystal Park Card Club
Casino, which were located in the Los Angeles Revitalization Tax Zone (LARZ). As
of December 31, 2001, the Company had approximately $9,967,000 of Los Angeles
Revitalization Zone ("LARZ") tax credits. The LARZ tax credits can only be used
to reduce certain California tax liabilities and cannot be used to reduce
federal tax liabilities. A valuation allowance has been recorded with respect to
the LARZ tax credits because the Company may not generate enough income subject
to California tax to utilize the LARZ tax credits before they expire. The amount
subject to carry-forward of these unused California tax credits (net of
valuation allowance) was approximately $967,000. The LARZ credits will expire
between 2007 to 2012.
As of December 31, 2001, the Company had federal net operating loss ("NOL") of
approximately $22,326,000 comprised principally of NOL carry-forwards acquired
in the Casino Magic Merger. The NOL carry-forwards expire on various dates
through 2018. Under the provision of Internal Revenue Code (Section 382) and the
regulations promulgated thereunder, the utilization of NOL carry-forwards 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. The 1998 acquisition of Casino Magic resulted in
such limitation and, accordingly, the Company's use of Casino Magic's NOL
carry-forwards is subject to restrictions imposed by Section 382 of the Internal
Revenue Code.
80
Note 13 - Property, Plant and Equipment
Property, plant and equipment held at December 31, 2001 and 2000 consisted of
the following:
December 31,
-------------------
2001 (a) 2000 (a)
-------- --------
(in thousands)
Land and land improvements $106,643 $ 96,249
Buildings 327,864 353,902
Equipment 196,708 183,523
Vessel and barges 112,029 105,829
Construction in progress 12,129 2,404
-------- --------
755,373 741,907
Less accumulated depreciation 179,074 148,189
-------- --------
$576,299 $593,718
======== ========
(a) Excludes $18,285,000 and $12,164,000 of assets held for sale as of December
31, 2001 and 2000, respectively (see Note 5).
Note 14 - Secured and Unsecured Notes Payable
Notes payable at December 31, 2001 and 2000 consisted of the following:
December 31,
--------------------
2001 2000
-------- --------
(in thousands)
Secured notes payable, Credit Facility $ 0 $ 0
Unsecured 9.25% Notes 350,000 350,000
Unsecured 9.5% Notes 125,000 125,000
Hollywood Park-Casino debt obligation 18,847 20,745
Other secured notes payable 2,407 3,259
Other unsecured notes payable 893 1,590
-------- --------
497,147 500,594
Less current maturities 3,654 3,432
-------- --------
$493,493 $497,162
======== ========
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 to $200,000,000. Effective April 2, 2001,
July 2, 2001 and October 1, 2001, the commitment amount of the Credit Facility
was automatically reduced by $10,000,000 on each such date, such that, in
connection with the scheduled commitment reductions, the commitment balance at
October 1, 2001 was $170,000,000. In November 2001, the Company chose to further
reduce the amount available under the facility to $110,000,000. Remaining
scheduled commitment reductions are $6,667,000 on March 31, 2003 and $16,667,000
on each June 30 and September 30, 2003. The Credit Facility also provides for
letters of credit up to $30,000,000 and swing line loans of up to $10,000,000.
As of December 31, 2001 and 2000, the Company had no outstanding borrowings
under the Credit Facility. The Credit Facility has remained unused since
February 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. Presently,
the Company does not use such financial instruments.
81
In November 2001, the Company and the bank syndicate executed Amendment No. 6,
which, among other things: (i) amended various financial covenant ratios to be
more consistent with current operations (therefore, reflective of the economic
uncertainty enhanced by the tragedies of September 11, 2001), (ii) allowed for
certain capital expenditures, including $25,000,000 related to Casino Magic
Bossier City (see Note 8), (iii) suspended any additional stock repurchase
activity until April 1, 2002 and, (iv) required the Company to utilize its cash
(other than working capital and casino cash) prior to drawing on the facility.
In July 2001, the Company and the bank syndicate executed Amendment No. 5,
which, among other things: (i) amended various financial covenant ratios to be
more consistent with operations (therefore reflective of the operations sold in
1999 and 2000, as well as the opening of the Belterra Casino Resort in October
2000), and (ii) allowed for the necessary capital spending for the Lake Charles
project (see Note 8). An additional amendment to the Credit Facility will be
necessary to obtain approval from the bank syndicate for capital projects not
specifically provided for in either Amendment No. 5 or No. 6. Costs associated
with Amendment No. 5 and 6 have been deferred and amortized over the remaining
life of the bank credit facility.
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 from which were used to pay the outstanding borrowings on the
Credit Facility, to fund current capital expenditures, and for 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 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 premium-to-face values:
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 the 9.5% Notes are unsecured obligations of the Company,
guaranteed by all material restricted subsidiaries of the Company, as defined in
the indentures. The Casino Magic Argentina subsidiaries do not guaranty the
debt. 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 (including the Company's common stock - see Note 3),
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.
Redemption of Casino Magic 13% Notes and Extraordinary Item In August of 1996,
Casino Magic of Louisiana, Corp. ("Casino Magic of Louisiana") 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 flows (as defined by the indenture).
82
On August 15, 2000, the Company redeemed all $112,875,000 in aggregate principal
amount of its then outstanding Casino Magic 13% Notes at the redemption price of
106.5%. Upon deposit of principal, premium and accrued interest for such
redemption, Casino Magic of Louisiana satisfied all conditions required to
discharge its obligations under the indenture. In connection with the
redemption, in August 2000, the Company recorded an extraordinary loss of
$2,653,000, net of federal and state income taxes, or $0.10 per basic and
diluted share. The extraordinary loss represents the payment of the redemption
premium and the write-off of deferred finance and premium costs, net of the
related federal and state income tax benefit of $1,493,000. Following the
redemption, Casino Magic of Louisiana became a guarantor of the Credit Facility,
the 9.25% Notes and the 9.5% Notes.
