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Securities and Exchange Commission
Washington, D.C. 20549
Form 10-K
[X] Annual Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act
of 1934
For the fiscal year ended December 31, 1998
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Commission file number 0-10619 Commission file number 333-34471-02
Hollywood Park, Inc. Hollywood Park Operating Company
(Exact Name of Registrant as Specified in Its Charter) (Exact Name of Registrant as Specified in Its Charter)
Delaware Delaware
(State or Other Jurisdiction of (State or Other Jurisdiction of
Incorporation or Organization) Incorporation or Organization)
95-3667491 95-3667220
(IRS Employer Identification No.) (IRS Employer Identification No.)
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1050 South Prairie Avenue, Inglewood, California 90301
(Address of Principal Executive Offices) (Zip Code)
(310) 419 - 1500
(Registrant's Telephone Number, Including Area Code)
Securities registered pursuant to Section 12(b) of the Act:
Hollywood Park, Inc.
Common Stock, $.10 par value
New York Stock Exchange
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark whether registrant: (1) has filed all reports required to
be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months, and (2) has been subject to such filing requirements
for the past 90 days. YES [ X ] NO [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ ]
The aggregate market value of the voting stock held by non-affiliates of the
registrant at March 25, 1999, was $225,750,604 based on a closing price of $8.75
per common share.
The number of outstanding shares of the registrant's common stock, as of the
close of business on March 25, 1999: 25,800,069.
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Hollywood Park, Inc.
Table of Contents
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Part I
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Item 1. Description of Business............................................................................... 1
General............................................................................................ 1
Gaming Operations.................................................................................. 2
Expansion Plans.................................................................................... 7
Government Regulation.............................................................................. 9
Competition........................................................................................23
Federal Income Tax Matters.........................................................................24
Employees..........................................................................................25
Other..............................................................................................25
Item 2. Properties............................................................................................26
Item 3. Legal Proceedings.....................................................................................27
Item 4. Submission of Matters to a Vote of Security Holders...................................................28
Part II
Item 5. Market for the Registrant's Common Equity and Related Stockholder Matters.............................28
Item 6. Selected Financial Data...............................................................................29
Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations................................................................31
Results of Operations...........................................................................32
Liquidity and Capital Resources.................................................................34
Item 7A. Quantitative and Qualitative Disclosures About Market Risk............................................38
Item 8. Financial Statements..................................................................................38
Item 9. Changes in and Disagreements with Accountants
on Accounting and Financial Disclosure..............................................................38
Part III
Item 10. Directors and Executive Officers of the Registrant....................................................39
Item 11. Executive Compensation................................................................................41
Summary Compensation Table.........................................................................41
Stock Option Plans.................................................................................42
Options/SAR Grants in Last Fiscal Year.............................................................42
Aggregated Options/SAR Exercises in Last Fiscal Year and Fiscal Year End Options/SAR Values........43
Pension Plan.......................................................................................43
Board Committees and Director Compensation.........................................................44
Directors Deferred Compensation Plan...............................................................45
Employment Contracts, Termination of Employment and Change-in-Control Arrangements.................46
Compensation Committee Interlocks and Insider Participation........................................47
Compensation Committee Report on Executive Compensation............................................47
Item 12. Security Ownership of Certain Beneficial Owners and Management........................................49
Item 13. Certain Relationships and Related Transactions........................................................50
Part IV
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K......................................51
Signatures......................................................................................................59
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Part I
Item 1. Description of Business
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General Hollywood Park, Inc. (the "Company" or "Hollywood Park") is a
diversified gaming company that owns and/or operates eight casinos, two pari-
mutuel horse racing facilities, and two card club casinos at locations in
Nevada, Mississippi, Louisiana, California, Arizona and Argentina. Hollywood
Park owns and operates, through its Boomtown, Inc. ("Boomtown") subsidiary,
land-based, dockside and riverboat gaming operations in Verdi, Nevada ("Boomtown
Reno"), Biloxi, Mississippi ("Boomtown Biloxi") and Harvey, Louisiana ("Boomtown
New Orleans"), respectively. As of the Company's October 15, 1998, acquisition
of Casino Magic Corp. ("Casino Magic"), Hollywood Park owns and operates
dockside gaming casinos in the cities of Bay St. Louis and Biloxi, Mississippi
("Casino Magic Bay St. Louis" and "Casino Magic Biloxi"); riverboat gaming in
Bossier City, Louisiana ("Casino Magic Bossier City"); and is a 51% partner in
two land-based casinos in Argentina ("Casino Magic Argentina"). Hollywood Park
also owns two card club casinos in California, both located in the Los Angeles
metropolitan area. The Hollywood Park-Casino is operated by the Company, and
located on the same property as the Hollywood Park Race Track. The Crystal Park
Hotel and Casino (the "Crystal Park Casino") is owned by the Company and is
leased to an unaffiliated operator. The Company's premier thoroughbred racing
facilities include the Hollywood Park Race Track, which the Company has owned
for 60 years, and Turf Paradise, Inc. ("Turf Paradise"), located in Phoenix,
Arizona. The Company is in the initial construction planning stages of a hotel
and casino resort in Indiana (the "Indiana Project"), after being approved to
receive the last available license to conduct riverboat gaming operations on the
Ohio River, on September 30, 1998.
Hollywood Park's strategic plan is to develop a broad base of regionally
diversified casino entertainment facilities by making selected acquisitions in
the non-Las Vegas, non-Atlantic City gaming markets and achieving economies of
scale. In the realization of this strategy, the Company acquired Boomtown on
June 30, 1997, and Casino Magic on October 15, 1998. Management seeks to
develop its casinos and maximize profitability by: (a) refinancing expensive
debt; (b) fostering customer loyalty by offering a value oriented, quality
customer service gaming experience; (c) providing gaming and entertainment
facilities uniquely designed for each property and targeted customer base; and
(d) using focused direct marketing incentives.
In January 1999, the Company strengthened its gaming management team by hiring
Paul Alanis as its President and Chief Operating Officer and J. Michael Allen as
Senior Vice President-Gaming Operations. Both Mr. Alanis and Mr. Allen held
similar positions with Horseshoe Gaming, Inc. Mr. Alanis and Mr. Allen were
hired to actively participate in the overall execution of the Company's business
and operating strategies including re-positioning the Boomtown and Casino Magic
properties and overseeing the construction and operations of the Indiana
Project.
The Company is the successor to the Hollywood Park Turf Club, organized in 1938,
incorporated in 1981 under the name Hollywood Park Realty Enterprises, Inc., and
in 1992, as part of a restructuring, renamed Hollywood Park, Inc. Hollywood
Park's active subsidiaries are as follows: (1) Hollywood Park Operating Company,
which has two wholly owned subsidiaries, Hollywood Park Food Services, Inc. and
Hollywood Park Fall Operating Company; (2) Turf Paradise, Inc.; (3) HP/Compton,
Inc.; (4) HP Casino, Inc.; (5) HP Yakama, Inc.; (6) HP Kansas, Inc.; and (7)
Boomtown, Inc., which has seven active subsidiaries: Boomtown Hotel & Casino,
Inc., Bayview Yacht Club, Inc., Mississippi - I Gaming, L.P., Louisiana Gaming
Enterprises, Inc., Louisiana - I Gaming, Pinnacle Gaming Development
Corporation, and Boomtown Hoosier, Inc.; and (8) Casino Magic Corp., which has
eleven active subsidiaries: Mardi Gras Casino Corp., Biloxi Casino Corp., Casino
Magic Finance Corp., Jefferson Casino Corporation, Casino Magic of Louisiana,
Corp., Casino Magic Neuquen S.A., Casino Magic Support Services S.A,; Casino
Magic American Corp., Casino Magic Management Services Corp., Casino One Corp.,
and Casino Magic Advertising, Inc. The Hollywood Park-Casino is a division of
Hollywood Park, Inc.
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The following is an overview of the Company's gaming properties:
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Number of
Gaming ---------------------------------------- Acreage
Square Slot Table Hotel Available For
Property Type of Gaming Footage Machines Games Rooms Development
-------- -------------- ------- -------- ----- ----- -----------
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Operating Properties:
Boomtown Reno Land-based 40,000 1,320 44 322 250
Boomtown New Orleans Cruising Riverboat 30,000 1,089 49 -- --
Boomtown Biloxi Dockside 33,630 1,308 35 -- --
Casino Magic Bay St. Louis Dockside 39,500 1,132 42 201 50
Casino Magic Biloxi Dockside 47,700 1,174 41 378 --
Casino Magic Bossier City Cruising Riverboat 30,000 980 44 188 --
Casino Magic Argentina (a) Land-based 29,500 473 56 -- --
Hollywood Park-Casino Card Club 30,000 -- 145 -- --
Crystal Park Casino (b) Card Club 30,000 -- 60 226 --
Hollywood Park Race Track Horse Racing -- -- -- -- 160
Turf Paradise Race Track Horse Racing -- -- -- -- 100
------- ----- --- ----- ---
Subtotal 310,330 7,476 516 1,315 560
Development Property:
Indiana Hotel/Casino (c) Cruising Riverboat 38,000 1,300 55 309 --
------- ----- --- ----- ---
Grand Total 348,330 8,776 571 1,624 560
======= ===== === ===== ===
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(a) There are two separate land-based casinos in Argentina, Casino Magic Neuqen
and Casino Magic San Martin de los Andes, collectively, Casino Magic
Argentina. The Company owns 51% of Casino Magic Argentina.
