SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[X] Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934
For the quarterly period ended March 31, 2002
Commission file number 001-13641
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)
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 [_]
The number of outstanding shares of the registrant's common stock, as of the
close of business on May 8, 2002: 25,904,812.
PINNACLE ENTERTAINMENT, INC.
Table of Contents
Part I
Item 1. Financial information
Consolidated Statements of Operations for the three months ended
March 31, 2002 and 2001 .......................................................... 1
Consolidated Balance Sheets as of March 31, 2002 and December 31, 2001 ............... 2
Condensed Consolidated Statements of Cash Flows for the three months ended
March 31, 2002 and 2001 .......................................................... 3
Condensed Notes to Consolidated Financial Statements ................................. 4
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations
Forward-Looking Statements ........................................................... 21
Risk Factors ......................................................................... 22
Critical Accounting Policies ......................................................... 23
Factors Affecting Future Operating Results ........................................... 23
Results of Operations ................................................................ 26
Liquidity, Capital Resources and Other Factors Influencing Future Results ............ 29
Item 3. Quantitative and Qualitative Disclosures About Market Risk ............................. 31
Part II
Item 1. Legal Proceedings ...................................................................... 31
Item 6. Exhibits and Reports on Form 8-K ....................................................... 32
Other Financial Information ............................................................ 33
Signatures ............................................................................. 34
Item 1. Financial Information
Pinnacle Entertainment, Inc.
Consolidated Statements of Operations
For the three months
ended March 31,
-------------------------------
2002 2001
--------- ---------
(in thousands, except per share data - unaudited)
Revenues:
Gaming $ 109,521 $ 114,262
Food and beverage 7,011 7,363
Truck stop and service station 3,611 4,262
Hotel and recreational vehicle park 3,150 3,124
Other income 3,962 4,996
--------- ---------
127,255 134,007
--------- ---------
Expenses:
Gaming 65,178 66,262
Food and beverage 8,096 9,493
Truck stop and service station 3,322 4,018
Hotel and recreational vehicle park 2,201 2,666
Selling, general and administrative 26,598 28,972
Depreciation and amortization 11,162 12,088
Other operating expenses 2,181 3,165
Re-branding costs, Bossier City 109 0
Pre-opening costs, Belterra Casino Resort 0 198
--------- ---------
118,847 126,862
--------- ---------
Operating income 8,408 7,145
Interest income (634) (1,848)
Interest expense, net of capitalized interest 12,633 12,307
--------- ---------
Loss before income taxes and change in accounting principle (3,591) (3,314)
Income tax benefit (1,293) (1,193)
--------- ---------
Net loss before change in accounting principle (2,298) (2,121)
Cumulative change in accounting principle, net of income tax benefit 56,704 0
--------- ---------
Net loss ($ 59,002) ($2,121)
========= =========
- ------------------------------------------------------------------------------------------------------------------
Net loss per common share - basic
Net loss before change in accounting principle - basic ($0.09) ($0.08)
Cumulative change in accounting principle - basic (2.23) 0.00
--------- ---------
Net loss per common share - basic ($2.32) ($0.08)
========= =========
Net loss per common share - diluted
Net loss before change in accounting principle - diluted ($0.09) ($0.08)
Cumulative change in accounting principle - diluted (2.23) 0.00
--------- ---------
Net loss per common share - diluted ($2.32) ($0.08)
========= =========
Number of shares - basic and diluted 25,444 26,288
- --------
See accompanying condensed notes to the consolidated financial statements.
1
Pinnacle Entertainment, Inc.
Consolidated Balance Sheets
March 31, December 31,
2002 2001
----------- ------------
(unaudited)
Assets (in thousands, except share data)
Current Assets:
Cash and cash equivalents $ 143,550 $ 153,187
Restricted cash 986 3,452
Receivables, net 8,675 9,194
Income tax receivable 6,387 10,587
Prepaid expenses and other assets 18,080 18,407
Deferred income taxes 4,712 4,712
Assets held for sale 18,285 18,285
Current portion of notes receivable 1,000 1,000
--------- ---------
Total current assets 201,675 218,824
Property, plant and equipment, net 574,762 576,299
Goodwill 19,558 68,727
Gaming licenses, net of amortization 22,682 36,588
Debt issuance costs, net of amortization 11,367 12,334
Other assets 6,345 6,577
--------- ---------
$ 836,389 $ 919,349
========= =========
Liabilities and Stockholders' Equity
Current Liabilities:
Accounts payable $ 11,371 $ 16,953
Accrued interest 6,322 17,423
Accrued compensation 15,828 13,737
Other accrued liabilities 32,597 31,887
Current portion of notes payable 3,654 3,654
--------- ---------
Total current liabilities 69,772 83,654
Notes payable, less current maturities 492,798 493,493
Deferred income taxes 18,448 22,686
Stockholders' Equity:
Capital stock --
Preferred - $1.00 par value, authorized 250,000 shares;
none issued and outstanding in 2002 and 2001 0 0
Common - $0.10 par value, authorized 40,000,000 shares;
25,443,444 shares issued and outstanding in 2002 and 2001 2,545 2,545
Capital in excess of par value 219,613 219,613
Accumulated other comprehensive loss (9,573) (4,430)
Retained earnings 42,786 101,788
--------- ---------
Total stockholders' equity 255,371 319,516
--------- ---------
$ 836,389 $ 919,349
========= =========
See accompanying condensed notes to the consolidated financial statements.
2
Pinnacle Entertainment, Inc.
Condensed Consolidated Statements of Cash Flows
For the three months ended March 31,
--------------------------------------
2002 2001
------------- -------------
(in thousands - unaudited)
Cash flows from operating activities:
Net loss ($ 59,002) ($ 2,121)
Adjustments to reconcile net loss to net cash provided by
(used in) operating activities:
Depreciation and amortization 11,162 12,088
Cumulative change in accounting principle 56,704 0
Other changes that (used) provided cash:
Receivables, net (519) 2,013
Income tax receivable 4,200 0
Prepaid expenses and other assets 559 (212)
Accounts payable (5,582) (10,276)
Accrued interest (11,054) (11,242)
Accrued compensation 2,091 (2,559)
Accrued liabilities 709 (737)
All other, net 1,088 935
--------- ---------
Net cash (used in) provided by operating activities 356 (12,111)
--------- ---------
Cash flows from investing activities:
Additions to property, plant and equipment (10,271) (10,082)
Capitalized interest (47) (226)
All other, net 43 101
--------- ---------
Net cash provided by (used in) investing activities (10,275) (10,207)
--------- ---------
Cash flows from financing activities:
Payment of notes payable (695) (661)
Common stock options exercised 0 480
Common stock repurchase and retirement 0 (5,344)
--------- ---------
Net cash used in financing activities (695) (5,525)
--------- ---------
Effect of exchange rate changes on cash (1,489) 0
Decrease in cash and cash equivalents (12,103) (27,843)
Cash, cash equivalents and restricted cash at beginning of period 156,639 172,868
--------- ---------
Cash, cash equivalents and restricted cash at end of period $ 144,536 $ 145,025
========= =========
See accompanying condensed notes to consolidated financial statements.
3
PINNACLE ENTERTAINMENT, INC.
Condensed Notes to Consolidated Financial Statements
Note 1 - Summary of Significant Accounting Policies
General Pinnacle Entertainment, Inc. (the "Company" or "Pinnacle Entertainment")
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. 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. 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 required cruising riverboat
casinos in southern Louisiana, including the Company's Boomtown New Orleans
operations, to remain dockside at all times (see Note 10). 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 pursuing the development of a luxury hotel and
dockside riverboat casino resort in connection with the fifteenth and final
gaming license to be issued in Louisiana at a site in Lake Charles (see Note 5).
Pinnacle Entertainment receives lease income from two card clubs in the Los
Angeles metropolitan area - 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, the Company classified the net book
value of Crystal Park Casino to "Assets held for sale" on the Consolidated
Balance Sheet (see Note 4).
The financial information included herein has been prepared in conformity with
accounting principles generally accepted in the U.S. as reflected in the
Company's consolidated Annual Report on Form 10-K, as filed with the Securities
and Exchange Commission, for the year ended December 31, 2001. This Quarterly
Report on Form 10-Q does not include certain footnotes and financial
presentations normally presented annually and should be read in conjunction with
the Company's 2001 Annual Report on Form 10-K.