Hollywood Park-Casino Debt Obligation In connection with the disposition of the
Hollywood Park-Casino to Churchill Downs in September 1999, the Company recorded
a long-term lease obligation of $23,000,000. Annual lease payments to Churchill
Downs of $3,000,000 are applied as a reduction of principal and interest
expense. The debt obligation is being amortized, based on a mortgage interest
method, over 10 years (the initial lease term with Churchill Downs).
Annual Maturities As of December 31, 2001, annual maturities of secured and
unsecured notes payable (including the long-term lease obligation related to the
Hollywood Park-Casino) are as follows:
Year ending
December 31: (in thousands)
- ------------ --------------
2002 $ 3,654
2003 2,416
2004 2,343
2005 2,474
2006 2,564
Thereafter 483,696
--------
$497,147
========
Note 15 - Long Term Lease Obligations
The Company has certain long term lease obligations, including corporate office
space (approximately 10,000 square feet), land at Belterra Casino Resort, office
equipment and gaming equipment. Minimum lease payments required under operating
leases that have initial terms in excess of one year as of December 31, 2001 are
as follows:
Period (in thousands)
- ------ --------------
2002 $ 7,384
2003 5,697
2004 4,784
2005 4,413
2006 4,177
Thereafter 48,663
-------
$75,118
=======
Total rent expense for these long-term lease obligations for the years ended
December 31, 2001, 2000 and 1999 was $9,488,000, $7,281,000 and $6,481,000,
respectively.
Note 16 - Slot Participation Expense
The Company is also a party to a number of slot participation arrangements at
its various casinos (which arrangements are customary for casino operations).
The arrangements consist of either a fix rent agreement on a per day basis, or a
percentage of slot machine gaming revenue, generally payable at month-end. Slot
participation expense was $9,539,000, $7,048,000 and $6,746,000 for the years
ended December 31, 2001, 2000 and 1999, respectively.
83
Note 17 - Stock Option Plans
The Company has three stock option plans (the "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 2001, the shareholders of the Company adopted the 2001 Stock Option Plan (the
"2001 Plan"), which provides for the issuance of up to 900,000 shares. Except
for the provisions governing the number of shares issuable under the 2001 Plan
and except for the provisions which reflect changes in tax and securities laws,
the provisions of the 2001 Plan are substantially similar to the provisions of
the prior plan adopted in 1993. 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 the 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 Stock Options Plans are administered and terms of option grants are
established by the Board of Directors' Compensation Committee. Under the terms
of the Stock Option Plans, options alone, or coupled with stock appreciation
rights, may be granted to select 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 Stock Option Plans
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.
As of December 31, 2001, the 2001 Plan is the only plan with stock option awards
available for grant; all of the 900,000 shares eligible for issuance under the
1996 Plan and 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 2001 Plan, approximately 165,000 have been granted. In addition,
585,000 shares (all of which are vested and have a weighted average exercise
price of $8.56 per share) of Pinnacle Entertainment common stock are issuable
upon exercise of options granted under pre-merger stock option plans of
Boomtown. In addition, 174,000 shares (all of which are vested and have a
weighted average exercise price of $23.03 per share) of Pinnacle Entertainment
common stock are issuable upon exercise of options granted under pre-merger
stock options plans of Casino Magic.
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 executive management team hired as of January
1, 1999 (see Note 3). As of December 31, 2001, none of these options were
exercised.
84
The following table summarizes information related to shares under option and
shares available for grant under the Company's 2001, 1996 and 1993 plans:
Weighted
Average
Number Exercise
of Shares Price
--------- --------
Options outstanding at December 31, 1998 1,644,321(a) $12.02
Granted 298,500 $12.30
Exercised, expired or forfeited (253,478) $11.72
- ------------------------------------------------------------------
Options outstanding at December 31, 1999 1,689,343 $12.08
Granted 0 $ 0.00
Exercised, expired or forfeited (116,259) $13.53
- ------------------------------------------------------------------
Options outstanding at December 31, 2000 1,573,084 $12.13
Granted 595,000 $ 9.85
Exercised, expired or forfeited (127,583) $ 8.62
- ------------------------------------------------------------------
Options outstanding at December 31, 2001 2,040,501 $11.52
==================================================================
Options exercisable at:
December 31, 2001 1,326,257 $12.20
December 31, 2000 995,912 $12.23
December 31, 1999 701,926 $11.90
==================================================================
(a) Includes 817,500 options issued outside of the 1993 and 1996 Plans.
The following table summarizes information about stock options under the 2001,
1996 and 1993 plans outstanding as of December 31, 2001:
Outstanding Exercisable
-------------------- ---------------------
Weighted Weighted
Number of Average Number of Average
Range of Shares at Exercise Shares at Exercise
Exercise Price 12/31/01 Price 12/31/01 Price
- ---------------------------------------------------------------
$6.70 - $10.19 1,190,633 $ 9.71 824,638 $10.03
$10.65 - $14.75 614,501 $12.54 297,502 $14.20
$14.81 - $20.25 235,367 $18.03 204,117 $18.03
- ---------------------------------------------------------------
2,040,501 $11.52 1,326,257 $12.20
===============================================================
The weighted average remaining contractual life of the outstanding options under
the Company's 2001, 1996 and 1993 plans as of December 31, 2001 is
approximately 7.18 years.
Accounting for Stock-Based Compensation
The Company estimated the fair market value of stock options using an
option-pricing model taking into account, as of the date of grant, the exercise
price and expected life of the option, the then current price of the underlying
stock and its expected volatility, expected dividend on the stock, and the
risk-free interest rate for the expected term of the options.