(b) The Company leases the Crystal Park Casino to an unaffiliated operator, for
a fixed monthly rent.
(c) The Company owns 97% of the Indiana Project.
Gaming Operations Boomtown, Inc. On June 30, 1997, pursuant to the Agreement
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and Plan of Merger dated as of April 23, 1996, by and among Hollywood Park, HP
Acquisition, Inc., (a wholly owned subsidiary of the Company), and Boomtown, HP
Acquisition, Inc. was merged with and into Boomtown (the "Boomtown Merger"). As
result of the Boomtown Merger, Boomtown became a wholly owned subsidiary of the
Company and each share of Boomtown common stock was converted into the right to
receive 0.625 of a share of Hollywood Park's common stock. Approximately
5,362,850 shares of Hollywood Park common stock, valued at $9.8125 per share
(excluding shares repurchased from Edward P. Roski, Jr. and subsequently
retired, as described below) were issued in the Boomtown Merger.
The Boomtown Merger was accounted for under the purchase method of accounting
for a business combination. The purchase price of the Boomtown Merger was
allocated to identifiable assets acquired and liabilities assumed based on their
estimated fair values at the date of acquisition. Based on financial analyses,
which considered the impact of general economic, financial and market conditions
on the assets acquired and the liabilities assumed, the estimated fair values
approximated their carrying values. The Boomtown Merger generated approximately
$15,302,000 of excess acquisition cost over the recorded value of the net assets
acquired, all of which was allocated to goodwill, which is being amortized over
40 years. The amortization of the goodwill is not deductible for income tax
purposes.
The Company acquired three of the four Boomtown properties; Boomtown Reno,
Boomtown New Orleans and Boomtown Biloxi. Boomtown's Las Vegas property was
divested following the Boomtown Merger on July 1, 1997. Boomtown and its
subsidiaries exchanged substantially all of their interest in the Las Vegas
property, including substantially all of the operating assets and notes
receivable of approximately $27,300,000 from the landowner/lessor of the Las
Vegas property, IVAC, a California general partnership of which Mr. Roski, a
former Boomtown director, is a general partner, for, among other things, two
unsecured notes receivable totaling approximately $8,465,000, cash, assumption
of certain liabilities and release from certain lease obligations. In addition,
concurrently with the divestiture of the Las Vegas property, Hollywood Park
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purchased and retired 446,491 shares of Hollywood Park common stock received by
Mr. Roski in the Boomtown Merger for a price of approximately $3,465,000,
payable in the form of a Hollywood Park promissory note.
Boomtown Reno has been operating for over 31 years on 569 acres in the rolling
foothills of the Sierra Nevada mountains, (current operations are utilizing
approximately 61 acres, with 250 acres available for development) in Verdi,
Nevada (just two miles from the California border and nine miles from downtown
Reno) on Interstate 80, the major highway connecting northern California and
Nevada. Boomtown Reno caters to middle-income customers and markets the
property as a gaming and entertainment establishment for the entire family. In
December 1998, Boomtown Reno held the grand opening of its new $25,000,000, 200
room hotel and gaming floor expansion and renovation. Boomtown Reno also
features, among other amenities, a truck stop, a recreational vehicle park, and
a full service gas station with a mini-mart.
Boomtown New Orleans opened in August 1994 on a 50 acre site in Harvey,
Louisiana, approximately ten miles from the French Quarter of New Orleans.
Prior to August 8, 1997, Boomtown New Orleans had a 7.5% minority interest
partner. On November 18, 1996, Boomtown entered into an agreement to buy out
the minority partner for $5,670,000, and as of August 8, 1997, the full payment
had been made.
Boomtown New Orleans conducts gaming on a riverboat, and as of mid-February
1998, operates on the Boomtown Belle II riverboat, purchased from Casino Magic
on September 25, 1997 for approximately $11,700,000. At 380 feet, Boomtown
Belle II is 130 feet longer than the previous riverboat and is 26 feet wider.
The gaming floors of Boomtown Belle II incorporate a more elegant decor,
including escalators to enhance patron traffic flow and allows for more spacious
gaming floors. Hollywood Park invested approximately $4,700,000 to renovate and
equip Boomtown Belle II. On July 1, 1998, Boomtown New Orleans opened its
$10,000,000 land-based expansion, The Great Escape, which is located on the
second floor of the land-based facility. The Great Escape is an adult oriented
dining and entertainment complex, featuring a 160 seat casual dining restaurant,
banquet facilities for up to 500 guests, and a state-of-the-art arcade style
amusement center. The first floor of the land-based facility houses a buffet
style restaurant and a bar/live music concert facility.
Boomtown Biloxi opened in July 1994 and occupies 19 acres on Mississippi's
historic Back Bay of the Mississippi Gulf Coast. Boomtown Biloxi had been
operating with a 15% minority interest partner, and on September 11, 1998, the
Company acquired the minority interest for $400,000. Boomtown Biloxi leases the
majority of the acreage under a 99 year lease. The Mississippi Gulf Coast is
marketed as the "Playground of the South" and has been a major tourist
destination, even prior to the advent of full casino gaming in 1992. Boomtown
Biloxi targets middle income local residents and offers a value oriented gaming
experience, including one of the best buffets in the Biloxi gaming market.
Casino Magic Corp. On October 15, 1998, Hollywood Park acquired Casino Magic,
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pursuant to the February 19, 1998 Agreement of Merger among Casino Magic Corp.,
Hollywood Park, Inc., and HP Acquisition II, Inc. (a wholly owned subsidiary of
Hollywood Park) (the "Casino Magic Merger"). Hollywood Park paid cash of
approximately $80,904,000 for Casino Magic's common stock. At the date of the
acquisition, Hollywood Park had purchased 792,900 common shares of Casino Magic,
on the open market, at a total cost of approximately $1,615,000. Hollywood Park
paid $2.27 per share for the remaining 34,929,224 Casino Magic common stock
outstanding.
The Casino Magic Merger was accounted for under the purchase method of
accounting for a business combination. The Company has performed a preliminary
purchase price allocation and will finalize this allocation in 1999. The
purchase price of the Casino Magic Merger was allocated to identifiable assets
acquired and liabilities assumed based on their estimated fair values at the
date of acquisition. Based on financial analyses, which considered the impact
of general economic, financial and market conditions on the assets acquired and
the liabilities assumed were, when found to be necessary, written up or down to
their fair market values. The Casino Magic Merger generated approximately
$43,284,000 of excess acquisition
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cost over the recorded value of the net assets acquired, all of which was
allocated to goodwill, to be amortized over 40 years. The amortization of the
goodwill is not deductible for income tax purposes.
On February 23, 1998, in conjunction with the Casino Magic Merger, Hollywood
Park entered into a voting agreement with Marlin F. Torguson pursuant to which,
among other things, Mr. Torguson agreed to vote the 7,954,500 shares of Casino
Magic common stock he beneficially owned in favor of approval and adoption of
the Agreement and Plan of Merger and the Casino Magic Merger, and any matter
that could reasonably be expected to facilitate the Casino Magic Merger. Mr.
Torguson also agreed to continue to serve as an employee of Casino Magic for
three years following the Casino Magic Merger, and to not compete with Hollywood
Park or Casino Magic in any jurisdictions in which either presently operates.
Casino Magic owns and operates dockside casinos in Bay St. Louis, Mississippi,
and Biloxi, Mississippi, riverboat gaming in Bossier City, Louisiana, and is a
51% partner in two land-based casinos in Argentina.
Casino Magic Bay St. Louis, began operations in September 1992, on a permanently
moored barge in a 17 acre marina with the adjoining land-based facilities
situated on 591 acres. Bay St. Louis is approximately 46 miles east of New
Orleans and 40 miles west of Biloxi. The three story land-based building houses
a restaurant, buffet, snack bar, gift shop, and a live entertainment lounge.
The property has a 201 room hotel, an 1,800 seat arena for concerts and sporting
events, and is the only Casino in the Gulf Coast market with an 18-hole
championship golf course on the same property as the gaming facility. There are
approximately 50 acres at the site that are available for development.
Casino Magic Biloxi is located in the Mississippi Gulf Coast market, and began
operations in June 1993. The property is situated on the Front Bay on the beach
of the Gulf of Mexico in a strip with two other casinos, and is located on the
major highway running through the Mississippi Gulf Coast, whereas, Boomtown
Biloxi is located on the Back Bay of Biloxi. Casino Magic Biloxi conducts
gaming from a permanently moored barge. The land-based facility is located
adjacent to the barge on the approximately 11.5 acre site. On May 1, 1998,
Casino Magic Biloxi opened its 378 room luxury hotel, which includes 16
individually themed master suites, 70 junior suites, 6,600 square feet of
convention and meeting space, a full service restaurant and retail shops.