The information furnished herein is unaudited; however, in the opinion of
management, it reflects all normal and recurring adjustments necessary to
present a fair statement of the financial results for the interim periods. It
should be understood that accounting measurements at interim dates inherently
involve greater reliance on estimates than at year end.
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 and Other Intangible Assets See Note 7 "Goodwill and Other Intangible
Assets."
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 March 31, 2002 and December 31, 2001 was
$12,439,000 and $11,472,000, respectively.
4
Amortization of debt issuance costs included in interest expense was $967,000
and $919,000 for the three months ended March 31, 2002 and 2001, 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. 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 $9,221,000 and
$13,098,000 for the three months ended March 31, 2002 and 2001, respectively.
Foreign Currency Translation Statement of Financial Accounting Standards No. 52
Foreign Currency Translation ("SFAS No. 52") requires that 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 be translated into U.S. dollars at the average exchange rates
prevailing during the period. The resulting translation adjustments are
reflected in a separate component of Stockholders' Equity - Accumulated Other
Comprehensive Loss. 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.
However, as a responsive measure to political and economic instability in the
latter half of 2001, the Argentine government moved to devalue its currency as
of early January 2002. Subsequently, the Argentine peso to U.S. dollar exchange
rate has been very volatile and mostly declining, from a rate of 1.65:1.0 in
early January 2002 to a rate of 2.80:1.0 as of March 31, 2002.
Accumulated Other Comprehensive Loss Statement of Financial Accounting Standards
No. 130 Reporting Comprehensive Income ("SFAS No. 130") requires that a company
disclose other comprehensive income and the components of such income. The
objective of SFAS No. 130 is to report a measure of all changes in equity of an
enterprise that result from transactions and other economic events of the period
other than transactions with owners. "Other comprehensive income" is the sum of
the following: net income (loss) and other comprehensive income (loss), which is
defined as all other non-owner changes in equity.
Pursuant to the devaluation of the Argentine peso (see "-Foreign Currency
Translation" above), the Company has recorded unrealized foreign currency
translation losses as other comprehensive loss in the accompanying financial
statements. Comprehensive loss was computed as follows:
For the three months ended March 31,
2002 2001
--------------- --------------
(in thousands, unaudited)
Net loss ($59,002) ($2,121)
Other comprehensive loss:
Foreign currency translation loss (5,143) 0
--------------- --------------
Comprehensive loss ($64,145) ($2,121)
=============== ==============
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 cash in
Argentina, property, plant and equipment, other long-term assets, deferred tax
assets, reserves associated with asset sales, and in determining litigation
reserves and other obligations. Actual results could differ from those
estimates.
5
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 $47,000 and $226,000 for the three months ended March 31, 2002 and 2001,
respectively.
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 March 31, 2002 and 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 in "Foreign Currency
Translation" above, Argentina continues to experience political and economic
disruption that began in the latter part of 2001, including devaluation of its
currency and a governmental restriction on transferring any cash out of the
country. As such, until the restriction on transferring funds out of the country
has been lifted, cash of Casino Magic Argentina maintained in Argentina will be
classified as Restricted Cash on the Consolidated Balance Sheet as it can only
be utilized within Argentina. In addition, due to the inability to transfer cash
out of the country, in the first quarter of 2002 the Company took a charge and
established a reserve of approximately $1,150,000 against its investments in
Argentina. This reserve is a reduction of Restricted Cash in the accompanying
Consolidated Balance Sheet as of March 31, 2002.
Pre-Opening Costs The Company's policy is to expense pre-opening costs as
incurred, in accordance with Statement of Position 98-5 Reporting on the Costs
of Start-Up Activities.
Revenue Recognition In December 1999, Staff Accounting Bulletin 101 Revenue
Recognition in Financial Statements ("SAB 101") was issued by the Securities and
Exchange Commission ("SEC"). 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 and has not had 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. 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. The Company did not have any
derivative or hedging instruments during the three months ended March 31, 2002
and 2001.
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 on 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.
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. The Company believes the adoption of SFAS No.143 will
not have a material impact on its financial position or results of operations.
SFAS No. 143 addresses the diversity in practice for the recognizing of asset
retirement obligations ("ARO's"). 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
6
adoption is encouraged.
Long-lived Assets The Company periodically reviews the propriety of the carrying
amount of long-lived assets and the related intangible assets as well as the
related amortization period to determine whether current events or circumstances
warrant adjustments to the carrying value and/or the estimates of useful lives.
This evaluation consists of comparing asset carrying values to the Company's
projection of the undiscounted cash 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").
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. The
Company believes that the adoption of SFAS No. 144 will not have a material
impact on its financial position or results of operations. 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 ("APB Opinion No.
30") 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 Financial Accounting Standards Board
("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.
Earnings per Share Basic earnings (loss) per share are based on net income
(loss) 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 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 2001 amounts
to be consistent with the 2002 financial statement presentation.
Note 2 - Management Restructuring
On April 11, 2002, the Company announced that Daniel R. Lee was elected Chairman
of the Board of Directors and named Chief Executive Officer ("CEO") of the
Company effective April 10, 2002. Mr. Lee replaced R.D. Hubbard as Chairman of
the Board, as Mr. Hubbard resigned from such position effective April 10, 2002,
and replaced Paul R. Alanis as CEO, as Mr. Alanis resigned as CEO and director
effective April 10, 2002. In addition, on April 26, 2002, Mr. Hubbard resigned
as a director, and on April 29, 2002, Mr. Robert T. Manfuso resigned as a
director (see Note 13).
7
Note 3 - Property, Plant and Equipment
Property, plant and equipment held at March 31, 2002 and December 31, 2001
consisted of the following:
March 31, December 31,
2002 (a) 2001 (a)
----------------- -----------------
(unaudited)
(in thousands)
Land and land improvements $106,250 $106,643
Buildings 329,041 327,864
Equipment 201,523 196,708
Vessels and barge 112,392 112,029
Construction in progress 14,963 12,129
---------------- ----------------
764,169 755,373
Less accumulated depreciation 189,407 179,074
---------------- ----------------
$574,762 $576,299
================ ================
(a) Excludes $18,285,000 of assets held for sale as of March 31, 2002
and December 31, 2001 (see Note 4).
Note 4 - Assets Held For Sale
Assets held for sale at March 31, 2002 and December 31, 2001 consist primarily
of 97 acres of surplus land in Inglewood, California and the Crystal Park Casino
in Compton, California.
The Company is seeking a buyer of the 97 acres of land owned in Inglewood,
California adjacent to the Hollywood Park Race Track and, as such, has
classified the $12,160,000 cost of this land as "Assets held for sale" on the
Consolidated Balance Sheets.
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 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. In addition, as the Company had begun seeking a buyer
of Crystal Park Casino, the Company classified the $6,000,000 of estimated net
realizable value of this asset as "Assets held for sale" as of March 31, 2002
and December 31, 2001 on the Consolidated Balance Sheets.
Note 5 - Expansion and Development
Bossier City In December 2001, Casino Magic Bossier City began a $25,000,000
remodel and expansion project, including remodeling the existing pavilion
building and dockside riverboat casino, and building all new restaurants. The
Company expects the project will be substantially complete in early July 2002.
During the three months ended March 31, 2002, approximately $4,500,000 was
incurred on the project. The Company has also announced it will be re-branding
the facility to "Boomtown Bossier City" in June or July 2002.
Lake Charles On April 6, 2002, the voters of Calcasieu Parish, Louisiana,
approved the Company's Lake Charles project located in that parish. In October
2001, the Company was selected by the Louisiana Gaming Control Board (the
"Gaming Control Board") to receive the fifteenth and final gaming license to be
issued by the Gaming Control Board. Issuance of the license is subject to a
number of remaining conditions, including, but not limited to, building a
facility consistent with presentations made to the Gaming Control Board,
meeting certain construction milestone dates and satisfying the financing
requirements to complete the project (the "Lake Charles Conditions"). Financing
requirements of the Lake Charles Conditions include setting aside $22,500,000 in
a refundable account (which deposit was made in April 2002), and demonstrating
the financial resources
8
for the full project once construction commences in late 2002 or early 2003.