85
In computing the stock-based compensation, the following assumptions were made:
Risk-Free
Interest Original Expected Expected
Rate Expected Life Volatility Dividends
--------- ------------- ---------- ---------
Options granted in the following periods:
1997 5.0% 3 years 47.8% None
1998 4.5% 3 to 10 years 40.1% None
1999 4.6% 10 years 47.3% None
2001 4.7% 7 years 50.4% None
The following sets forth the unaudited pro forma financial results related to
the Company's employee stock-based compensation plans, with respect to the
options estimated fair value, based on the Company's stock price at the grant
date:
For the years ended December 31,
-------------------------------------
2001 2000 1999
-------- -------- -------
(in thousands, except per share data)
Net (loss) income before extraordinary item and stock-based
compensation expense ($28,649) $ 79,492 $44,047
Stock-based compensation expense 2,748 1,187 1,510
-------- -------- -------
Pro forma net (loss) income, before extraordinary item (31,397) 78,305 42,537
Extraordinary item, net of taxes 0 2,653 0
-------- -------- -------
Pro forma net (loss) income ($31,397) $ 75,652 $42,537
======== ======== =======
Pro forma net (loss) income per common share - basic
Pro forma net (loss) income before extraordinary income ($ 1.22) $ 2.97 $ 1.64
Extraordinary item, net of tax benefit 0.00 (0.10) 0.00
-------- -------- -------
Pro forma net (loss) income per share - basic ($ 1.22) $ 2.87 $ 1.64
======== ======== =======
Pro forma net (loss) income per common share - diluted
Pro forma net (loss) income before extraordinary income ($ 1.22) $ 2.85 $ 1.62
Extraordinary item, net of tax benefit 0.00 (0.10) 0.00
-------- -------- -------
Pro forma net (loss) income per share - diluted ($ 1.22) $ 2.75 $ 1.62
======== ======== =======
Number of shares - basic 25,814 26,335 25,966
Number of shares - diluted 25,814 27,456 26,329
Note 18 - 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% of pretax income (subject to the
legal limitation of $10,500 for 2001). The Company offers discretionary
matching, and for the years ended December 31, 2001, 2000 and 1999 matching
contributions to the 401(k) Plan totaled $567,000, $1,027,000 and $1,437,000,
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
year ended December 31, 1999 totaled $948,000. 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
86
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 does not make matching contributions to
the Deferred Plan. As a nonqualified plan (as defined by the Internal Revenue
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 19 - 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)
entered into a new Aircraft Time Sharing Agreement. A prior agreement was
entered into in November 1993. The June 1998 Aircraft Time Sharing Agreement is
identical to the prior agreement in all respects, except for the type of
aircraft covered by the agreement. The June 1998 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
$55,000 in 2001, $97,000 in 2000 and $176,000 in 1999.
Timothy J. Parrott (a director and member of the Executive Committee, and, as of
October 2000, a member of the Audit Committee of the Company's Board of
Directors) purchased 270,738 shares of Boomtown common stock in connection with
Boomtown's 1988 acquisition of Boomtown Hotel & Casino, Inc. (which operates
Boomtown Reno). Mr. Parrott paid an aggregate purchase price for the common
stock of $222,000, of which $1,000 was paid in cash and $221,000 was paid by a
promissory note secured by a pledge to Boomtown of all of the shares owned by
Mr. Parrott. As of October 31, 1998, Mr. Parrott resigned his position as
Chairman of Boomtown, and the Company retained him as a consultant to provide
services relating to gaming and other business issues. For such services, Mr.
Parrott was retained for a three-year period, which period expired in October
2001, 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 was 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 paid him $300,000 for each year, during
the three-year period, which period expired in October 2001, 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. All of the foregoing payments have been made to Mr. Torguson as of
December 31, 2001.
Note 20 - Commitments and Contingencies
Employment and Severance Agreement The Company has an employment agreement with
one officer, which grants the employee the right to receive his 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 in the employment agreement) or if the
Company terminates the employee without cause (as defined in the employment
agreement). In the event of a change in control (as defined in the employment
agreement), the employee is entitled to receive one full year's salary
87
plus the maximum bonus payable, plus extension of certain benefits and the
immediate vesting of all stock options. At December 31, 2001, the maximum
contingent liability for salary and incentive compensation under this agreement
was approximately $600,000.
Legal Astoria Entertainment Litigation In November 1998, Astoria Entertainment,
--------------------------------
Inc. filed a complaint in the United States District Court for the Eastern
District of Louisiana. Astoria, an unsuccessful applicant for a license to
operate a riverboat casino in Louisiana, attempted to assert a claim under the
Racketeer Influenced and Corrupt Organizations ("RICO") statutes, seeking
damages allegedly resulting from its failure to obtain a license. Astoria named
several companies and individuals as defendants, including Hollywood Park, Inc.
(the predecessor to Pinnacle Entertainment), Louisiana Gaming Enterprises, Inc.
("LGE"), a wholly owned subsidiary of the Company, and an employee of Boomtown,
Inc. The Company believed the RICO claim against it had no merit and, indeed,
Astoria voluntarily dismissed its RICO claim against Hollywood Park, LGE, and
the Boomtown employee.
On March 1, 2001, Astoria amended its complaint. Astoria's amended complaint
added new legal claims, and named Boomtown, Inc. and LGE as defendants. Astoria
claims that the defendants (i) conspired to corrupt the process for awarding
licenses to operate riverboat casinos in Louisiana, (ii) succeeded in corrupting
the process, (iii) violated federal and Louisiana antitrust laws, and (iv)
violated the Louisiana Unfair Trade Practices Act. The amended complaint asserts
that Astoria would have obtained a license to operate a riverboat casino in
Louisiana, but for these alleged improper acts. On August 21, 2001, the court
dismissed Astoria's federal claims with prejudice and its state claims without
prejudice. On September 21, 2001, Astoria appealed those dismissals to the U.S.
Court of Appeals for the Fifth Circuit. On October 3, 2001, Boomtown, Inc. and
LGE filed a cross-appeal on the grounds that the state claims should have been
dismissed with prejudice. Astoria subsequently voluntarily dismissed its appeal.
Boomtown Inc.'s and LGE's appeal is currently pending before the court.
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 ("RICO"), 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 (the "Poulos/Ahern Lawsuit") 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 RICO and for state common law claims for fraud, unjust
enrichment and negligent misrepresentation.