Casino Magic Biloxi's land-based facility offers buffets, and a fine dining
restaurant.
Casino Magic Bossier City opened in October 1996, with casino operations
conducted from a dockside riverboat, on 23 acres of land. The property is
highly visible from, and has convenient access to Interstate Highway 20, a major
thoroughfare between Bossier City/Shreveport and the Dallas-Fort Worth area,
approximately 180 miles to the west. In December 1998, Casino Magic Bossier
City opened its 188 room luxury hotel, with four master suites, 88 junior suites
and additional full service restaurants. The Casino Magic Bossier facility
includes a 55,000 square foot entertainment pavilion which includes the 350 seat
Abracadabra buffet restaurant, a gift shop, a bar and lounge area, and a 300
seat live entertainment theater. The entertainment pavilion also includes two
smaller full service restaurants.
In December 1994, Casino Magic, through its wholly owned subsidiary, Casino
Magic Neuquen S.A., entered into a twelve year concession agreement with the
Province of Neuquen, Argentina. Casino Magic Argentina owns 51% of and operates
two casinos in the Province of Neuquen in the cities of Neuquen and San Martin
de los Andes in west-central Argentina. Neuquen Province is the gateway to the
well established tour destinations and ski resorts of the Andes Mountains.
There are approximately 900,000 residents within a 50 mile radius of the two
cities.
Hollywood Park-Casino The Hollywood Park-Casino is located in Inglewood,
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California on the same premises as the Hollywood Park Race Track. By law, a
California card club casino may neither bank card games nor offer certain of the
familiar card games permitted in Nevada and other traditional gaming
jurisdictions, and thus does not participate in the wagers made or in the
outcome of any of the games played. Instead, the Hollywood Park-Casino offers
only certain forms of card games, including Poker, Pai Gow and California
Blackjack. Patrons pay a fee for each hand played, or a fee for seats at gaming
tables. Players bet solely
4
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against each other. Revenues are also derived from food and beverage sales,
rental of facilities for bingo, gift shops and health club operations.
As of January 1, 1998's enactment of Senate Bill 8, Hollywood Park was able to
operate the Hollywood Park-Casino indefinitely. Under the previous law, as of
January 1, 1999, Hollywood Park would not have been able to operate the
Hollywood Park-Casino and would have had to lease the property, as is the case
with the Crystal Park Casino.
The Crystal Park Casino The Crystal Park Casino, located in Compton, California
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opened on October 25, 1996. As of December 31, 1997, Hollywood Park owned 100%
of Crystal Park Hotel and Casino Development Company, LLC ("Crystal Park LLC"),
the entity that owns the Crystal Park Casino. In December 1997, Hollywood Park
paid $1,000,000 (or the initial amount the member contributed) for 3.4% of
Crystal Park LLC and in February 1998, paid an additional $2,000,000 (or the
initial amount the member contributed) for the remaining outstanding 6.8% of
Crystal Park LLC in a transaction with an effective date of December 31, 1997.
Current California law does not allow publicly traded companies, such as
Hollywood Park, to operate a card club casino (other than on the same premises
as a race track); therefore, Crystal Park LLC leases the facility to California
Casino Management, Inc. ("CCM") under a 48 month, triple net lease executed on
December 19, 1997. Rent due under the lease was scheduled to increase as of
July 1, 1998, but under present market conditions, will be $100,000 per month,
for the foreseeable future. Previously, the Crystal Park Casino was under lease
to Compton Entertainment, Inc. ("CEI"). On November 4, 1997, Crystal Park LLC
obtained a judgment in an action for unlawful detainer against CEI, due to CEI's
failure to pay a portion of the June 1997 rent and to make required additional
rent payments. In October 1997, the California Attorney General revoked CEI's
conditional gaming registration, and the City of Compton revoked CEI's city
gaming license. CEI closed the Crystal Park Casino on October 11, 1997. CCM
reopened the Crystal Park Casino on December 26, 1997.
Under the lease with CCM, if California law is changed to allow Hollywood Park
to operate the Crystal Park Casino, Crystal Park LLC will operate the property
in a partnership with CCM, with Crystal Park LLC owning 90% of the business.
Hollywood Park Race Track With pari-mutuel wagering, patrons bet against each
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other in a pool rather than against the operator of the facility or with pre-set
odds. Revenues are also derived from concession sales, admissions and program
sales.
The Hollywood Park Race Track, located in Inglewood, California, conducts two
live on-track thoroughbred horse race meets per year. Race dates must be
applied for on an annual basis from the California Horse Racing Board (the
"CHRB"). The 1998 live Spring/Summer Meet ran for thirteen weeks, for a total
of 66 race days and the live Autumn Meeting ran for six weeks, for a total of 31
race days. Live races run Wednesday through Sunday, usually with nine live
races a day. The Company also sends the signal of its live races off-track to
other locations including fairgrounds, other race tracks, hotels and casinos.
In total, the Company simulcasts its live races to up to 1,000 locations in 40
states and four countries. The Company also accepts the simulcast signal from
live races conducted at other race tracks, including the four local southern
California tracks, and two northern California tracks. In September 1998,
legislation was passed which removed prior restrictions and allowed the Company
to increase the number of simulcast races it can accept from out of state race
tracks. The new legislation also provided annual license fee (or tax) relief on
pari-mutuel wagers made on thoroughbred races in California. The Company
receives a lower pari-mutuel commission rate on simulcast races, compared to
live races.
Hollywood Park derives racing revenues from a share of the pari-mutuel handle at
rates fixed by the state of California. Pari-mutuel commission rates were as
follows for 1998: live races, on-track 6.7%, live races, off-track range from
1.6% to 4.5%, simulcast races taken from other race tracks range from 2.0% to
6.8%.
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Turf Paradise Race Track Turf Paradise, located in Phoenix, Arizona, has one
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continuous live thoroughbred meet that starts in September and runs through May.
In 1998, Turf Paradise raced live for the period January 1 through May 3,
operated as a simulcast facility for the period from May 4 through May 21, and
for the period from September 9 through October 1. Turf Paradise resumed live
racing on October 3 running through December 31. Live racing is primarily
conducted Friday through Tuesday, with live races simulcast to approximately 45
off-track sites in Arizona. The live racing signal is also simulcast to
approximately 45 out-of-state hubs, from which the signal is further
disseminated to approximately 500 sites in four countries.
At Turf Paradise, the state of Arizona fixes the pari-mutuel percentage
commissions for on-track, and within the state off-track racing as follows:
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Win, Place, Two-Horse Three or More
Show Pool Horse Pool
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<S> <C> <C> <C>
Live in-state handle 18% 19% 23%
Simulcast in-state handle 20% 21% 25%
</TABLE>
Turf Paradise also receives approximately 2.0% to 3.5% of the out-of-state, off-
track pari-mutuel handle wagered on its live races. When operating as a
simulcast facility for the smaller northern Arizona race tracks, Turf Paradise
receives 3.8% of the pari-mutuel handle generated at Turf Paradise.
Sunflower Sunflower Racing, Inc. ("Sunflower") previously owned the Woodlands
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Race Track located in Kansas City, Kansas. On May 17, 1996, Sunflower filed for
reorganization under Chapter 11 of the Bankruptcy Code. On March 31, 1996,
Hollywood Park recorded a non-cash write off of its approximately $11,412,000
investment in Sunflower. In April 1998, the courts rejected Sunflower's plan of
reorganization. On June 4, 1998, the bankruptcy court converted Sunflower's
case from Chapter 11 to Chapter 7, and appointed a trustee to administer the
assets of Sunflower. Sunflower is no longer operational. In December 1998, the
court entered an order authorizing the sale of substantially all of Sunflower's
assets, including the Woodlands Race Track to Kansas Racing LLC, a Kansas
limited liability company.
Other Gaming Hollywood Park, through its wholly owned subsidiary HP Yakama,
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Inc. ("HP Yakama") loaned approximately $9,618,000 to the Tribal Gaming
Corporation (the "Tribal Corporation") to construct the Legends Casino. The
Tribal Corporation gave HP Yakama a promissory note for the $9,618,000, payable
in 84 equal installments at a 10% rate of interest.
Pursuant to a seven year Master Lease between HP Yakama and the Confederated
Tribes and Bands of the Yakama Indian Nation (the "Tribes"), HP Yakama must pay
the Tribes monthly rent of $1,000. HP Yakama and the Tribal Corporation entered
into a corresponding seven year Sublease, under which the Tribal Corporation
owes rent to HP Yakama. Rent under the Sublease was initially set at 28% of Net
Revenues (as defined in the relevant agreements), and decreases to 22% over the
seven year term of the lease.
Under the terms of a Profit Participation Agreement with North American Sports
Management ("NORAM") (who entered into the initial agreements with the Tribal
Corporation and the Tribes), HP Yakama is required to pay NORAM 22% of the
actual rent received under the Sublease.