In February 2002, the Governor of Louisiana signed a compact with the Jena Band
of the Choctaw Indians to allow for the development and operation of a
land-based casino in the city of Vinton, Louisiana. Vinton is also in Calcasieu
Parish and is 20 miles closer to Houston, Texas, the major market 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.
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, which project is expected to
be completed in 2004. The Company is considering various financing options for
the development of the proposed project.
In connection with the project, in 1999 the Company entered into an option
agreement with the Lake Charles Harbor and Terminal District (the "District") to
lease 225 acres of unimproved land from the District upon which such resort
complex would be constructed. The 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. The
Company anticipates executing the lease agreement in 2002. The lease calls for
annual rental payments of $815,000, commencing upon opening of the facility,
with a maximum annual increase thereafter of 5%. Although the lease payments are
not payable until commencement of operations, a portion of the future rent will
be accrued during the construction period. 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, including lease payments to date and
campaign costs in connection with the vote on April 6, 2002, have been expensed
as incurred.
Note 6 - Note Receivable and Related Agreements
In 1998, the Company entered into a seven-year loan agreement with a Native
American tribe for $9,618,000, which proceeds were used to construct the Legends
Casino in Yakima, Washington. Concurrently, the Company entered into various
lease agreements with said tribe, which lease agreements, among other things,
provided for cash flow participation from the operations of the casino facility.
In June 2001, the tribe repaid the loan (which amount was approximately
$6,300,000 at such time), and terminated the related lease 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 the repayment and
early termination of the related lease agreements, the Company no longer
receives interest income nor cash flow participation income.
Note 7 - Goodwill and Other Intangible Assets
Goodwill Goodwill consists of the excess of the acquisition cost over the fair
value of the net assets acquired in business combinations and, prior to January
1, 2002, was 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 was being amortized over the extended life of the
concession agreement (see "-Gaming Licenses" below). Pursuant to the
implementation of SFAS No. 142 (discussed below), there was no goodwill
9
amortization in the three months ended March 31, 2002. Goodwill amortization
expense for the three months ended March 31, 2001 was $710,000. Goodwill as of
March 31, 2002 is $19,558,000 and relates to the current Boomtown locations.
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 Sheets,
as the Company agreed not to pursue the collection of such receivable as
additional consideration for the fifteen-year extension. Such additional
concession agreement cost is being 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, but is studying the situation in light of the uncertain economic,
political and currency situation of Argentina. The unamortized gaming license
costs related to Casino Magic Argentina as of March 31, 2002 and December 31,
2001 was $2,817,000 and $4,949,000 (which amounts reflect the translation
adjustment for Casino Magic Argentina assets and liabilities pursuant to SFAS
No. 52 - see "-Foreign Currency Translation" above), respectively, and
amortization expense was $130,000 and $237,000 for the three months ended March
31, 2002 and 2001, 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.
Based on the classification of the gaming license as a non-amortizing intangible
asset and pursuant to the implementation of SFAS 142 (discussed below), there
was no gaming license amortization expense related to the Casino Magic Bossier
City license in the three months ended March 31, 2002. Amortization expense for
the three months ended March 31, 2001 was $401,000. The remaining net book value
of the Casino Magic Bossier City gaming license as of March 31, 2002 is
$19,865,000.
Implementation of SFAS Nos. 141 and 142 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 were effective July 1, 2001 and January 1, 2002,
respectively, for the Company. SFAS 141 requires, among other things, that the
purchase method of accounting be used for all business combinations initiated
after June 30, 2001. SFAS No. 142 requires, among other things, that goodwill
and other non-amortizing intangible assets no longer be amortized over their
useful lives, but rather be subject to at least an annual assessment for
impairment by applying a fair-value-based test.
As early implementation of SFAS No. 142 was not permitted, the Company
implemented SFAS No. 142 effective January 1, 2002. During the three months
ended March 31, 2002, the Company completed its evaluation of the financial
statement impact of the adoption of SFAS No. 142 and recorded an intangible
asset impairment charge of $56,704,000, including a goodwill impairment charge
of $49,169,000 related to the Casino Magic locations and gaming license
impairment charge of $7,535,000 (net of an income tax benefit of $4,239,000) in
the quarter ended March 31, 2002. In accordance with SFAS No. 142, such
transition-related impairment charge is classified as a cumulative effect of a
change in accounting principle, net of the income tax benefit.
Under these 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.
10
The following table sets forth information concerning goodwill and other
intangible assets as of March 31, 2002:
Less Foreign
Currency
Adjustment
Balance as of Less and Balance as of
December 31, Impairment Amortization March 31,
2001 Losses (a) Expense (b) 2002
-------------------------------------------------------------
(unaudited, in thousands)
Goodwill $ 68,727 ($49,169) $ 0 $ 19,558
======== ======== ======== ========
Other intangible assets:
Casino Magic Bossier City non-amortizing
gaming license $ 31,639 ($11,774) $ 0 $ 19,865
Casino Magic Argentina amortizing gaming
license 4,949 0 (2,132) 2,817
-------- -------- -------- --------
Cumulative gaming licenses $ 36,588 ($11,774) ($ 2,132) $ 22,682
======== ======== ======== ========
(a) The Casino Magic Bossier City gaming license impairment loss of $11,774,000
is before any income tax benefit from such loss. Net of the income tax
benefit of $4,239,000, the cumulative impairment charges due to the
implementation of SFAS 142 are $56,704,000.
(b) Reflects the foreign currency translation adjustment of approximately
$2,002,000 and additional accumulated amortization of $130,000 related to
the Casino Magic Argentina gaming license.
Estimated future amortization expense for each of the years ended December 31,
2002, 2003, 2004, 2005 and 2006 for the Casino Magic Argentina gaming license,
applying prevailing average peso to dollar exchange rate for the three months
ended March 31, 2002 of approximately 2.19 pesos to the dollar to each of the
years, is approximately $520,000. Such amount is subject to change based on
fluctuations in the exchange rate between the Argentine peso and the U.S.
dollar.
11
The following table sets forth the pro forma effect of the adoption of SFAS No.
142:
For the three months ended March 31,
2002 2001
-------- --------
(unaudited)
(in thousands, except per share
data)
Pro forma adjusted net loss
Loss before change in accounting principle ($2,298) ($2,121)
======== ========
Reported net loss ($59,002) ($2,121)
Goodwill amortization expense, net of income
taxes 0 454
Casino Magic Bossier City gaming license
amortization expense, net of income taxes 0 257
-------- --------
Pro forma adjusted net loss ($59,002) ($1,410)
======== ========
Loss per share - basic and diluted
Per share loss before change in accounting principle ($0.09) ($0.08)
======== ========
Per share reported net loss ($2.32) ($0.08)
Per share goodwill amortization expense, net of
income taxes 0 0.02
Per share Casino Magic Bossier City gaming
license amortization expense, net of
income taxes 0 0.01
-------- --------
Per share pro forma adjusted net loss ($2.32) ($0.05)
======== ========
Number of shares - basic and diluted 25,444 26,288
Note 8 - Secured and Unsecured Notes Payable
Notes payable at March 31, 2002 and December 31, 2001:
March 31, December 31,
2002 2001
---------- -----------
(unaudited)
(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 18,382 18,847
Other secured notes payable 2,177 2,407
Other unsecured notes payable 893 893
---------- ----------
496,452 497,147
Less current maturities 3,654 3,654
---------- ----------
$492,798 $493,493
========== ==========
Secured Notes Payable, Bank Credit Facility The Company currently maintains a
reducing revolving bank credit facility with a syndicate of banks in the amount
of $110,000,000, which facility expires in December 2003 and has scheduled
commitment reductions of $6,667,000 on March 31, 2003 and $16,667,000 on each of
June 30 and September 30, 2003 (the "Credit Facility"). The Credit Facility also
provides for letters of credit up to $30,000,000 and swing line loans of up to
$10,000,000.
12
As of March 31, 2002 and December 31, 2001, 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.
In 2001, the Company and the bank syndicate executed amendments to the Credit
Facility that, among other things: (i) amended various financial covenant
ratios, (ii) allowed for certain capital expenditures, including the Lake
Charles project and Casino Magic Bossier City expansion and renovation project
(see Note 5), (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. 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 the Credit
Facility or related amendments.