At a December 13, 1996 status conference, the Poulos/Ahern Lawsuit was
consolidated with two other class action lawsuits (one on behalf of a smaller,
more defined class of plaintiffs and one against additional defendants)
involving allegations substantially identical to those in the Poulos/Ahern
Lawsuit (collectively, the "Consolidated Lawsuits") and all pending motions in
the Consolidated Lawsuits were deemed withdrawn without prejudice. The
plaintiffs in the Consolidated Lawsuits filed a consolidated amended complaint
on February 14, 1997, which the defendants moved to dismiss. On December 19,
1997, the court granted the defendants' motion to dismiss certain allegations in
the RICO claim, but denied the motion as to the remainder
88
of such claim; granted the defendants' motion to strike certain parts of the
consolidated amended complaint; denied the defendants' remaining motions to
dismiss and to stay or abstain; and permitted the plaintiffs to substitute one
of the class representatives. On January 9, 1998, the plaintiffs filed a second
consolidated amended complaint containing claims nearly identical to those in
the previously dismissed complaints. The defendants answered, denying the
substantive allegations of the second consolidated amended complaint. On March
19, 1998, the magistrate judge granted the defendants' motion to bifurcate
discovery into "class" and "merits" phases. "Class" discovery was completed on
July 17, 1998. The magistrate judge recommended denial of the plaintiffs' motion
to compel further discovery from the defendants, and the court affirmed in part.
"Merits" discovery is stayed until the court decides the motion for class
certification filed by the plaintiffs on March 18, 1998, which motion the
defendants opposed. In January 2001, the plaintiffs filed a supplement to their
motion for class certification. On March 29, 2001, defendants filed their
response to plaintiffs' supplement to motion for class certification. The
hearing on plaintiffs' Motion for Class Certification was held November 15,
2001. The Court has not issued a ruling on this motion.
The claims are not covered under the Company's insurance policies. While the
Company cannot predict the outcome of this litigation, management 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 Corp., and James Edward Ernst,
its then Chief Executive Officer. In the complaint, as amended, 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 contracts and business relations; and (iii) breached
covenants of good faith and fair dealing they allegedly owed to the plaintiff,
and seeks compensatory damages in an amount to be proven at trial as well as
punitive damages. 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, as well as a motion for partial
summary judgment on damages issues. Thereafter, the plaintiff, in July of 1998,
filed a motion to reopen discovery. The court granted the plaintiff's motion, in
part, allowing the parties to conduct additional limited discovery. On November
30, 1999, the matter was transferred to the Circuit Court for the Second
Judicial District for Harrison County, Mississippi. On October 19, 2001, the
Court denied defendant's motion for summary judgment. On October 22, 2001, the
Court granted defendant's motion for partial summary judgment, in part,
requiring plaintiff to modify its method of calculating damages. On October 24,
2001, the defendants were granted a continuance in order to allow additional
discovery to be conducted on plaintiff's revised damage claims. Trial has been
set for November 12, 2002. The Company's insurer has essentially denied coverage
of the claim against Mr. Ernst under the Company's directors and officers
insurance policy, but has reserved its right to review the matter as to tortious
interference at or following trial. The Company believes that the insurer should
not be permitted to deny coverage, although no assurances can be given that the
insurer will change its position. While the Company cannot predict the outcome
of this action, management believes the lawsuit will not have a material adverse
effect and intends to vigorously defend this action.
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 the
Boomtown Biloxi land based improvements in Biloxi, Mississippi (the "Project").
The lawsuit alleged 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 sought recovery in excess of $4,000,000 plus punitive
damages. 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. On February 7, 2002, the Mississippi
Supreme Court affirmed the judgment of the lower court.
Casino Magic Biloxi Patron Shooting Incident On January 13, 2001, three Casino
- --------------------------------------------
Magic Biloxi patrons were shot, sustaining serious injuries as a result of a
shooting incident involving another Casino Magic Biloxi patron, who then killed
himself. Several other patrons sustained minor injuries while attempting to exit
the casino. On August 1, 2001, two of the casino patrons shot during the January
13, 2001 incident filed a complaint in the
89
Circuit Court of Harrison County, Mississippi, Second Judicial District. The
complaint alleges that Biloxi Casino Corp. failed to exercise reasonable care to
keep its patrons safe from foreseeable criminal acts of third persons and seeks
unspecified compensatory and punitive damages. The Plaintiffs filed an amended
complaint on August 17, 2001. The amended complaint added an allegation that
Biloxi Casino Corp. violated a Mississippi statute by serving alcoholic
beverages to the perpetrator who was allegedly visibly intoxicated and that
Biloxi Casino Corp.'s violation of the statute was the proximate cause of or
contributing cause to Plaintiffs' injuries. While the Company cannot predict the
outcome of the litigation, the Company believes that Biloxi Casino Corp. is not
liable for any damages arising from the incident and the Company, together with
its applicable insurers, intends to vigorously defend this lawsuit.
Actions by Greek Authorities In 1995, a Dutch subsidiary of Casino Magic Corp.,
- ----------------------------
Casino Magic Europe B.V. ("CME"), performed management services for Porto Carras
Casino, S.A. ("PCC"), a joint venture in which CME had a minority interest.
Effective December 31, 1995, CME with the approval of PCC, assigned its
interests and obligations under the PCC management agreement to a Greek
subsidiary, Casino Magic Hellas S.A. "(Hellas"). Hellas issued invoices to PCC
for management fees which accrued during 1995, but had not been billed by CME.
In September 1996, local Greek tax authorities in Thessaloniki assessed a
penalty of approximately $3,500,000 against Hellas, and an equal amount against
PCC, arising out of the presentation and payment of the invoices. The
Thessaloniki tax authorities asserted that the Hellas invoices were fictitious,
representing an effort to reduce the taxable income of PCC.