General All of the Company's properties in Mississippi and Louisiana are
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dependent upon attracting customers within their respective geographical
markets. With the acquisitions of Boomtown and Casino Magic, the Company has
three casinos in Mississippi, two in Biloxi and one in nearby Bay St. Louis, and
two casinos in Louisiana, one in Bossier City and one in Harvey, near New
Orleans (the Louisiana properties are located 320 miles apart). There can be no
assurance that the Company will be able to continue to attract a sufficient
number of customers necessary to make its operations profitable. In addition,
adverse regulatory changes or changes in the gaming environment in Mississippi
and Louisiana could have a materially adverse effect on the Company's
operations.
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The Company's riverboat and dockside gaming facilities in Mississippi and
Louisiana, as well as any additional riverboats that might be developed or
acquired, such as the Indiana Project, are subject to risks in addition to those
associated with land-based casinos, including loss of service due to casualty,
mechanical failure, extended or extraordinary maintenance, flood, hurricane or
other severe weather conditions. For cruising riverboats there are additional
risks associated with the movement of vessels on waterways, including risks of
casualty due to river turbulence and severe weather conditions.
In September 1998, a hurricane struck the Gulf Coast region and Boomtown Biloxi,
Boomtown New Orleans, Casino Magic Biloxi, and Casino Magic Bay St. Louis were
forced to shut down operations for approximately one week, though none of the
properties sustained significant damage. If any of the Company's casinos, be it
riverboat, dockside or land-based cease operations for any period of time, it
could adversely affect the Company's results of operations.
Mississippi Anti-Gaming Initiative In 1998, two referenda were proposed which,
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if approved, would have amended the Mississippi Constitution to ban gaming in
Mississippi and would have required all currently legal gaming entities to cease
operations within two years of the ban. A Mississippi State Circuit Court judge
ruled that the first of the proposed referenda was illegal because, among other
reasons, it failed to include required information regarding its anticipated
effect on government revenues. The Mississippi Supreme Court affirmed the
Circuit Court ruling, but only on procedural grounds. The second referendum
proposal included the same language on government revenues as the first
referendum and was struck down by another Mississippi State Circuit Court judge
on the same grounds as the first.
On March 22, 1999, another such referendum was filed with the Mississippi
Secretary of State. The language of this most recent proposal also fails to
include information regarding its anticipated effect on government revenues and
may be subject to legal challenge on the same basis that the two previous
proposals were successfully challenged. Any such referendum must be approved by
the Mississippi Secretary of State and signatures of approximately 98,000
registered voters must be gathered and certified in order for such a proposal to
be included on a statewide ballot for consideration by the voters. The next
election, for which the proponents could attempt such a proposal on the ballot,
would be November 2000. It is likely at some point that a revised initiative
will be filed which would adequately address the issues regarding the effect on
government revenues of prohibition of gaming in Mississippi. However, while it
is too early in the process for the Company to make any predictions with respect
to whether such a referendum will appear on a ballot or the likelihood of such a
referendum being approved by the voters, if such a referendum were passed and
gaming were prohibited in Mississippi, it would have a materially adverse effect
on the Company.
Expansion Plans During 1998, Hollywood Park continued to actively pursue all
aspects of its strategic plan. The acquisition of Casino Magic was finalized on
October 15, 1998, with debt refinancing and major asset investments for the
benefit of the Casino Magic properties starting immediately thereafter.
The following is a summary of the property enhancements and the financial
restructuring projects that Hollywood Park undertook with respect to its
Boomtown and Casino Magic properties, as part of its overall acquisition
strategy.
Boomtown Reno The $25,000,000 expansion and renovation of Boomtown Reno was
- -------------
essentially completed as of December 1998. The 200 room hotel addition opened
and the majority of the gaming floor renovations have been completed.
Boomtown New Orleans Prior to August 8, 1997, Boomtown New Orleans had a 7.5%
- --------------------
minority interest partner. On November 18, 1996, Boomtown entered into an
agreement to buy out the minority partner for $5,670,000, and as of August 8,
1997, the full payment had been made.
On September 25, 1997, Hollywood Park purchased the Boomtown Belle II riverboat
from Casino Magic for approximately $11,700,000. Boomtown Belle II is 130 feet
longer and 26 feet wider than the previous riverboat. The gaming floors of
Boomtown Belle II incorporate a more elegant decor, including escalators to
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enhance patron traffic flow and allows for more spacious gaming floors.
Boomtown Belle II also includes a third deck with 5,000 square feet of banquet
or special use facilities. Hollywood Park invested approximately $4,700,000 to
renovate and equip Boomtown Belle II. On July 1, 1998, Boomtown New Orleans
opened its $10,000,000 land-based expansion; the Great Escape, which is located
on the second floor of the facility. The Great Escape is an adult oriented
dining and entertainment complex, with banquet and meeting facilities.
Boomtown Biloxi Boomtown Biloxi had been operating as a partnership, of which
- ---------------
Hollywood Park, through two wholly owned subsidiaries owned 85%, with 15% owned
by a limited partner. On September 11, 1998, Hollywood Park (through its
Boomtown, Inc. subsidiary), purchased the 15% minority interest for $400,000.
On August 4, 1997, Hollywood Park executed an agreement to purchase the barge
upon which the Boomtown Biloxi casino sits along with the associated building
shell for $5,250,000. Boomtown Biloxi had been leasing these assets. Boomtown
Biloxi executed a promissory note for the purchase, calling for four equal
annual principal payments, payable on the anniversary of the agreement. As of
December 31, 1998, the Company had two payments remaining.
In October 1997, Boomtown Biloxi exercised its option to purchase for $1,000,000
a half-acre parcel adjacent to the existing property, which is currently used
for valet parking, and may be used for other expansion opportunities in the
future.
Boomtown Corporate On July 3, 1997, Boomtown repurchased and retired
- ------------------
essentially all of its outstanding $103,500,000 11.5% First Mortgage Notes. In
June 1998, the Company called the remaining outstanding 11.5% First Mortgage
Notes, for a cash payment of $1,378,000.
Casino Magic Bossier City Hollywood Park provided the funds to accelerate the
- -------------------------
$21,000,000 construction of Casino Magic Bossier City's 188 room luxury hotel,
which opened in December 1998.
Casino Magic Corporate On October 15, 1998, Casino Magic redeemed its
- ----------------------
$135,000,000 11.5% First Mortgage Notes at 103.833%, at a total cost of
approximately $141,515,000.
Other Possible Expansion Projects The Company is presently evaluating the
- ---------------------------------
following projects: (a) renovation of the casino gaming area and related
amenities at Casino Magic Biloxi; (b) future development of the property at
Casino Magic Bay St. Louis; and (c) construction of an additional hotel tower at
Casino Magic Bossier City, (if the operating results of the recently opened 188
room addition support the expansion).
Indiana Hotel and Casino Resort On September 14, 1998, the Indiana Gaming
- -------------------------------
Commission approved the Company to receive the last available license to conduct
riverboat gaming operations on the Ohio River in Indiana. The application was
originally filed under a joint venture between the Company and Hilton Gaming
Corporation ("Hilton"). On May 6, 1998, Hollywood Park and Hilton agreed that
the Company would acquire Hilton's interest in the joint venture, and Hilton
withdrew as an applicant. Hollywood Park paid Hilton approximately $750,000 in
exchange for Hilton's interest. Hollywood Park owns 97% of the Indiana Project,
with the remaining 3% held by a non-voting local partner.
The Indiana Project will be located in the City of Vevay, in Switzerland county,
which is approximately 35 miles southwest of Cincinnati, Ohio and will be the
gaming site most readily accessible to northern Kentucky, including the city of
Lexington.
The Company plans to spend approximately $150,000,000 (exclusive of capitalized
interest) on the Indiana Project which will include a new riverboat, a 300 room
luxury hotel, a golf course, convention center, restaurants and related
amenities. It is expected that the Indiana Project will take approximately 18
to 24 months to complete; however there can be no assurance that construction or
other issues will not delay the opening.
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There can be no assurance that the Company will be successful in completing any
currently contemplated or future expansion projects or, even if they are
completed, that the projects will be successful. Numerous factors, including
regulatory or financial constraints, could intervene and cause the Company to
alter, delay or abandon expansion plans. Such risks include an inability to
secure required financing and required local gaming approvals and other permits
and approvals, as well as risks typically associated with any construction
project, including possible shortages of materials or skilled labor, unforeseen
engineering, environmental or geological problems, work stoppages, weather
interference and unanticipated costs overruns. In addition, the Company is
subject to state and local laws and regulations, ordinances and similar
provisions relating to zoning and other matters that may restrict the possible
uses of the Company's land and other assets. Any additional development of the
Company's land, including the expansion plans described above, would require
approval of such items as environmental impact reports and similar
certifications. There can be no assurance that other requisite approvals would
be obtained.
Government Regulation Louisiana The ownership and operation of a riverboat
---------
gaming vessel is subject to the Louisiana Riverboat Economic Development and
Gaming Control Act (the "Louisiana Act"). As of May 1, 1996, gaming activities
are regulated by the Louisiana Gaming Control Board (the "Board"). The Board is
responsible for issuing the gaming license and enforcing the laws, rules and
regulations relative to riverboat gaming activities. The Board is empowered to
issue up to fifteen licenses to conduct gaming activities on a riverboat of new
construction in accordance with applicable law. However, no more than six
licenses may be granted to riverboats operating from any one parish.