Currently, the Company anticipates it will seek further amendments to the Credit
Facility, or terminate the Credit Facility and seek a new bank credit agreement
in the second or third quarter of 2002. There can be no assurances the Company
will be able to secure a 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 seek an alternative source of financing for
its Lake Charles project. All financing for the Company requires various
regulatory approvals and there can be no assurances that such approvals can be
obtained.
Unsecured 9.25% and 9.5% Notes In February 1999, the Company issued $350,000,000
of 9.25% Senior Subordinated Notes due 2007 (the "9.25% Notes"), and in August
1997, issued $125,000,000 of 9.5% Senior Subordinated Notes due 2007 (the "9.5%
Notes"). In January 1999, the Company received the required number of consents
to modify selected covenants associated with the 9.5% Notes and entered into the
First Supplemental Indenture to the 9.5% Notes. All costs associated with the
issuance of the 9.25% Notes, 9.5% Notes and the First Supplemental Indenture to
the 9.5% Notes were capitalized and are being amortized over the terms of the
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 guarantee 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, 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.
13
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 the initial lease term of ten years.
Note 9 - Stock Buyback
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. Since August
1998, the Company has repurchased 1,603,000 shares at a total cost of
approximately $15,360,000. No such stock purchases were made during the three
months ended March 31, 2002. Under the Company's most restrictive debt
covenants, approximately $4,600,000 is available to continue the stock buyback
program as of March 31, 2002.
Note 10 - Louisiana Dockside Gaming Legislation
Effective April 1, 2001, the gaming taxes paid to the state of Louisiana
increased from 18.5% to 21.5% of net gaming proceeds for the riverboats in
southern Louisiana, including the Company's Boomtown New Orleans property. For
the northern Louisiana riverboat casinos operating in parishes bordering the Red
River, including the Company's Casino Magic Bossier City property, the gaming
tax increase to 21.5% of net gaming proceeds will be phased in over
approximately two years. The phase-in included a 1% increase on each of April 1,
2001 and 2002, with another 1% on April 1, 2003.
Note 11 - Litigation
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. and LGE's appeal is currently pending before the court. In May
2002, Astoria refiled its state claims in the Civil District Court for the
Parish of Orleans, Louisiana. While the Company cannot predict the outcome of
this litigation, management intends to vigorously defend this action and does
not expect that the litigation will have a material adverse effect on the
financial condition or results of operations of the Company.
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
14
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. At a March 27, 2002 status conference, the Court lifted
the stay on discovery allowing the parties to conduct limited discovery on the
manufacturers and casinos where the named plaintiffs played. During the status
conference, the presiding judge also indicated that he was withdrawing from the
case and that the case will be reassigned to one of the three new judges in the
District of Nevada. Such reassignment has not yet occurred.
The claims are not covered under the Company's insurance policies. While the
Company cannot predict the outcome of this litigation, management intends to
vigorously defend the action.
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
15
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 the 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. On March 20, 2002, the third shooting victim filed a complaint in the
Circuit Court of Harrison County, Mississippi, Second Judicial District. The
allegations in the complaint are substantially similar to those contained in the
August 1, 2001 lawsuit. 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.
16
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 was
properly named, the compliance committee reinstated Messrs. 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.
17
Note 12 - 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
For the three months ended March 31, 2002 and 2001 and balance sheets as of
March 31, 2002 and December 31, 2001
(in thousands - unaudited)
(b)
(a) Wholly
Wholly Owned Consolidating Pinnacle
Pinnacle Owned Non- and Entertainment,
Entertainment, Guarantor Guarantor Eliminating Inc.
Inc. Subsidiaries Subsidiaries Entries Consolidated
---- ------------ ------------ ------- ------------
As of and for the three months ended
March 31, 2002
Balance Sheet
- -------------
Current assets $ 130,755 $ 64,537 $ 6,383 $ 0 $ 201,675
Property, plant and equipment, net 21,223 552,438 1,101 0 574,762
Other non-current assets 11,367 34,917 2,817 10,851 59,952
Investment in subsidiaries 491,170 560 0 (491,730) 0
Inter-company 143,813 30,144 0 (173,957) 0
--------- --------- --------- --------- ---------
$ 798,328 $ 682,596 $ 10,301 ($654,836) $ 836,389
========= ========= ========= ========= =========
Current liabilities $ 20,806 $ 45,682 $ 3,284 $ 0 $ 69,772
Notes payable, long-term 491,497 1,301 0 0 492,798
Other non-current liabilities 30,654 0 0 (12,206) 18,448
Inter-company 0 167,501 6,456 (173,957) 0
Equity 255,371 468,112 561 (468,673) 255,371
--------- --------- --------- --------- ---------
$ 798,328 $ 682,596 $ 10,301 ($654,836) $ 836,389
========= ========= ========= ========= =========
Statement of Operations
- -----------------------
Revenues:
Gaming $ 0 $ 107,638 $ 1,883 $ 0 $ 109,521
Food and beverage 0 6,858 153 0 7,011
Equity in subsidiaries (16,063) 422 0 15,641 0
Other 1,500 9,209 14 0 10,723
--------- --------- --------- --------- ---------
(14,563) 124,127 2,050 15,641 127,255
--------- --------- --------- --------- ---------
Expenses:
Gaming 0 64,596 582 0 65,178
Food and beverage 0 7,957 139 0 8,096
Administrative and other 4,539 29,921 (49) 0 34,411
Depreciation and amortization 604 10,382 176 0 11,162
--------- --------- --------- --------- ---------
5,143 112,856 848 0 118,847
--------- --------- --------- --------- ---------
Operating income (loss) (19,706) 11,271 1,202 15,641 8,408
Interest expense (income), net 11,994 10 (5) 0 11,999
--------- --------- --------- --------- ---------
Income (loss) before taxes (31,700) 11,261 1,207 15,641 (3,591)
Management fee & inter-company interest expense (4,843) 4,843 0 0 0
(income)
Income tax (benefit) expense (2,078) 0 785 0 (1,293)
--------- --------- --------- --------- ---------
Net income (loss) (24,779) 6,418 422 15,641 (2,298)
Change in accounting principle 34,223 22,481 0 0 56,704
--------- --------- --------- --------- ---------
($59,002) ($16,063) $ 422 $ 15,641 ($59,002)
========= ========= ========= ========= =========
Statement of Cash Flows
- -----------------------
Net cash (used in) provided by operating activities ($5,028) $ 4,590 $ 794 $ 0 $ 356
Net cash used in investing activities (75) (10,200) 0 0 (10,275)
Net cash used in financing activities (466) (229) 0 0 (695)
Effect of exchange rate changes on cash 0 0 (1,489) 0 (1,489)
18
Pinnacle Entertainment, Inc.
Consolidating Condensed Financial Information
For the three months ended March 31, 2002 and 2001 and balance sheets as of
March 31, 2002 and December 31, 2001
(in thousands - unaudited)
(b)
(a) Wholly
Wholly Owned Consolidating Pinnacle
Pinnacle Owned Non- and Entertainment,
Entertainment, Guarantor Guarantor Eliminating Inc.