PCC and Hellas each appealed their respective assessments. The assessment of the
fine against PCC was overturned by the Administrative court of Thessaloniki on
December 11, 2000. The court determined that the actions taken by Hellas and PCC
were not fictitious but constituted a legitimate business transaction and
accordingly overturned the assessment of the fine. The taxing authorities may
appeal the court's decision. Hellas's appeal was dismissed for technical
procedural failures and has not been reinstated; presumably, however, the
rationale of the court in the PCC fine matter would apply equally to the Hellas
fine matter.
Under Greek law, shareholders are not liable for the liabilities of a Greek
company in which they hold shares, even if the entity is later liquidated or
dissolved, and assessments such as these generally are treated as liabilities of
the company. Additionally, all of PCC's stock was sold to an unrelated company
in December of 1996, and the buyer assumed all of PCC's liabilities. Therefore,
management does not expect that this matter will have a materially adverse
effect on the financial condition or results of operations of the Company.
In June 2000, Greek authorities issued a warrant to appear at a September 29,
2000 criminal proceeding to Marlin Torguson (a member of the Company's board of
directors and Chairman of the Board of Casino Magic since its inception) and
Robert Callaway (former Associate General Counsel for the Company and, prior to
its acquisition by the Company, Casino Magic's General Counsel). They were
charged under Greek law, and convicted in absentia, as being culpable criminally
for corporate misconduct based solely on their status as alleged executive board
members of PCC. The Company is advised that they are not, and have never been,
managing (active) executive directors of PCC. Accordingly, the Company believes
that they were improperly named in the proceedings. The defendants have a right
of appeal for a de novo trial under Greek law.
Upon being notified of the convictions, the Company's compliance committee
suspended Mr. Callaway and Mr. Torguson from their respective duties, other than
to assist in the investigation of actions described above, and sought the
resignation of Mr. Torguson from the Company board of directors. At the time
that the Greek court overturned the PCC fine, and based upon (1) the
determination of the court that the Hellas/PCC transaction was a legitimate
transaction and (2) the fact that neither Mr. Torguson nor Mr. Callaway were
properly named, the compliance committee reinstated Messsrs. Torguson and
Callaway. In February 2001, Mr. Callaway left the employ of the Company.
90
During the first quarter of 2001, the Greek taxing authorities appealed the
December 11, 2000 decision by the Administrative Court of Thessaloniki
overturning the assessment of the fine against PCC. No hearing date on such
appeal has been set.
On March 30, 2001, appeals on behalf of Marlin Torguson and Robert Callaway were
filed. The hearing before the three-member Court of Misdemeanors of Thessaloniki
has been set for October 24, 2002.
The Company has been advised that the resolution of the related civil penalties
may sometimes resolve criminal issues in Greece. The Company is actively working
to resolve the civil and criminal actions related to this matter.
Other The Company is party to a number of other pending legal proceedings,
- -----
though management does not expect that the outcome of such proceedings, either
individually or in the aggregate, will have a material effect on the Company's
financial results.
Note 21 - Unaudited Quarterly Information; Supplementary Financial Information
The following is a summary of unaudited quarterly financial data for the years
ended December 31, 2001 and 2000:
2001
--------------------------------------------
Dec.31, Sept.30, June.30, Mar.31,
--------- -------- -------- --------
(in thousands, except per share data)
Revenues $ 123,767 $139,264 $131,603 $134,007
Loss (gain) on asset impairment/disposition, net $ 23,530 $ 81 ($581) $ 0
Pre-opening costs, Belterra Casino Resort $ 0 $ 0 $ 412 $ 198
Terminated merger $ 0 $ 0 ($464) $ 0
Operating (loss) income ($22,879) $ 7,390 $ 2,621 $ 7,145
Net (loss) income ($22,244) $ 1,003 ($5,287) ($2,121)
========= ======== ======== ========
Per Share Data
Net (loss) income per share - basic & diluted (a) ($0.87) $ 0.04 ($0.20) ($0.08)
========= ======== ======== ========
2000
-----------------------------------------------
Dec.31, Sept.30, June.30, Mar.31,
-------- --------- --------- ---------
(in thousands, except per share data)
Revenues $123,144 $ 141,029 $ 158,906 $ 161,543
Loss (gain) on asset impairment/disposition, net $ 566 ($59,941) ($35,587) ($23,854)
Pre-opening costs, Belterra Casino Resort $ 1,721 $ 7,853 $ 3,713 $ 1,743
Terminated merger $ 724 $ 2,878 $ 1,500 $ 625
Operating (loss) income ($1,214) $ 71,319 $ 54,768 $ 47,031
Net (loss) income before extraordinary item ($6,141) $ 37,489 $ 26,232 $ 21,912
Extraordinary item, net of taxes 0 2,653 0 0
-------- -------- --------- ---------
Net (loss) income ($6,141) $ 34,836 $ 26,232 $ 21,912
======== ======== ========= =========
Net (loss) income per common share - basic (a)
Net (loss) income before extraordinary item ($0.23) $ 1.42 $ 1.00 $ 0.83
Extraordinary item, net of tax benefit 0.00 (0.10) 0.00 0.00
-------- -------- --------- ---------
Net (loss) income per share - basic ($0.23) $ 1.32 $ 1.00 $ 0.83
======== ======== ========= =========
Net income per common share - diluted (a)
Net (loss) income before extraordinary item ($0.23) $ 1.37 $ 0.96 $ 0.80
Extraordinary item, net of tax benefit 0.00 (0.10) 0.00 0.00
-------- --------- --------- ---------
Net (loss) income per share - diluted ($0.23) $ 1.27 $ 0.96 $ 0.80
======== ========= ========= =========
(a) Net (loss) 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 (loss) income
per share.
91
Below are the material unusual and infrequent occurring items that impacted the
2001 and 2000 quarterly financial results:
. In December 2001, the Company wrote down certain assets, including a card
club in Compton, California, a riverboat casino in Harvey, Louisiana and a
breakwater reef in Biloxi, Mississippi, and accordingly recorded asset
impairment charges of $23,530,000 (see Note 4).