An initial license to conduct gaming operations is valid for a term of five
years. The Louisiana Act provides for successive one year renewals after the
initial five year term.
The laws and regulations of Louisiana seek to (i) prevent unsavory or unsuitable
persons from having any direct or indirect involvement with gaming at any time
or in any capacity; (ii) establish and maintain responsible accounting practices
and procedures; (iii) maintain effective control over the financial practices of
licensees, including establishing procedures for reliable record keeping and
making periodic reports to the Board; (iv) prevent cheating and fraudulent
practices; (v) provide a source of state and local revenues through fees; and
(vi) ensure that gaming licensees, to the extent practicable, employ and
contract with Louisiana residents, women and minorities.
The Louisiana Act specifies certain restrictions and conditions relating to the
operation of riverboat gaming, including but not limited to the following: (i)
in parishes bordering the Red River, such as the Company's Casino Magic property
in Bossier, gaming may be conducted dockside; however, in all other authorized
locations such as Boomtown New Orleans, gaming is not permitted while a
riverboat is docked, other than for forty-five minutes between excursions,
unless dangerous weather or water conditions exist; (ii) each round trip
riverboat cruise may not be less than three nor more than eight hours in
duration, subject to specified exceptions; (iii) agents of the Board are
permitted on board at any time during gaming operations; (iv) gaming devices,
equipment and supplies may be purchased or leased from permitted suppliers; (v)
gaming may only take place in the designated river or waterway; (vi) gaming
equipment may not be possessed, maintained, or exhibited by any person on a
riverboat except in the specifically designated gaming area, or a secure area
used for inspection, repair, or storage of such equipment; (vii) wagers may be
received only from a person present on a licensed riverboat; (viii) persons
under 21 are not permitted in designated gaming areas; (ix) except for slot
machine play, wagers may be made only with tokens, chips, or electronic cards
purchased from the licensee aboard a riverboat; (x) licensees may only use
docking facilities and routes for which they are licensed and may only board and
discharge passengers at the riverboat's licensed berth; (xi) licensees must have
adequate protection and indemnity insurance; (xii) licensees must have all
necessary federal and state licenses, certificates and other regulatory
approvals prior to operating a riverboat; and (xiii) gaming may only be
conducted in accordance with the terms of the license and the rules and
regulations adopted by the Board.
No person may receive any percentage of the profits from the Company's
operations in Louisiana without first being found suitable. In March 1994,
Boomtown New Orleans, its officers, key personnel, partners and
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persons holding a 5% or greater interest in the partnership were found suitable
by the predecessor to the Board. In April 1996, the Board's predecessor
confirmed that Casino Magic Bossier's officers, key personnel, partners and
persons holding a 5% or greater interest in the corporation were suitable and
authorized to acquire an existing licensee. A gaming license is deemed to be a
privilege under Louisiana law and as such may be denied, revoked, suspended,
conditioned or limited at any time by the Board. In issuing a license, the Board
must find that the applicant is a person of good character, honesty and
integrity and the applicant is a person whose prior activities, criminal record,
if any, reputation, habits and associations do not pose a threat to the public
interest of the State of Louisiana or to the effective regulation and control of
gaming, or create or enhance the dangers of unsuitable, unfair or illegal
practices, methods, and activities in the conduct of gaming or the carrying on
of business and financial arrangements in connection therewith. The Board will
not grant any licenses unless it finds that: (i) the applicant is capable of
conducting gaming operations, which means that the applicant can demonstrate the
capability, either through training, education, business experience, or a
combination of the above, to operate a gaming casino; (ii) the proposed
financing of the riverboat and the gaming operations is adequate for the nature
of the proposed operation and from a source suitable and acceptable to the
Board; (iii) the applicant demonstrates a proven ability to operate a vessel of
comparable size, capacity and complexity to a riverboat in its application for a
license; (v) the applicant designates the docking facilities to be used by the
riverboat; (vi) the applicant shows adequate financial ability to construct and
maintain a riverboat; (vii) the applicant has a good faith plan to recruit,
train and upgrade minorities in all employment classifications; and (viii) the
applicant is of good moral character.
The Board may not award a license to any applicant who fails to provide
information and documentation to reveal any fact material to qualifications or
who supplies information which is untrue or misleading as to a material fact
pertaining to the qualification criteria; who has been convicted of or pled nolo
contendere to an offense punishable by imprisonment of more than one year; who
is currently being prosecuted for or regarding whom charges are pending in any
jurisdiction of an offense punishable by more than one year imprisonment; if any
holder of 5% or more in the profits and losses of the applicant has been
convicted of or pled guilty or nolo contendere to an offense which at the time
of conviction is punishable as a felony.
The transfer of a license is prohibited. The sale, assignment, transfer,
pledge, or disposition of securities which represent 5% or more of the total
outstanding shares issued by a holder of a license is subject to prior Board
approval. A security issued by a holder of a license must generally disclose
these restrictions.
Section 2501 of the regulations enacted by the Louisiana State Police Riverboat
Gaming Division pursuant to the Louisiana Act (the "Regulations") requires prior
written approval of the Board of all persons involved in the sale, purchase,
assignment, lease, grant or foreclosure of a security interest, hypothecation,
transfer, conveyance or acquisition of an ownership interest (other than in a
corporation) or economic interest of five percent (5%) or more in any licensee.
Section 2523 of the Regulations requires notification to and prior approval from
the Board of the (a) application for, receipt, acceptance or modification of a
loan, or the (b) use of any cash, property, credit, loan or line of credit, or
the (c) guarantee or granting of other forms of security for a loan by a
licensee or person acting on a licensee's behalf. Exceptions to prior written
approval include without limitation to any transaction for less than $2,500,000
in which all of the lending institutions are federally regulated, the
transaction modifies the terms of an existing, previously approved loan
transaction, or if the transaction involves publicly registered debt and
securities sold pursuant to a firm underwriting agreement.
The failure of a licensee to comply with the requirements set forth above may
result in the suspension or revocation of that licensee's gaming license.
Additionally, if the Board finds that the individual owner or holder of a
security of a corporate license or intermediary company or any person with an
economic interest in a licensee is not qualified under the Louisiana Act, the
Board may require, under penalty of suspension or revocation of the license,
that the person not (a) receive dividends or interest on securities of the
corporation, (b) exercise directly or indirectly a right conferred by securities
of the corporation, (c) receive remuneration or economic benefit from the
licensee, or (d) continue in an ownership or economic interest in the licensee.
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A licensee must periodically report the following information to the Board,
which is not confidential and is to be available for public inspection: the
licensee's net gaming proceeds from all authorized games; the amount of net
gaming proceeds tax paid; and all quarterly and annual financial statements
presenting historical data that are submitted to the Board, including annual
financial statements that have been audited by an independent certified public
accountant.
The Louisiana Act restricts gaming space on riverboats to no more than 30,000
square feet. The Board has adopted rules governing the method for approval of
the area of operations and the rules and odds of authorized games and devices
permitted, and prescribing grounds and procedures for the revocation, limitation
or suspension of licenses and permits.
On April 19, 1996, the Louisiana legislature adopted legislation requiring
statewide local elections on a parish-by-parish basis to determine whether to
prohibit or continue to permit licensed riverboat gaming, licensed video poker
gaming, and licensed land-based gaming in Orleans Parish. The applicable local
election took place on November 5, 1996, and the voters in the parishes of
Boomtown New Orleans and Casino Magic Bossier voted to continue licensed
riverboat and video poker gaming. However, it is noteworthy that the current
legislation does not provide for any moratorium on future local elections on
gaming.
Fees to the state of Louisiana for conducting gaming activities on a riverboat
include (i) $50,000 per riverboat for the first year of operation and $100,000
per year, per riverboat thereafter, plus (ii) 18.5% of net gaming proceeds.
Mississippi The ownership and operation of casino facilities in Mississippi are
- -----------
subject to extensive state and local regulation, but primarily the licensing and
regulatory control of the Mississippi Gaming Commission (the "Mississippi
Commission") and the Mississippi State Tax Commission (the "Mississippi Gaming
Authorities").
The Mississippi Gaming Control Act (the "Mississippi Act"), which legalized
dockside casino gaming in Mississippi, was enacted June 29, 1990. Although not
identical, the Mississippi Act is similar to the Nevada Gaming Control Act. The
Mississippi Commission adopted regulations which are also similar in many
respects to the Nevada gaming regulations.