Inc. Subsidiaries Subsidiaries Entries Consolidated
---- ------------ ------------ ------- ------------
For the three- months ended March 31, 2001
Statement of Operations
- -----------------------
Revenues
Gaming $ 0 $ 109,453 $ 4,809 $ 0 $ 114,262
Food and beverage 0 7,009 354 0 7,363
Equity in subsidiaries 10,956 1,154 0 (12,110) 0
Other 1,500 10,852 30 0 12,382
--------- --------- --------- ---------- ---------
12,456 128,468 5,193 (12,110) 134,007
--------- --------- --------- ---------- ---------
Expenses:
Gaming 0 64,952 1,310 0 66,262
Food and beverage 0 9,218 275 0 9,493
Administrative and other 4,394 33,026 1,599 0 39,019
Depreciation and amortization 683 10,767 359 279 12,088
--------- --------- --------- ---------- ---------
5,077 117,963 3,543 279 126,862
--------- --------- --------- ---------- ---------
Operating income (loss) 7,379 10,505 1,650 (12,389) 7,145
Interest expense (income), net 10,979 (451) (69) 0 10,459
--------- --------- --------- ---------- ---------
Income (loss) before taxes (3,600) 10,956 1,719 (12,389) (3,314)
Income tax expense (1,758) 0 565 0 (1,193)
--------- --------- --------- ---------- ---------
Net income (loss) ($1,842) $ 10,956 $ 1,154 ($12,389) ($2,121)
========= ========= ========= ========== =========
Statement of Cash Flows
- -----------------------
Net cash provided by (used in) operating activities ($27,323) $ 13,772 $ 1,161 $ 279 ($12,111)
Net cash provided by (used in) investing activities (215) (8,877) (1,115) 0 (10,207)
Net cash provided by (used in) financing activities (5,324) (201) 0 0 (5,525)
As of 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
========= ========= ========= ========== =========
(a) The following subsidiaries are treated as guarantors of both the 9.5% Notes
and 9.25% Notes for all periods presented: Belterra Resort Indiana LLC,
Boomtown, Inc., Boomtown Hotel & Casino, Inc., Louisiana - I Gaming,
Louisiana Gaming Enterprises, Inc., HP/Compton, Inc., Casino Magic Corp.,
Biloxi Casino Corp., Casino One Corporation, Crystal Park Hotel and Casino
Development Company, LLC, Casino Magic of Louisiana, Corp., Casino Parking,
Inc. and St. Louis Casino Corp.
(b) The following subsidaries are treated as wholly owned non-guarantors of
both the 9.5% Notes and the 9.25% Notes for all periods presented: Casino
Magic Neuguen S.A. and its subsidiary Casino Magic Support Services.
19
Note 13 - Subsequent Events
On April 11, 2002, the Company announced that the Indiana Gaming Commission had
begun an investigation into the Company's regulatory compliance at Belterra
Casino Resort. The investigation was initiated as a result of allegations of
harassment in a lawsuit filed by two former employees of Belterra Casino Resort.
The Indiana Gaming Commission, like most gaming regulatory bodies, has very
broad authority in regulating and determining the suitability of its gaming
licensees. The Indiana Gaming Commission, for example, has the authority to
impose a fine, suspend or terminate Belterra Casino Resort's license, or take
other serious disciplinary measures as a result of the investigation. At its
meeting on May 13, 2002, the Indiana Gaming Commission instructed the staff to
continue to negotiate with the Company, with a view to settling this matter with
the payment of a fine and other remedial actions, rather than revoking the
Belterra Casino Resort license.
See also Note 2 regarding management changes and Note 5 regarding voter approval
of the Lake Charles project, all of which occurred after March 31, 2002.
20
Item 2. 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 Annual Report on Form 10-K for the year ended December 31, 2001,
and other filings with the Securities and Exchange Commission.
Forward-Looking Statements
Except for the historical information contained herein, the matters addressed in
this Quarterly Report on Form 10-Q 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, operating results and pending regulatory matters,
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:
. continued compliance with the conditions negotiated with the Louisiana
Gaming Control Board in connection with the Company's proposed Lake
Charles project, completion of the project on time and on budget and
the effect of expanded Native American gaming in Louisiana on the
Company's decision to proceed with the Lake Charles project (see Note
5 to the Condensed 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;
. settlement of the harassment lawsuits and the investigation of the
Indiana Gaming Commission, and any related fine, suspension of
Belterra Casino Resort's license, or other serious disciplinary
action, and other charges (see Note 13 to the Condensed Notes to
Consolidated Financial Statements);
. 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 those states), such as the expansion of Native American
gaming in California and Louisiana and the potential introduction of
casino gaming in Alabama, Arkansas, Kentucky, Ohio or Texas;
. 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 5 to the
Condensed 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 1 "-Foreign Currency Translation" to the
Condensed Notes to Consolidated Financial Statements);
. the amount and effect of future impairment charges under SFAS No. 121
and SFAS No. 142;
21
. the failure to sell any of the assets held for sale (see Note 4 to the
Condensed 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 obtain adequate financing to meet strategic goals,
including financing for the Lake Charles project (see Notes 5 and 8 to
the Condensed Notes to Consolidated Financial Statements);
. 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 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 the Company
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 Quarterly Report on Form 10-Q 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
The following is a summary list of some of the risk factors relating to the
Company. In addition to the other information set forth in this Quarterly Report
on Form 10-Q for the three months ended March 31, 2002, one should carefully
consider the risk factors as disclosed in the Company's Annual Report on Form
10-K for the year ended December 31, 2001 for additional detail regarding these
and other risk factors.
. All of the Company's properties are dependent upon retaining existing
and attracting new customers within their respective geographical
markets, particularly in the Mississippi and Louisiana gaming markets
since it operates three facilities in these markets and is pursuing
development of the Lake Charles project in western Louisiana.
. The Company faces intense competition in all the markets in which it
operates.
. Loss of land-based, riverboat or dockside facilities from service
would adversely affect the Company's operations.
. The substantial amount of debt of the Company could materially
adversely affect the Company's business.
22
. Limited operating history at the Belterra Casino Resort does not allow
the Company to measure effectively various improvements the Company
has implemented at the facility in an effort to improve its
operating results.
. Development of the Lake Charles project could not provide for a
sufficient return.
. Financing for the Company's capital spending plans may not be
acceptable to lenders or the Company.
. The Company faces extensive regulatory oversight from gaming
authorities and any adverse regulatory changes or changes in the
gaming environment in any of the jurisdictions the Company operates
could have a material adverse effect on the Company's operations.
. The Company is currently subject to litigation and in the future could
be subject to additional litigation, all of which is time consuming
and can divert resources and attention of management.
. Due to the risks associated with any construction project, the Company
may not be able to complete expansion projects and new construction
projects on time, on budget or as planned.
. The Company experiences quarterly fluctuations in operating results
due to seasonality of the Company's business, including the stronger
summer months and weaker winter months.
For more information on the potential factors that could affect the Company's
financial results, please see "Forward-Looking Statements" and "Factors
Affecting Future Operating Results" below 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
Condensed 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,
among others, policies for i) insurance reserves, asset disposition reserves,
allowances for doubtful accounts, asset impairment and other reserves; ii)
valuation of goodwill and long-lived assets; iii) depreciable lives of various
assets; and iv) 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.
Factors Affecting Future Operating Results
Indiana Gaming Commission On April 11, 2002, the Company announced that the
Indiana Gaming Commission had begun an investigation into the Company's
regulatory compliance at Belterra Casino Resort (see Note 13 to the Condensed
Notes to Consolidated Financial Statements).
23
Goodwill Amortization In June 2001, the Financial Accounting Standards Board
issued Statements of Financial Accounting Standards No. 142 Goodwill and Other
Intangible Assets ("SFAS No. 142"), which was effective January 1, 2002 for the
Company (see Note 7 to the Condensed Notes to Consolidated Financial
Statements). With the adoption of SFAS No. 142 on January 1, 2002 (earlier
adoption was not permitted), goodwill is no longer amortized over its estimated
useful life, which amortization expense for the three months ended March 31,
2001 was $710,000. Rather, goodwill is subject to at least an annual assessment
for impairment by applying a fair-value-based test.
Gaming License Amortization 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. With the adoption of SFAS 142 on January 1,
2002, and based on the classification of the gaming license as a non-amortizing
intangible asset, the gaming license is no longer amortized, which amortization
expense for the three months ended March 31, 2001 was $401,000. Rather, the
Casino Magic Bossier City gaming license asset is subject to at least an annual
assessment for impairment by applying a fair-value-based test.
Argentina During the second half of 2001, the political and economic condition
of Argentina deteriorated, culminating in December 2001 with the resignation of
the then President of the country, the imposition of restrictions on cash
withdrawals 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 place
restrictions on all transfers of U.S. dollars out of the country.
During the three months ended March 31, 2002, the political and economic
condition of Argentina did not improve, and accordingly, the currency exchange
rate of the Argentine peso to the U.S. dollar has deteriorated from an initial
free market rate of approximately 1.65 Argentine pesos to the U.S. dollar in
early January 2002 to a rate of approximately 2.80 as of March 31, 2002 and a
weighted average rate of approximately 2.19 for the three months ended March 31,
2002.