. In June 2001, the Company received an early pay-off of the promissory note
related to the HP Yakama operations and payment for the early termination
of the Master Lease and Sublease, and after deducting for cash
participation receivables through June 30, 2001, and certain closing costs,
the Company's pre-tax gain from the transaction was approximately $639,000
(see Note 6).
. In June 2001, the Company opened the Tom Fazio-designed championship golf
course at Belterra Casino Resort, and in October 2000, the Company opened
the Belterra Casino Resort. Pre-opening costs associated with the
completion of the golf course in 2001 and the development and construction
of the resort in 2000 were $610,000 and $15,030,000 for the years ended
December 31, 2001 and 2000, respectively.
. In August 2000, the Company completed the sale of two of its casinos in
Mississippi for $195,000,000 in cash and an after-tax gain of $35,538,000,
in June 2000, the Company completed the sale of Turf Paradise for
$53,000,000 in cash and an after-tax gain of $21,262,000, and in March
2000, the Company completed the sale of 42 acres of surplus land for
$24,200,000 in cash and an after-tax gain of $15,322,000 (see Note 11).
. In August 2000, the Company redeemed all of the outstanding Casino Magic
13% Notes at a redemption price of 106.5%. In connection with the
redemption, the Company recorded an extraordinary loss of $2,653,000, which
amount represents the payment of the redemption premium and the write-off
of deferred finance and premium costs, net of the related income tax
benefit (see Note 14).
. In April 2000, the Company entered into the Merger Agreement, which
agreement was subsequently terminated in January 2001. In 2001, the Company
recovered $464,000 of costs due to the settlement of the Purported Class
Action Lawsuits (see Note 20) and, in 2000, the Company incurred costs of
$5,727,000 in connection with the terminated merger (see Note 10). The
Company does not expect to incur additional costs relating to the
terminated merger.
Note 22 - 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 and 9.5% Notes, because there are
no quoted market prices for transactions of a similar nature.
Based on quoted market values at December 31, 2001, the fair values of the 9.5%
and 9.25% Notes are approximately $107,500,000 and 297,500,000, respectively,
compared to book values as of December 31, 2001 of $125,000,000 and
$350,000,000, respectively.
92
Note 23 - Consolidating Condensed Financial Information
The Company's subsidiaries (excluding 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, 2001
(b)
(a) Wholly
Wholly Owned Consolidating Pinnacle
Pinnacle Owned Non- and Entertainment,
Entertainment, Guarantor Guarantor Eliminating Inc.
Inc. Subsidiaries Subsidiaries Entries Consolidated
-------------- ------------ ------------ ------------- --------------
(in thousands)
As of and for the year ended December 31, 2001
Balance Sheet
- -------------
Current assets $ 140,407 $ 70,992 $ 7,425 $ 0 $ 218,824
Property, plant and equipment, net 21,753 552,633 1,913 0 576,299
Other non-current assets 20,796 57,631 4,949 40,850 124,226
Investment in subsidiaries 542,202 5,280 0 (547,482) 0
Inter-company 156,082 20,360 0 (176,442) 0
--------- --------- -------- --------- ---------
$ 881,240 $ 706,896 $ 14,287 ($683,074) $ 919,349
========= ========= ======== ========= =========
Current liabilities $ 34,816 $ 46,223 $ 2,615 $ 0 $ 83,654
Notes payable, long term 492,016 1,477 0 0 493,493
Other non-current liabilities 34,892 0 0 (12,206) 22,686
Inter-company 0 170,050 6,392 (176,442) 0
Equity 319,516 489,146 5,280 (494,426) 319,516
--------- --------- -------- --------- ---------
$ 881,240 $ 706,896 $ 14,287 ($683,074) $ 919,349
========= ========= ======== ========= =========
Statement of Operations
- -----------------------
Revenues:
Gaming $ 0 $ 423,487 $ 18,602 $ 0 $ 442,089
Food and beverage 0 29,524 1,428 0 30,952
Equity in subsidiaries (16,308) 4,622 0 11,686 0
Other 6,000 49,471 129 0 55,600
--------- --------- -------- --------- ---------
(10,308) 507,104 20,159 11,686 528,641
--------- --------- -------- --------- ---------
Expenses:
Gaming 0 254,589 4,984 0 259,573
Food and beverage 0 37,665 1,134 0 38,799
Administrative and other 15,119 164,451 6,972 0 186,542
Depreciation and amortization 2,684 44,203 1,447 1,116 49,450
--------- --------- -------- --------- ---------
17,803 500,908 14,537 1,116 534,364
--------- --------- -------- --------- ---------
Operating income (loss) (28,111) 6,196 5,622 10,570 (5,723)
Interest expense (income), net 46,129 (984) (313) 0 44,832
--------- --------- -------- --------- ---------
Income (loss) before management fee, intercompany
interest expense (income) and taxes (74,240) 7,180 5,935 10,570 (50,555)
Management fee & intercompany interest expense
(income) (23,488) 23,488 0 0 0
Income tax expense (23,219) 0 1,313 0 (21,906)
--------- --------- -------- --------- ---------
Net income (loss) ($27,533) ($16,308) $ 4,622 $ 10,570 ($28,649)
========= ========= ======== ========= =========
Statement of Cash Flows
- -----------------------
Net cash provided by (used in) operating
activities ($11,862) $ 48,297 ($1,486) $ 1,116 $ 36,065
Net cash provided by (used in) investing
activities (264) (41,461) (1,579) 0 (43,304)
Net cash provided by (used in) financing
activities (11,591) (851) 0 0 (12,442)
93
Pinnacle Entertainment, Inc.
Consolidating Condensed Financial Information
As of and for the year ended December 31, 2000
(b)
(a) Wholly
Wholly Owned Consolidating Pinnacle
Pinnacle Owned Non- and Entertainment,
Entertainment, Guarantor Guarantor Eliminating Inc.