The laws, regulations and supervisory procedures of Mississippi and the
Mississippi Commission seek to: (i) prevent unsavory or unsuitable persons from
having any direct or indirect involvement with gaming at any time or in any
capacity; (ii) establish and maintain responsible accounting practices and
procedures; (iii) maintain effective control over the financial practices of
licensees, including establishing minimum procedures for internal fiscal affairs
and safeguarding of assets and revenues, providing reliable record keeping and
making periodic reports to the Mississippi Commission; (iv) prevent cheating and
fraudulent practices; (v) provide a source of state and local revenues through
taxation and licensing fees; and (vi) ensure that gaming licensees, to the
extent practicable, employ Mississippi residents. The regulations are subject
to amendment and interpretation by the Mississippi Commission. Changes in
Mississippi laws or regulations may limit or otherwise materially affect the
types of gaming that may be conducted and such changes, if enacted, could have
an adverse effect on the Company and the Company's Mississippi gaming
operations.
The Mississippi Act provides for legalized dockside gaming at the discretion of
the fourteen counties that border the Gulf Coast or the Mississippi River, but
only if the voters in such counties have not voted to prohibit gaming in that
county. During 1998, certain anti-gaming groups proposed for adoption through
the initiative and referendum process certain amendments to the Mississippi
Constitution which would prohibit gaming in the state. The proposals were
declared illegal by Mississippi courts on constitutional and procedural grounds.
If another such proposal were to be offered and if a sufficient number of
signatures were to be gathered to place a legal initiative on the ballot, it is
possible for the voters of Mississippi to consider such a proposal in November
of 2000. As of January 1, 1999, dockside gaming was permissible in nine of the
fourteen eligible counties in the state and gaming operations had commenced in
Adams, Coahoma, Hancock, Harrison, Tunica, Warren and Washington counties.
Under Mississippi law, gaming vessels must be located on the Mississippi River
or on navigable waters in eligible counties along the Mississippi River or in
11
<PAGE>
the waters lying south of the counties along the Mississippi Gulf Coast. The
law permits unlimited stakes gaming on permanently moored vessels on a 24-hour
basis and does not restrict the percentage of space which may be utilized for
gaming. There are no limitations on the number of gaming licenses which may be
issued in Mississippi.
The Mississippi Act permits substantially all traditional casino games and
gaming devices, and, on August 11, 1997, a Mississippi Circuit Court judge
issued a ruling that the Mississippi Act permits race books on the premises of
licensed casinos. The Mississippi Commission appealed the decision to the
Mississippi Supreme Court, which has not yet rendered a decision.
The Company and any subsidiary of the Company (or partnership in which the
subsidiary is a partner) that operates a casino in Mississippi (a "Mississippi
Gaming Subsidiary"), is subject to the licensing and regulatory control of the
Mississippi Commission. The Company must be registered under the Mississippi
Act as a publicly traded holding company for the Mississippi Gaming Subsidiaries
and is required periodically to submit detailed financial and operating reports
to the Mississippi Commission and furnish any other information which the
Mississippi Commission may require. If the Company is unable to continue to
satisfy the registration requirements of the Mississippi Act, the Company and
its Mississippi Gaming Subsidiaries cannot own or operate gaming facilities in
Mississippi.
Each Mississippi Gaming Subsidiary must maintain a gaming license from the
Mississippi Commission to operate a casino in Mississippi. Such licenses are
issued by the Mississippi Commission subject to certain conditions, including
continued compliance with all applicable state laws and regulations. Gaming
licenses are not transferable, are issued for a two-year period and must be
renewed periodically thereafter. Boomtown Biloxi's license must be renewed in
July of 2000, Casino Magic Bay St. Louis's license must be renewed in April of
2000, and Casino Magic Biloxi's license must be renewed in December of 2000. No
person may become a stockholder of or receive any percentage of profits from a
licensed subsidiary of a registered holding company without first obtaining
licenses and approvals from the Mississippi Commission. The Company has
obtained such approvals in connection with the licensing of its Mississippi
Gaming Subsidiaries, and the registration of the Company as a publicly-traded
holding company.
Certain officers and employees of the Company and the officers, directors and
certain key employees of the Company's Mississippi Gaming Subsidiaries must be
found suitable to be licensed by the Mississippi Commission. The Company
believes that it has obtained, applied for or is in the process of applying for
all necessary findings of suitability with respect to such persons associated
with the Company or its Mississippi Gaming Subsidiaries, although the
Mississippi Commission in its discretion may require additional persons to file
applications for findings of suitability. In addition, any person having a
material relationship or involvement with the Company may be required to be
found suitable, in which case those persons must pay the costs and fees
associated with such investigation. The Mississippi Commission may deny an
application for a finding of suitability for any cause that it deems reasonable.
Changes in certain licensed positions must be reported to the Mississippi
Commission. In addition to its authority to deny an application for a finding
of suitability, the Mississippi Commission has jurisdiction to disapprove a
change in a person's corporate position or title and such changes must be
reported to the Mississippi Commission. The Mississippi Commission has the
power to require any Mississippi Gaming Subsidiary and the Company to suspend or
dismiss officers, directors and other key employees or sever relationships with
other persons who refuse to file appropriate applications or whom the
authorities find unsuitable to act in such capacities.
Employees associated with gaming must obtain work permits that are subject to
immediate suspension under certain circumstances. The Mississippi Commission
shall refuse to issue a work permit to a person convicted of a felony and it may
refuse to issue a work permit to a gaming employee if the employee has committed
certain misdemeanors, or knowingly violated the Mississippi Act, or for any
other reasonable cause.
At any time, the Mississippi Commission has the power to investigate and require
the finding of suitability of any record or beneficial stockholder of the
Company. Mississippi law requires any person who acquires
12
<PAGE>
more than 5% of the common stock of a publicly traded corporation registered
with the Mississippi Commission to report the acquisition to the Mississippi
Commission, and such person may be required to be found suitable. Also, any
person who becomes a beneficial owner of more than 10% of the common stock of
such a company, as reported to the Securities and Exchange Commission, must
apply for a finding of suitability by the Mississippi Commission and must pay
the costs and fees that the Mississippi Commission incurs in conducting the
investigation. The Mississippi Commission has generally exercised its discretion
to require a finding of suitability of any beneficial owner of more than 5% of a
registered publicly-traded holding company's common stock. However, the
Mississippi Commission has adopted a policy that permits certain institutional
investors to own beneficially up to 10% of a registered public company's common
stock without a finding of suitability. If a stockholder who must be found
suitable is a corporation, partnership or trust, it must submit detailed
business and financial information, including a list of beneficial owners.
Any person who fails or refuses to apply for a finding of suitability or a
license within 30 days after being ordered to do so by the Mississippi
Commission may be found unsuitable. The same restrictions apply to a record
owner, if the record owner, after request, fails to identify the beneficial
owner. Management believes that compliance by the Company with the licensing
procedures and regulatory requirements of the Mississippi Commission will not
affect the marketability of the Company's securities. Any person found
unsuitable and who holds, directly or indirectly, any beneficial ownership of
the securities of the Company beyond such time as the Mississippi Commission
prescribes, may be guilty of a misdemeanor. The Company is subject to
disciplinary action if, after receiving notice that a person is unsuitable to be
a stockholder or to have any other relationship with the Company or its
Mississippi Gaming Subsidiaries, the Company: (i) pays the unsuitable person
any dividend or other distribution upon the voting securities of the Company;
(ii) recognizes the exercise, directly or indirectly, of any voting rights
conferred by securities of the Company held by the unsuitable person; (iii) pays
the unsuitable person any remuneration in any form for services rendered or
otherwise, except in certain limited and specific circumstances; or (iv) fails
to pursue all lawful efforts to require the unsuitable person to divest himself
of the securities, including, if necessary, the immediate purchase of the
securities for cash at a fair market value.
The Company may be required to disclose to the Mississippi Commission upon
request the identities of the holders of any of the Company's debt or other
securities. In addition, under the Mississippi Act the Mississippi Commission
may, in its discretion, (i) require holders of securities of registered
corporations, including debt securities such as the 9.5% Notes and the 9.25%
Notes, to file applications, (ii) investigate such holders, and (iii) require
such holders to be found suitable to own such securities. If the Mississippi
Commission determines that a person is unsuitable to own such security, then the
issuer may be sanctioned, including the loss of its approvals, if without the
prior approval of the Mississippi Commission, it (i) pays to the unsuitable
person any dividend, interest, or any distribution whatsoever; (ii) recognizes
any voting right by such unsuitable person in connection with such securities;
(iii) pays the unsuitable person remuneration in any form; or (iv) makes any
payment to the unsuitable person by way of principal, redemption, conversion,
exchange, liquidation, or similar transaction. Although the Mississippi
Commission generally does not require the individual holders of obligations such
as the Notes to be investigated and found suitable, the Mississippi Commission
retains the discretion to do so for any reason, including but not limited to a
default, or where the holder of the debt instrument exercises a material
influence over the gaming operations of the entity in question. Any holder of
debt securities required to apply for a finding of suitability must pay all
investigative fees and costs of the Mississippi Commission in connection with
such an investigation.
Each Mississippi Gaming Subsidiary must maintain in Mississippi a current ledger
with respect to ownership of its equity securities, and the Company must
maintain in Mississippi a current list of stockholders of the Company which must
reflect the record ownership of each outstanding share of any class of equity
security issued by the Company. The ledger and stockholder lists must be
available for inspection by the Mississippi Commission at any time. If any
securities of the Company are held in trust by an agent or by a nominee, the
record holder may be required to disclose the identity of the beneficial owner
to the Mississippi Commission. A failure to make such disclosure may be grounds
for finding the record holder unsuitable. The Company must also render maximum
assistance in determining the identity of the beneficial owners.