The Company continues to classify the cash ($986,000 net of reserves) maintained
in Argentina as restricted cash at March 31, 2002, due to recent actions taken
by the government of Argentina to restrict all U.S. currency transfers out of
the country.
The impact of these events to Casino Magic Argentina includes a reduction in
revenue resulting from a decline in customer counts and lower discretionary
spending by customers. The Company anticipates the economic instability will
continue throughout the remainder of 2002 and will therefore continue to impact
adversely Casino Magic Argentina's operating results in 2002. At March 31, 2002,
assets in Argentina were $6,770,000 or less than 1% of the Company's
consolidated assets.
Legislation Regarding Dockside Gaming in Louisiana Effective April 1, 2001, the
gaming taxes paid to the state of Louisiana increased from 18.5% to 21.5% of net
gaming proceeds for the riverboats in the southern region of the state,
including the Company's Boomtown New Orleans property. For the northern
Louisiana riverboat casinos operating in parishes bordering the Red River,
including the Company's Casino Magic Bossier City property, the gaming tax
increase to 21.5% of net gaming proceeds will be phased in over approximately
two years. The phase-in included a 1% increase on each of April 1, 2001 and
2002, with another 1% on April 1, 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 are no longer required to arrange their plans to coincide
with a cruising schedule. The Company also believes the new legislation will
benefit the proposed Lake Charles project (see below), as it will enable the
Company to build a riverboat casino that will remain dockside at all times and
thus compete more effectively with existing operators. Finally, the Company
24
believes the increased gaming taxes have 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.
Bossier City Expansion and Re-branding In December 2001, Casino Magic Bossier
City began a $25,000,000 remodel and expansion project, including remodeling the
existing pavilion building and dockside riverboat casino, and building all new
restaurants. The Company expects the project will be substantially complete in
early July 2002. During the three months ended March 31, 2002, approximately
$4,500,000 was incurred on the project. The Company believes operations during
said quarter were adversely impacted by construction disruption to the facility,
including the closure of various food and beverage venues and the redirecting of
customer walkways to accommodate construction activity. The Company anticipates
such construction disruption will continue in the quarter ended June 30, 2002.
In addition, the Company has announced the re-branding of the facility to
"Boomtown Bossier City" effective in June or July 2002, which re-branding costs
incurred in the three months ended March 31, 2002 were $109,000. The Company
anticipates such costs will increase in the quarter ended June 30, 2002, with
some final expenses likely in the quarter ended September 30, 2002. Total
re-branding expenses in 2002 are expected to be approximately $1 million.
Lake Charles On April 6, 2002, the voters of Calcasieu Parish, Louisiana,
approved the Company's Lake Charles project located in that parish. As
previously announced, in October 2001, the Company was selected by the Louisiana
Gaming Control Board (the "Gaming Control Board") to receive the fifteenth and
final gaming license to be issued by the Gaming Control Board. In connection
with the project, in 1999 the Company entered into an option agreement with the
Lake Charles Harbor and Terminal District (the "District") to lease 225 acres of
unimproved land from the District upon which such resort complex would be
constructed. The 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. The Company anticipates
executing the lease agreement in 2002. The lease calls for annual rental
payments of $815,000, commencing upon opening of the facility, with a maximum
annual increase thereafter of 5%. Although the lease payments are not payable
until commencement of operations, a portion of the future rent will be accrued
during the construction period. 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 including lease payments to date and obtaining
voter approval on April 6, 2002 have been expensed as incurred.
In February 2002, the Governor of Louisiana signed a compact with the Jena
Band of the Choctaw Indians to allow for the development and operation of a
land-based casino in the city of Vinton, Louisiana. Vinton is also in Calcasieu
Parish and is 20 miles closer to Houston, Texas, the major market for casinos in
Lake Charles, than the Company's proposed Lake Charles projects. In March 2002,
such compact was disapproved by the U.S. Department of the Interior. There can
be no assurances that 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 its
proposed Lake Charles project.
Projects such as the Bossier City expansion and renovation and the Lake Charles
project (both noted above) include numerous risks that could require substantial
changes to proposed plans or otherwise alter the time frames or budgets
initially contemplated. Such risks include the ability to secure all required
permits and
25
resolution of potential land use issues, as well as risks typically associated
with any construction project, including possible shortages of materials or
skilled labor, unforeseen engineering or environmental or geological problems,
work stoppages, weather interference and unanticipated cost overruns. There can
be no assurances that the Company will be able to complete either project on
time or on budget.
Assets Held for Sale Assets held for sale of $18,285,000 at March 31, 2002 and
December 31, 2001 consist primarily of 97 acres of surplus land in Inglewood,
California and the Crystal Park Casino in Compton, California (see Note 4 to the
Condensed Notes to Consolidated Financial Statements). 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 seeking buyers for the facility,
and accordingly, reclassified the assets as held for sale (see Note 4 to the
Condensed Notes to Consolidated Financial Statements).
Results of Operations
Three months ended March 31, 2002 compared to the three months ended March 31,
- ------------------------------------------------------------------------------
2001
- ----
Revenues Total revenues for the three months ended March 31, 2002 decreased by
- --------
$6,752,000, or 5.0%, as compared to the three months ended March 31, 2001.
Revenues increased at Belterra Casino Resort by $2,272,000, at Boomtown New
Orleans by $958,000, and at Casino Magic Biloxi by $185,000. These improvements
were offset by reductions in revenue at Casino Magic Bossier City of $5,345,000,
at Casino Magic Argentina of $3,143,000, at Boomtown Reno of $717,000 and for
card clubs and other, a reduction of $962,000.
Gaming revenues decreased $4,741,000, or 4.1%, for the three months ended
March 31, 2002 as compared to the three months ended March 31, 2001. Gaming
revenues increased by $1,900,000, or 8.2%, at Belterra Casino Resort; by
$1,025,000, or 4.2%, at Boomtown New Orleans; by $448,000, or 2.2%, at Casino
Magic Biloxi and were essentially flat at Boomtown Reno. Gaming revenues
decreased by $5,246,000, or 16.6%, at Casino Magic Bossier City and by
$2,926,000, or 60.8%, at Casino Magic Argentina. The improved gaming revenue at
Belterra Casino Resort was attributed to improved marketing programs and milder
winter weather that increased the overall guest counts, a normal maturation of
the facility which opened in October 2000, and a redesigned casino gaming floor
that improved overall efficiency and customer service. The improved gaming
revenue at Boomtown New Orleans was due to the additional slot machine revenue
from the additional 300 slot machines installed on the third deck of the
dockside riverboat casino in the third quarter of 2001, as well as the increased
table game revenue from the new high-limit table games area, also on the third
deck of the riverboat casino. The improved gaming revenue at Casino Magic Biloxi
was primarily due to improved slot revenue, which improvement was attributed to
the introduction of a triple point reward program to slot club members, which
increased related slot revenue. The decline in gaming revenue at Casino Magic
Bossier City was due to the elimination of expensive marketing programs
undertaken to maintain market share in the first quarter of 2001, as well as
construction disruption from the $25,000,000 expansion, renovation and
re-branding project (see Note 5 to the Condensed Notes to the Consolidated
Financial Statements). The decrease in gaming revenue at Casino Magic Argentina
was due to the adverse economic and political conditions in the country, which
conditions initially reduced the number of customers visiting the facility and
amount of spending while at the property, as well as the impact of the
translation from the Argentine peso to the U.S. dollar, pursuant to SFAS No. 52
(see Note 1 "-Foreign Currency Translation" to the Condensed Notes to
Consolidated Financial Statements).
26
Food and beverage revenues decreased by $352,000, or 4.8%. Food and beverage
revenues increased at Belterra Casino Resort by $156,000, or 7.6%, offset by
reduced revenues at Casino Magic Bossier City of $128,000, or 35.8%, and at
Casino Magic Argentina of $201,000, or 56.8%. The improved food and beverage
revenues at Belterra Casino Resort was primarily due to the increase in the
number of guests visiting and staying at the facility noted above. The decline
in food and beverage revenue at Casino Magic Bossier City was primarily due to
the closure of the majority of the food and beverage venues during the expansion
and remodeling project, some of which are expected to be re-opened during the
second quarter of 2002. The decline in food and beverage revenue at Casino Magic
Argentina was primarily due to the translation adjustment pursuant to SFAS No.