Inc. Subsidiaries Subsidiaries Entries Consolidated
-------------- ------------ -------------- ------------- --------------
(in thousands)
As of and for the year ended December 31, 2000
Balance Sheet
- -------------
Current assets $ 146,941 $ 67,931 $ 9,985 $ 0 $ 224,857
Property, plant and equipment, net 23,969 567,714 2,035 0 593,718
Other non-current assets 24,309 70,927 5,693 41,971 142,900
Investment in subsidiaries 560,204 6,539 0 (566,743) 0
Inter-company 162,213 100,074 0 (262,287) 0
--------- --------- ------- --------- ---------
$ 917,636 $ 813,185 $17,713 ($787,059) $ 961,475
========= ========= ======= ========= =========
Current liabilities $ 43,115 $ 50,683 ($423) $ 0 $ 93,375
Notes payable, long term 494,729 2,433 0 0 497,162
Other non-current liabilities 18,615 (2,447) 5,800 (12,206) 9,762
Inter-company 0 256,490 5,797 (262,287) 0
Equity 361,177 506,026 6,539 (512,566) 361,176
--------- --------- ------- --------- ---------
$ 917,636 $ 813,185 $17,713 ($787,059) $ 961,475
========= ========= ======= ========= =========
Statement of Operations
- -----------------------
Revenues:
Gaming $ 0 $ 441,503 $20,398 $ 0 $ 461,901
Food and beverage 1,056 29,300 1,564 0 31,920
Racing 9,452 0 0 0 9,452
Equity in subsidiaries 63,703 5,150 0 (68,853) 0
Other 6,157 53,565 130 0 59,852
--------- --------- ------- --------- ---------
80,368 529,518 22,092 (68,853) 563,125
--------- --------- ------- --------- ---------
Expenses:
Gaming 0 252,565 5,781 0 258,346
Food and beverage 892 32,952 1,336 0 35,180
Racing 4,133 0 0 0 4,133
Administrative and other 24,351 135,928 5,997 0 166,276
(Gain) loss on disposition of assets (119,718) 902 0 0 (118,816)
Depreciation and amortization 3,336 39,798 1,573 1,395 46,102
--------- --------- ------- --------- ---------
(87,006) 462,145 14,687 1,395 391,221
--------- --------- ------- --------- ---------
Operating income (loss) 167,374 67,373 7,405 (70,248) 171,904
Interest expense (income), net 39,279 1,017 (280) 0 40,016
--------- --------- ------- --------- ---------
Income (loss) before taxes and extraordinary item 128,095 66,356 7,685 (70,248) 131,888
Income tax expense 49,861 0 2,535 0 52,396
--------- --------- ------- --------- ---------
Net income (loss) before extraordinary item 78,234 66,356 5,150 (70,248) 79,492
------- --------- ---------
Extraordinary item, net of income taxes 0 2,653 0 0 2,653
--------- --------- ------- --------- ---------
Net income (loss) $ 78,234 $ 63,703 $ 5,150 ($ 70,248) $ 76,839
========= ========= ======= ========= =========
Statement of Cash Flows
- -----------------------
Net cash provided by (used in) operating
activities ($333,857) $ 303,312 $ 3,757 $ 1,304 ($ 25,484)
Net cash provided by (used in) investing
activities 388,466 (194,008) (1,181) 0 193,277
Net cash provided by (used in) financing
activities (5,119) (113,168) 0 0 (118,287)
94
Pinnacle Entertainment, Inc.
Consolidating Condensed Financial Information
As of and for the year ended December 31, 1999
(b)
(a) Wholly
Wholly Owned Consolidating Pinnacle
Pinnacle Owned Non- and Entertainment,
Entertainment, Guarantor Guarantor Eliminating Inc.
Inc. Subsidiaries Subsidiaries Entries Consolidated
-------------- ------------ -------------- ------------- --------------
(in thousands)
As of and for the year ended 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 $356,833 $146,190 $ 0 $ 536,661
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
-------- -------- -------- ---------- ----------
166,765 487,449 153,431 (121,653) 685,992
-------- -------- -------- ---------- ----------
Expenses:
Gaming 18,241 188,434 81,968 0 288,643
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
-------- -------- -------- ---------- ----------
41,735 377,402 121,166 1,485 541,788
-------- -------- -------- ---------- ----------
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
(a) The following subsidiaries are treated as guarantors of both the 9.5% Notes
and 9.25% Notes for all periods presented: Turf Paradise, Inc. (through
June 13, 2000), 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), Belterra Resorts LLC, Boomtown, Inc., Boomtown Hotel &
Casino, Inc., Bay View Yacht Club, Inc. (through August 8, 2000), Louisiana
- I Gaming, Louisiana Gaming Enterprises, Inc., Boomtown Hoosier, Inc., HP
Casino, Inc., HP Yakama, Inc., HP Consulting, Inc. and HP/Compton, 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. (through August 8, 2000), Biloxi
Casino Corp., Bay St. Louis Casino Corp., Casino Magic Finance Corp.,
Casino Magic American Corp., and Casino One Corporation. Crystal Park Hotel
and Casino Development Company, LLC and Mississippi - I Gaming L.P.
(through August 8, 2000) 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. Jefferson Casino Corporation and Casino Magic of
Louisiana, Corp. were treated as wholly owned guarantors upon the
redemption of the Casino Magic 13% Notes in August 2000 (see Note 14).
95
(b) Prior to the redemption of the Casino Magic 13% Notes on August 15, 2000,
(see Note 14), Jefferson Casino Corporation and Casino Magic of Louisiana,
Corp. were wholly owned non-guarantors of the 9.5% and 9.25% Notes. Upon
redemption of the Casino Magic 13% Notes, Jefferson Casino Corporation and
Casino Magic of Louisiana, Corporation became guarantors of the 9.5% and
9.25% Notes (see note (a) above). Prior to October 1999, Casino Magic
Neuquen S.A. and its subsidiary Casino Magic Support Services were
non-wholly owned non-guarantors to the 9.5% and 9.25% Notes. 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% and 9.25% Notes.
96
Pinnacle Entertainment, Inc.