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The Mississippi Act requires that the certificates representing securities of a
publicly-traded corporation bear a legend to the general effect that such
securities are subject to the Mississippi Act and the regulations of the
Mississippi Commission. The Company has received from the Mississippi
Commission a waiver from this legend requirement. The Mississippi Commission
has the power to impose additional restrictions on the holders of the Company's
securities at any time.
Substantially all loans, leases, sales of securities and similar financing
transactions by a Mississippi Gaming Subsidiary must be reported to or approved
by the Mississippi Commission. A Mississippi Gaming Subsidiary may not make a
public offering of its securities, but may pledge or mortgage casino facilities.
The Company may not make a public offering of its securities without the prior
approval of the Mississippi Commission if any part of the proceeds of the
offering is to be used to finance the construction, acquisition or operation of
gaming facilities in Mississippi or to retire or extend obligations incurred for
one or more such purposes. Such approval, if given, does not constitute a
recommendation or approval of the investment merits of the securities subject to
the offering.
Under the regulations of the Mississippi Commission, a gaming licensee may not
guarantee a security issued by an affiliate company pursuant to a public
offering, or pledge its assets to secure payment or performance of the
obligations evidenced by the security issued by the affiliated company, without
the prior approval of the Mississippi Commission. A pledge of stock of a gaming
licensee and the foreclosure of such a pledge are ineffective without the prior
approval of the Mississippi Commission. Moreover, restrictions on the transfer
of an equity security issued by a Mississippi licensee and agreements not to
encumber such securities are ineffective without the prior approval of the
Mississippi Commission.
Changes in control of the Company through merger, consolidation, acquisition of
assets, management or consulting agreements or any form of takeover, cannot
occur without the prior approval of the Mississippi Commission. The Mississippi
Commission may also require controlling stockholders, officers, directors and
other persons having a material relationship or involvement with the entity
proposing to acquire control, to be investigated and licensed as part of the
approval process relating to the transaction.
The Mississippi legislature has declared that some corporate acquisitions
opposed by management, repurchases of voting securities and other corporate
defense tactics that affect corporate gaming licensees in Mississippi and
corporations whose stock is publicly traded that are affiliated with those
licensees, may be injurious to stable and productive corporate gaming. The
Mississippi Commission has established a regulatory scheme to ameliorate the
potentially adverse effects of these business practices upon Mississippi's
gaming industry and to further Mississippi's policy to: (i) assure the
financial stability of corporate gaming operators and their affiliates; (ii)
preserve the beneficial aspects of conducting business in the corporate form;
and (iii) promote a neutral environment for the orderly governance of corporate
affairs. Approvals are, in certain circumstances, required from the Mississippi
Commission before the Company may make exceptional repurchases of voting
securities in excess of the current market price of its common stock (commonly
called "greenmail") or before a corporate acquisition opposed by management may
be consummated. Mississippi's gaming regulations will also require prior
approval by the Mississippi Commission if the Company adopts a plan of
recapitalization proposed by its Board of Directors opposing a tender offer made
directly to the shareholders for the purpose of acquiring control of the
Company.
Neither the Company nor any subsidiary may engage in gaming activities in
Mississippi while also conducting gaming operations outside of Mississippi
without approval of the Mississippi Commission. The Mississippi Commission may
require determinations that, among other things, there are means for the
Mississippi Commission to have access to information concerning the out-of-state
gaming operations of the Company and its affiliates. The Mississippi Commission
has approved the Company's current operations in other jurisdictions but must
approve the Company's future gaming operations in any new jurisdictions.
If the Mississippi Commission decides that a Mississippi Gaming Subsidiary
violated a gaming law or regulation, the Mississippi Commission could limit,
condition, suspend or revoke the license of the Mississippi Gaming Subsidiary,
subject to compliance with certain statutory and regulatory procedures. In
addition, a
14
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Mississippi Gaming Subsidiary, the Company and the persons involved could be
subject to substantial fines for each separate violation. Because of such a
violation, the Mississippi Commission could attempt to appoint a supervisor to
operate the casino facilities. Limitation, conditioning or suspension of any
gaming license or the appointment of a supervisor could (and revocation of any
gaming license would) materially adversely affect the Company, the Mississippi
Gaming Subsidiary's gaming operations and the Company's results of operations.
License fees and taxes, computed in various ways depending on the type of gaming
involved, are payable to the State of Mississippi and to the counties and cities
in which a Mississippi Gaming Subsidiary's respective operations will be
conducted. Depending upon the particular fee or tax involved, these fees and
taxes are payable either monthly, quarterly or annually and are based upon (i) a
percentage of the gross gaming revenues received by the casino operation, (ii)
the number of slot machines operated by the casino, or (iii) the number of table
games operated by the casino. The license fee payable to the State of
Mississippi is based upon "gaming receipts" (generally defined as gross receipts
less pay outs to customers as winnings) and equals 4% of gaming receipts of
$50,000 or less per month, 6% of gaming receipts over $50,000 and less than
$134,000 per month, and 8% of gaming receipts over $134,000. The foregoing
license fees are allowed as a credit against the licensee's Mississippi income
tax liability for the year paid. The gross revenue fee imposed by the
Mississippi communities in, which the Company's casino operations are located,
equals approximately 4% of the gaming receipts.
In October 1994, the Mississippi Commission adopted two new regulations. Under
the first regulation, as a condition of licensure or license renewal, casino
vessels on the Mississippi Gulf Coast that are not self-propelled must be moored
to withstand a Category 4 hurricane with 155 mile-per-hour winds and 15-foot
tidal surge. The Company believes that all of its Mississippi Gaming
Subsidiaries currently meet this requirement. The second regulation requires as
a condition of licensure or license renewal that a gaming establishment's plan
include a 500-car parking facility in close proximity to the casino complex and
infrastructure facilities, the expenditures for which will amount to at least
25% of the casino cost. Such facilities shall include any of the following: a
250-room hotel of at least a two-star rating as defined by the current edition
of the Mobil Travel Guide, a theme park, golf courses, marinas, tennis complex,
entertainment facilities, or any other such facility as approved by the
Mississippi Commission as infrastructure. Parking facilities, roads, sewage and
water systems, or facilities normally provided by cities and/or counties are
excluded. The Mississippi Commission may in its discretion reduce the number of
rooms required, where it is shown to the Commission's satisfaction that
sufficient rooms are available to accommodate the anticipated visitor load. The
Company believes that all of its Mississippi Gaming Subsidiaries currently meet
such requirements. The Mississippi Commission has recently adopted amendments
to the regulation that increase the infrastructure development requirement from
25% to 100% for new casinos (or upon acquisition of a closed casino), but
grandfather existing licensees.
The sale of food or alcoholic beverages at the Mississippi Gaming Subsidiaries
is subject to licensing, control and regulation by the applicable state and
local authorities. The agencies involved have full power to limit, condition,
suspend or revoke any such license, and any such disciplinary action could (and
revocation would) have a materially adverse effect upon the operations of the
affected casino or casinos. Certain officers and managers of the Company and
the Mississippi Gaming Subsidiaries must be investigated by the Alcoholic
Beverage Control Division of the State Tax Commission (the "ABC") in connection
with the Mississippi Gaming Subsidiaries' liquor permits. Changes in licensed
positions must be approved by the ABC.
Nevada The ownership and operation of casino gaming facilities in Nevada are
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subject to: (i) the Nevada Gaming Control Act and the regulations promulgated
thereunder (collectively, "Nevada Act"); and (ii) various local regulations.
The Company's gaming operations are subject to the licensing and regulatory
control of the Nevada Gaming Commission ("Nevada Commission"), the Nevada State
Gaming Control Board ("Nevada Board") and Washoe County. The Nevada Commission,
the Nevada Board and Washoe County are collectively referred to as the "Nevada
Gaming Authorities."
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The laws, regulations and supervisory procedures of the Nevada Gaming
Authorities are based upon declarations of public policy which are concerned
with, among other things: (i) the prevention of unsavory or unsuitable persons
from having a direct or indirect involvement with gaming at any time or in any
capacity; (ii) the establishment and maintenance of responsible accounting
practices and procedures; (iii) the maintenance of effective controls over the
financial practices of licensees, including the establishment of minimum
procedures for internal fiscal affairs and the safeguarding of assets and
revenues, providing reliable record keeping and requiring the filing of periodic
reports with the Nevada Gaming Authorities; (iv) the prevention of cheating and
fraudulent practices; and (v) providing a source of state and local revenues
through taxation and licensing fees. Changes in such laws, regulations and
procedures could have an adverse effect on Boomtown Reno's gaming operations.