52.
Truck stop and service station revenue generated at Boomtown Reno decreased by
$651,000, or 15.3%, primarily due to a decrease in fuel prices
period-over-period.
Hotel and recreational vehicle park revenues increased by $26,000, or less than
1.0%.
Other income decreased by $1,034,000, or 20.7%. This reduction in other income
is due primarily to the termination of certain lease agreements in connection
with the repayment of a promissory note from a Native American casino in June of
2001 (see Note 6 to the Condensed Notes to Consolidated Financial Statements),
and therefore there was no cash flow participation revenue in the first quarter
of 2002. In addition, other income declined period-over-period due to reduced
lease income from Crystal Park Casino (see Note 4 to the Condensed Notes to
Consolidated Financial Statements), which lease was renegotiated in the fourth
quarter of 2001 to $20,000 per month from $100,000 per month.
Expenses Total expenses for the three months ended March 31, 2002 decreased by
- --------
$8,015,000, or 6.3%, as compared to the three months ended March 31, 2001.
Expenses decreased at Casino Magic Bossier City by $4,923,000, at Casino Magic
Argentina by $1,545,000, at Pinnacle Entertainment corporate by $1,610,000, at
Boomtown Reno by $917,000 and at Casino Magic Biloxi by $390,000. These expense
reductions were offset by an increase in expenses at Boomtown New Orleans of
$1,507,000 and at Belterra Casino Resort of $326,000.
Gaming expenses decreased by $1,084,000, or 1.6%, for the three months ended
March 31, 2002 as compared to the three months ended March 31, 2001. Gaming
expenses increased at Belterra Casino Resort by $3,452,000, or 28.3% and at
Boomtown New Orleans by $1,609,000, or 12.8%. Gaming expenses decreased at
Casino Magic Bossier City by $4,887,000, or 21.9%; at Casino Magic Argentina by
$728,000, or 55.6%; at Boomtown Reno by $269,000, or 4.7%; and at Casino Magic
Biloxi by $261,000, or 2.1%. The increase in gaming expenses at Belterra Casino
Resort was primarily due to additional marketing expenses that helped to
increase the attendance over prior year and therefore improved the gaming
revenue, as well as an increase in gaming taxes due to the increase in gaming
revenue. Gaming expenses increased at Boomtown New Orleans primarily due to the
additional 3% gaming tax paid on gaming revenue pursuant to the dockside
legislation that became effective April 1, 2001 (see Note 10 to the Condensed
Notes to Consolidated Financial Statements), as well as the increase in labor
costs to staff the third deck of the dockside riverboat casino, which
improvement was completed in the third quarter of 2001. Gaming expenses
decreased at Casino Magic Bossier City due to the substantial reduction in
marketing spending in the first quarter of 2002 compared to the first quarter of
2001, as noted above. Gaming expenses decreased at Casino Magic Argentina
primarily due to the translation adjustment pursuant to SFAS No. 52. Gaming
expenses at Boomtown Reno and Casino Magic Biloxi declined despite improved
revenue, which decrease can be attributed to the cost containment programs
implemented at each facility in late 2001 and continued in 2002.
Food and beverage expenses decreased by $1,397,000, or 14.7%. Food and beverage
expenses decreased at Belterra Casino Resort by $782,000, or 21.5%, and
decreased at Casino Magic Bossier City by $253,000, or 40.0%. The reduction in
food and beverage expenses at Belterra Casino Resort is due primarily to more
efficient staffing, which in turn has reduced labor for most departments, as
well as reduced cost of sales due
27
to lower cost menu items in the various food outlets. The reduction in expenses
at Casino Magic Bossier City is primarily due to the closure of a majority of
the food venues in the middle of the quarter due to the building of all new food
outlets at the facility (see Note 5 to the Condensed Consolidated Financial
Statements).
Truck stop and service station expenses at Boomtown Reno decreased by $696,000,
or 17.3%, due primarily to a decrease in fuel prices in 2002.
Hotel and recreational vehicle park expenses increased by $465,000, or 17.4%,
including a reduction of $423,000 at Belterra Casino Resort and a slight
increase at Casino Magic Biloxi. The decline in hotel expenses at Belterra can
be attributed to the labor reductions implemented in the fourth quarter of 2001,
which savings continued in the first quarter of 2002, as well as a reduction in
the cost of various amenity packages (shampoos, soaps, etc.) in the hotel rooms.
Selling, general and administrative expenses decreased by $2,374,000, or 8.2%.
Administrative expenses were down for Pinnacle Entertainment, Inc.'s corporate
overhead by $1,064,000, or 23.1%, and at Belterra Casino Resort by $1,689,000,
or 23.2%. The decline in corporate overhead for the quarter ended March 31, 2002
is due primarily to a reduction in consulting agreement contracts and reduced
payroll and compensation costs. The reduction in administrative costs at
Belterra Casino Resort is also due primarily to cost containment programs,
including a reduction in labor costs.
Depreciation and amortization decreased by $926,000, or 7.7%, the majority of
which is due to the cessation of goodwill amortization and Casino Magic Bossier
City gaming license amortization pursuant to implementation of SFAS No. 142 as
of January 1, 2002 (see Note 7 to the Condensed Notes to Consolidated Financial
Statements).
Other operating expenses decreased $984,000, or 31.1%, including $286,000, or
25.5%, related to the Belterra Casino Resort; $352,000, or 71.4%, related to
Casino Magic Biloxi; and $374,000, or 52.5%, related to Casino Magic Argentina.
The reductions in other operating expenses at Belterra Casino Resort and Casino
Magic Biloxi are consistent with the overall cost containment programs
implemented in the fourth quarter of 2001. The reduction in other operating
costs at Casino Magic Argentina is due primarily to the translation adjustment
due to SFAS No. 52.
Re-branding costs of $109,000 in the first quarter of 2002 are related to the
re-branding of Casino Magic Bossier City to "Boomtown Bossier City", which
re-branding project is expected to be completed in early June or July 2002 (see
Note 5 to the Condensed Notes to Consolidated Financial Statements). The
pre-opening costs of $198,000 incurred in the first quarter of 2001 are related
to the completion of the golf course at Belterra Casino Resort, which golf
course opened in July 2001.
Interest income decreased by $1,214,000, or 65.7%, primarily due to the early
repayment of a promissory note from a Native American Casino (see Note 6 to the
Condensed Notes to Consolidated Financial Statements), lower investment funds
and lower interest rates during the three months ended March 31, 2002 compared
to the same period of 2001.
Interest expense, net of capitalized interest, increased by $326,000, or 2.6%,
due primarily to the reduction of capitalized interest of $179,000.
The cumulative change in accounting principle of $56,704,000 recorded for the
three months ended March 31, 2002 related to the write-down of goodwill and
other intangible assets in connection with the adoption of SFAS 142 as of
January 1, 2002 (see Note 7 to the Condensed Notes to Consolidated Financial
Statements).
28
Liquidity, Capital Resources and Other Factors Influencing Future Results
As of March 31, 2002, the Company had cash, cash equivalents and restricted
cash, all of which had original maturities of less than ninety days, of
$144,536,000 compared to $156,639,000 at December 31, 2001.
Pursuant to the Company's 9.5% Notes and 9.25% Notes (see Note 8 to the
Condensed Notes to Consolidated Financial Statement), the Company pays cash
interest of $22,125,000 in February and August of each year and therefore
utilizes cash generated from operations. In those quarters in which the interest
payments are not due, the second and fourth quarters of each year, the Company
generally generates more cash from operating activities.
For the three months ended March 31, 2002, operating activities generated net
cash of $356,000, compared with net cash uses of $12,111,000 in the three months
ended March 31, 2001. In the three-month period ending March 31, 2002, the net
cash flow from operations was generated primarily from earnings before interest,
taxes, depreciation, amortization and non-recurring items ("EBITDA") of
$19,679,000 and cash income tax refunds of approximately $4,200,000. This net
cash flow was offset by uses of cash for cash interest payments on the 9.5% and
9.25% Notes of approximately $22,125,000 and cash used by working capital of
$1,654,000. In the same three-month period last year, the cash used in
operations was $12,111,000, which included EBITDA from operations of
$19,431,000, offset by cash interest payments for the 9.5% Notes and 9.25% Notes
of approximately $22,125,000 and cash used for working capital of $10,836,000 (a
majority of the working capital use being due to the establishment of normal
working capital and payment of construction payables at the Belterra Casino
Resort, which opened in late October 2000).