Selected Financial Data by Property
For the year
For the three months ended, ended
---------------------------------------------------- ------------
December 31, September 30, June 30, March 31, December 31,
2001 2001 2001 2001 2001
------------ ------------- --------- --------- ------------
(unaudited) (audited)
---------------------------------------------------- ------------
(in thousands, except per share data)
Revenues:
Belterra Casino Resort $ 26,479 $ 28,903 $ 25,994 $ 26,195 $ 107,571
Boomtown Reno 19,483 26,868 24,833 19,112 90,296
Boomtown New Orleans 26,116 27,005 24,839 25,742 103,702
Casino Magic Biloxi 20,497 21,735 21,548 22,715 86,495
Casino Magic Bossier City 25,649 27,354 25,431 32,528 110,962
Casino Magic Argentina 3,983 5,599 5,384 5,193 20,159
Card Clubs and Other 1,560 1,800 3,574 2,522 9,456
Pinnacle Entertainment, Inc. - Corporate 0 0 0 0 0
--------- -------- --------- --------- ---------
123,767 139,264 131,603 134,007 528,641
--------- -------- --------- --------- ---------
Expenses:
Belterra Casino Resort 28,922 29,806 28,196 25,812 112,736
Boomtown Reno 15,689 19,933 18,745 16,745 71,112
Boomtown New Orleans 19,309 19,974 18,518 18,336 76,137
Casino Magic Biloxi 17,153 17,721 17,369 18,284 70,527
Casino Magic Bossier City 23,312 23,616 27,180 27,457 101,565
Casino Magic Argentina 3,310 3,427 3,169 3,184 13,090
Card Clubs and Other 78 66 45 158 347
Pinnacle Entertainment, Inc. - Corporate 3,209 4,157 4,258 4,600 16,224
--------- -------- --------- --------- ---------
110,982 118,700 117,480 114,576 461,738
--------- -------- --------- --------- ---------
Non-recurring income (expenses):
Gain (loss) on disposition of assets, net 0 (81) 581 0 500
Impairment write-down of assests (23,530) 0 0 0 (23,530)
Pre-opening costs, Belterra Casino Resort 0 0 (412) (198) (610)
Terminated merger costs 0 0 464 0 464
--------- -------- --------- --------- ---------
(23,530) (81) 633 (198) (23,176)
--------- -------- --------- --------- ---------
Depreciation and amortization:
Belterra Casino Resort 2,993 3,840 3,075 2,990 12,898
Boomtown Reno 1,956 1,941 1,940 1,997 7,834
Boomtown New Orleans 1,572 1,580 1,447 1,413 6,012
Casino Magic Biloxi 1,824 1,640 1,670 1,665 6,799
Casino Magic Bossier City 1,944 2,210 2,134 2,122 8,410
Casino Magic Argentina 400 344 344 359 1,447
Card Clubs and Other 878 968 953 968 3,767
Pinnacle Entertainment, Inc. - Corporate 567 570 572 574 2,283
--------- -------- --------- --------- ---------
12,134 13,093 12,135 12,088 49,450
--------- -------- --------- --------- ---------
Operating (loss) income (22,879) 7,390 2,621 7,145 (5,723)
Interest income (761) (984) (1,428) (1,848) (5,021)
Interest expense, net of interest income 12,639 12,596 12,311 12,307 49,853
--------- -------- --------- --------- ---------
Income (loss) before income taxes (34,757) (4,222) (8,262) (3,314) (50,555)
Income tax (benefit) expense (12,513) (5,225) (2,975) (1,193) (21,906)
--------- -------- --------- --------- ---------
Net (loss) income ($22,244) $ 1,003 ($ 5,287) ($2,121) ($28,649)
========= ======== ========= ========= =========
Net (loss) income per common share :
Net (loss) income - basic ($0.87) $ 0.04 ($0.20) ($0.08) ($1.11)
Net (loss) income - diluted ($0.87) $ 0.04 ($0.20) ($0.08) ($1.11)
Number of shares - basic
Number of shares - diluted 25,444 25,542 25,996 26,288 25,814
25,444 25,623 25,996 26,288 25,814
97
Pinnacle Entertainment, Inc.
Exhibit Index
Exhibit Description
- ------- -----------
10.3 Amended and Restated Disposition and Development Agreement of Purchase
and Sale, and Lease with Option to Purchase, dated August 2, 1995, by
and between The Community Redevelopment Agency of the City of Compton
and Compton Entertainment, Inc.
10.4 Guaranty, dated July 31, 1995, by Hollywood Park, Inc., in favor of
the Community Redevelopment Agency of the City of Compton.
10.5 Assignment, Assumption and Consent Agreement, by and among HP/Compton,
Inc., and Crystal Park Hotel and Casino Development Company LLC,
Hollywood Park, Inc. and The Community Redevelopment Agency of the
City of Compton, dated July 18, 1996.
10.6 Operating Agreement for Crystal Park Hotel and Casino Development
Company, LLC, a California Limited Liability Company, dated July 18,
1996, effective August 28, 1996.
10.36 Amendment No. 3 to Amended and Restated Reducing Revolving Loan
Agreement, dated September 15, 2000.
10.37 Amendment No. 4 to Amended and Restated Reducing Revolving Loan
Agreement, dated March 16, 2001.
10.54 Employment Agreement dated September 1, 2001, by and between Pinnacle
Entertainment, Inc. and Wade Hundley.
10.55 First Amendment to the Pinnacle Entertainment, Inc. (formerly
Hollywood Park, Inc.) Executive Deferred Compensation Plan dated March
15, 2000.
10.56 Second Amendment to the Pinnacle Entertainment, Inc. Executive
Compensation Plan dated January 1, 2001.
10.57 Statement of Conditions to Riverboat Gaming License of PNK (Lake
Charles), LLC dated November 20, 2001.
11.1 Statement re: Computation of Per Share Earnings
21.1 Subsidiaries of Pinnacle Entertainment, Inc.
23.1 Consent of Arthur Andersen LLP
99.1 Letter responsive to Temporary Note 3T to Article 3 of Regulation S-X
98