Net cash used by investing activities of $10,275,000 in the three months ended
March 31, 2002 is primarily attributed to the addition of property, plant and
equipment of approximately $10,271,000. The additions during the three months
ended March 31, 2002 include costs related to the expansion and renovation
project at Casino Magic Bassier City and completion of the expansion project at
Boomtown New Orleans (see Note 5 to the Condensed Notes to Consolidated
Financial Statements) and maintenance capital spending. Net cash used by
investing activities of $10,207,000 for the three months ended March 31, 2001 is
primarily attributed to the addition of property, plant and equipment of
$10,082,000, including construction of the golf course at Belterra Casino Resort
(which opened in July 2001), construction costs associated with the expansion
project at Boomtown New Orleans and the purchase of leased land underlying
Crystal Park Casino.
The net cash used in financing activities of $695,000 in the three months ended
March 31, 2002 is due to the payment of long-term debt. The net cash used in
financing activities in the three months ended March 31, 2001 of $5,525,000 is
due primarily to the payment of $5,344,000 for the purchase of 500,000 shares of
the Company's common stock (see Note 9 to the Condensed Notes to Consolidated
Financial Statements).
Cash, cash equivalents and restricted cash was also reduced by $1,489,000 due to
the effect of the change in foreign currency exchange rate of the Argentine peso
to the U.S. dollar from 1.65:1.0 at December 31, 2001 to 2.80:1.0 at March 31,
2002 (see Note 1 "-Foreign Currency Translation" to the Condensed Notes to
Consolidated Financial Statements).
As discussed in Note 8 to the Condensed 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 March 31, 2002,
the Company had no outstanding borrowings under the Credit Facility, and has not
utilized the Credit Facility since February 1999. 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 the Credit Facility or related
amendments.
Interest rates on future borrowings under the Credit Facility are determined by
adding a margin, which is based on 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.
29
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 either
extensively modify the current Credit Facility (which expires in December 2003
or terminate the Credit Facility and secure a new bank credit agreement. 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
can be no assurance the Louisiana Gaming Control Board or other regulatory
agency 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 or secure alternative sources of financing, should the
Company move forward with the project).
In addition to the Credit Facility, the Company is considering various other
options for the development of the proposed Lake Charles project, including, but
not limited to, a new bank credit facility or other senior debt, leasing
arrangements, issuance of equity and joint venture arrangements.
Regardless of future changes to the Credit Facility, the Company currently
believes that its available cash and cash equivalents at March 31, 2002 of over
$143,000,000 and cash flow from operations in 2002 will be sufficient to finance
working capital needs, make necessary debt service payments and finance the
capital spending requirements for at least the next twelve months. In addition,
the Company also currently believes that its current cash resources are
sufficient to meet the requirements of its existing operations beyond the next
twelve months. Funding for the Lake Charles project and other material projects
may require additional financing.
In addition to the above anticipated uses of resources, the Company may use a
portion of existing resources to (i) make capital improvements at other existing
properties, (ii) reduce its outstanding debt obligations at or prior to their
scheduled maturities, 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.
30
Item 3. 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 1 "-Foreign Currency Translation" to the Condensed 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 8 to the Condensed Notes to Consolidated Financial Statements). Total
assets in Argentina at March 31, 2002 were $6,770,000 (including $2,136,000 of
Argentine peso cash translated to U.S. dollars), or less than 1% of consolidated
assets of the Company. At March 31, 2002, the Company had no outstanding
borrowings under the Credit Facility.
As of March 31, 2002, the Company did not hold any investments in market risk
sensitive instruments of the type described in Item 305 of Regulation S-K.
Part II
Other Information
Item 1. 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"), 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. and LGE's appeal is currently pending before the court. In May
2002, Astoria refiled its state claims in the Civil District Court for the
Parish of Orleans, Louisiana. While the Company cannot predict the outcome of
this litigation, management intends to vigorously defend the action.
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. At a March 27, 2002 status conference, the Court lifted
the stay on discovery allowing the parties to conduct limited discovery on the
manufacturers and casinos where the named plaintiffs played. During the status
conference, the presiding judge also indicated that he was withdrawing from the
case and that the case will be reassigned to one of the three new judges in the
District of Nevada. Such reassignment has not yet occurred.
The claims are not covered under the Company's insurance policies. While the
Company cannot predict the outcome of this litigation, management intends to
vigorously defend the action.
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 intends to vigorously defend the 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. On March 20, 2002, the third shooting victim filed a complaint in the
Circuit Court of Harrison County, Mississippi, Second Judicial District. The
allegations in the complaint are substantially similar to those contained in the
August 1, 2001 lawsuit. While the Company cannot predict the outcome of the
litigation, 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 was
properly named, the compliance committee reinstated Messrs. 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.
31
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.
Item 6. Exhibits and Reports on Form 8-K
- ----------------------------------------
(a) Exhibits
Exhibit
Number Description of Exhibit
- ------ ----------------------
10.1* Employment Agreement dated as of April 10, 2002 by and between Pinnacle
Entertainment, Inc. and Daniel R. Lee.
10.2* Nonqualified Stock Option Agreement dated as of April 10, 2002 by and
between Pinnacle Entertainment, Inc. and Daniel R. Lee.
10.3* Nonqualified Stock Option Agreement dated as of April 10, 2002 by and
between Pinnacle Entertainment, Inc. and Daniel R. Lee.
11* Statement re Computation of Per Share Earnings
________
* Filed herewith
(b) Reports on Form 8-K:
None
32
PINNACLE ENTERTAINMENT, INC.
Selected Financial Data by Property
For the three months ended March 31,
-------------------------------------------------
2002 2001
------------ -------------
(in thousands, except per share data - unaudited)
Revenues:
Belterra Casino & Resort $ 28,467 $ 26,195
Boomtown New Orleans 26,700 25,742
Boomtown Reno 18,395 19,112
Casino Magic Biloxi 22,900 22,715
Casino Magic Bossier City 27,183 32,528
Casino Magic Argentina 2,050 5,193
Card Clubs and other 1,560 2,522
------------ -------------
127,255 134,007
------------ -------------
Expenses:
Belterra Casino & Resort 26,084 25,812
Boomtown New Orleans 19,703 18,336
Boomtown Reno 16,025 16,745
Casino Magic Biloxi 17,699 18,284
Casino Magic Bossier City 22,620 27,457
Casino Magic Argentina 1,822 3,184
Card Clubs and other 87 158
Corporate 3,536 4,600
------------ -------------
107,576 114,576
------------ -------------
Non-recuring expenses:
Re-branding costs, Bossier City (109) 0
Pre-opening costs, Belterra Casino Resort 0 (198)
------------ -------------
(109) (198)
------------ -------------
Depreciation and amortization (11,162) (12,088)
------------ -------------
Operating income 8,408 7,145
Interest income 634 1,848
Interest expense, net of capitalized interest (12,633) (12,307)
------------ -------------
Loss before income taxes and change in accounting principle (3,591) (3,314)
Income tax benefit 1,293 1,193
------------ -------------
Net loss before change in accounting principle (2,298) (2,121)
Cumulative change in accounting principle, net of income tax benefit (56,704) 0
------------ -------------
Net loss ($59,002) ($2,121)
============ =============
Net loss per common share - basic and diluted
Net loss before cumulative change in accounting principle ($0.09) ($0.08)
Cumulative change in accounting principle (2.23) 0.00
------------ -------------
Net loss - basic and diluted ($2.32) ($0.08)
============ =============
Number of shares - basic and diluted 25,444 26,288
33
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/ Daniel R. Lee Dated: May 14, 2002
-----------------------------------------
Daniel R. Lee
Chairman of the Board
and Chief Executive Officer
(Principal Executive Officer)
By: /s/ Bruce C. Hinckley Dated: May 14, 2002
-----------------------------------------
Bruce C. Hinckley
Senior Vice President
and Chief Financial Officer
(Principal Financial and
Accounting Officer)
34