Boomtown Hotel & Casino, Inc. (the "Gaming Subsidiary"), which operates Boomtown
Reno and two other gaming operations with slot machines only, is required to be
licensed by the Nevada Gaming Authorities. The gaming licenses require the
periodic payment of fees and taxes and are not transferable. The Company is
currently registered by the Nevada Commission as a publicly traded corporation
(a "Registered Corporation") and has been found suitable to own the stock of
Boomtown, which is registered as an intermediary company ("Intermediary
Company"). Boomtown has been found suitable to own the stock of the Gaming
Subsidiary, which is a corporate licensee (a "Corporate Licensee") under the
terms of the Nevada Act. As a Registered Corporation, the Company is required
periodically to submit detailed financial and operating reports to the Nevada
Commission and furnish any other information which the Nevada Commission may
require. No person may become a stockholder of, or holder of an interest of, or
receive any percentage of profits from an Intermediary Company or a Corporate
Licensee without first obtaining licenses and approvals from the Nevada Gaming
Authorities. The Company, Boomtown and the Gaming Subsidiary have obtained from
the Nevada Gaming Authorities the various registrations, findings of
suitability, approvals, permits and licenses required in order to engage in
gaming activities in Nevada.
The Nevada Gaming Authorities may investigate any individual who has a material
relationship to, or material involvement with, the Company, Boomtown or the
Gaming Subsidiary in order to determine whether such individual is suitable or
should be licensed as a business associate of a gaming licensee. Officers,
directors and certain key employees of the Company, Boomtown and the Gaming
Subsidiary must file applications with the Nevada Gaming Authorities and may be
required to be licensed or found suitable by the Nevada Gaming Authorities.
Officers, directors and key employees of the Company and Boomtown who are
actively and directly involved in gaming activities of the Gaming Subsidiary may
be required to be licensed or found suitable by the Nevada Gaming Authorities.
The Nevada Gaming Authorities may deny an application for licensing for any
cause which they deem reasonable. A finding of suitability is comparable to
licensing, and both require submission of detailed personal and financial
information followed by a thorough investigation. The applicant for licensing
or a finding of suitability must pay all the costs of the investigation.
Changes in licensed positions must be reported to the Nevada Gaming Authorities
and, in addition to their authority to deny an application for a finding of
suitability or licensure, the Nevada Gaming Authorities have jurisdiction to
disapprove a change in a corporate position.
If the Nevada Gaming Authorities were to find an officer, director or key
employee unsuitable for licensing or unsuitable to continue having a
relationship with the Company, Boomtown or the Gaming Subsidiary, the companies
involved would have to sever all relationships with such person. In addition,
the Nevada Commission may require the Company, Boomtown or the Gaming Subsidiary
to terminate the employment of any person who refuses to file appropriate
applications. Determinations of suitability or of questions pertaining to
licensing are not subject to judicial review in Nevada.
The Company and the Gaming Subsidiary are required to submit detailed financial
and operating reports to the Nevada Commission. Substantially all material
loans, leases, sales of securities and similar financing transactions by the
Company, Boomtown and the Gaming Subsidiary must be reported to or approved by
the Nevada Commission.
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If it were determined that the Nevada Act was violated by the Gaming Subsidiary,
the gaming licenses it holds could be limited, conditioned, suspended or
revoked, subject to compliance with certain statutory and regulatory procedures.
In addition, the Company, Boomtown, the Gaming Subsidiary and the persons
involved could be subject to substantial fines for each separate violation of
the Nevada Act at the discretion of the Nevada Commission. Further, a
supervisor could be appointed by the Nevada Commission to operate Boomtown Reno
and, under certain circumstances, earnings generated during the supervisor's
appointment (except for reasonable rental value of the casino) could be
forfeited to the State of Nevada. Limitation, conditioning or suspension of the
gaming licenses of the Gaming Subsidiary or the appointment of a supervisor
could (and revocation of any gaming license would) materially adversely affect
the Company's gaming operations.
Any beneficial holder of the Company's voting securities, regardless of the
number of shares owned, may be required to file an application, be investigated,
and be found suitable as a beneficial holder of the Company's voting securities
if the Nevada Commission has reason to believe that such ownership would
otherwise be inconsistent with the declared policies of the State of Nevada.
The applicant must pay all costs of investigation incurred by the Nevada Gaming
Authorities in conducting any such investigation.
The Nevada Act requires any person who acquires beneficial ownership of more
than 5% of a Registered Corporation's voting securities to report the
acquisition to the Nevada Commission. The Nevada Act requires that beneficial
owners of more than 10% of a Registered Corporation's voting securities apply to
the Nevada Commission for a finding of suitability within thirty days after the
Chairman of the Nevada Board mails the written notice requiring such filing.
Under certain circumstances, an "institutional investor," as defined in the
Nevada Act, which acquires more than 10%, but not more than 15%, of a Registered
Corporation's voting securities may apply to the Nevada Commission for a waiver
of such finding of suitability if such institutional investor holds the voting
securities for investment purposes only. An institutional investor shall not be
deemed to hold voting securities for investment purposes unless the voting
securities were acquired and are held in the ordinary course of business as an
institutional investor and not for the purpose of causing, directly or
indirectly, the election of a majority of the members of the board of directors
of the Registered Corporation, any change in the Registered Corporation's
corporate charter, bylaws, management, policies or operations of the Registered
Corporation, or any of its gaming affiliates, or any other action which the
Nevada Commission finds to be inconsistent with holding the Registered
Corporation's voting securities for investment purposes only. Activities which
are not deemed to be inconsistent with holding voting securities for investment
purposes only include: (i) voting on all matters voted on by stockholders; (ii)
making financial and other inquiries of management of the type normally made by
securities analysts for informational purposes and not to cause a change in its
management, policies or operations; and (iii) such other activities as the
Nevada Commission may determine to be consistent with such investment intent.
If the beneficial holder of voting securities who must be found suitable is a
corporation, partnership or trust, it must submit detailed business and
financial information, including a list of beneficial owners. The applicant is
required to pay all costs of investigation.
Any person who fails or refuses to apply for a finding of suitability or a
license within thirty days after being ordered to do so by the Nevada Commission
or the Chairman of the Nevada Board, may be found unsuitable. The same
restrictions apply to a record owner if the record owner, after request, fails
to identify the beneficial owner. Any stockholder found unsuitable and who
holds, directly or indirectly, any beneficial ownership of the common stock
beyond such period of time as may be prescribed by the Nevada Commission may be
guilty of a criminal offense. The Company is subject to disciplinary action if,
after it receives notice that a person is unsuitable to be a stockholder or to
have any other relationship with the Company, Boomtown or the Gaming Subsidiary,
the Company (i) pays that person any dividend or interest upon voting securities
of the Company, (ii) allows that person to exercise, directly or indirectly, any
voting right conferred through securities held by that person, (iii) pays
remuneration in any form to that person for services rendered or otherwise, or
(iv) fails to pursue all lawful efforts to require such unsuitable person to
relinquish his voting securities including, if necessary, the immediate purchase
of said voting securities for cash at fair market value.
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The Nevada Commission may, in its discretion, require the holder of any debt
security of a Registered Corporation to file applications, be investigated and
be found suitable to own the debt security of a Registered Corporation. If the
Nevada Commission determines that a person is unsuitable to own such security,
then pursuant to the Nevada Act, the Registered Corporation can be sanctioned,
including the loss of its approvals, if without the prior approval of the Nevada
Commission, it (i) pays to the unsuitable person any dividend, interest, or any
distribution whatsoever; (ii) recognizes any voting right by such unsuitable
person in connection with such securities; (iii) pays the unsuitable person
remuneration in any form; or (iv) makes any payment to the unsuitable person by
way of principal, redemption, conversion, exchange, liquidation, or similar
transaction.
The Company is required to maintain a current stock ledger in Nevada which may
be examined by the Nevada Gaming Authorities at any time. If any securities are
held in trust by an agent or by a nominee, the record holder may be required to
disclose the identity of the beneficial owner to the Nevada Gaming Authorities.
A failure to make such disclosure may be grounds for finding the record holder
unsuitable. The Company is also required to render maximum assistance in
determining the identity of the beneficial owner. The Nevada Commission has the
power to require that the Company's stock certificates bear a legend indicating
that the securities are subject to the Nevada Act. However, to date the Nevada
Commission has not imposed such a requirement on the Company.
The Company is not permitted to make a public offering of its securities without
the prior approval of the Nevada Commission if the securities or the proceeds
therefrom are intended to be used to construct, acquire or finance gaming
facilities in Nevada, or to retire or extend obligations incurred for such
purposes. On March 25, 1999, the Nevada Commission granted the Company prior
approval to make public offerings for a period of two years, subject to certain
conditions (the `Shelf Approval"). The Shelf Approval also applies to any
affiliated company wholly owned by the Company (an "Affiliate"), which is a
publicly traded corporation or would thereby become a publicly traded
corporation pursuant to a public offering. The Shelf Approval also includes
approval for Boomtown and the Gaming Subsidiary to guarantee any security issued
by, and for the Gaming Subsidiary to hypothecate its assets to secure the
payment or performance of any obligations issued by the Company or an Affiliate
in a public offering under the Shelf Registration. The Shelf Approval also
includes approval to place restrictions upon the transfer of and enter into
agreements not to encumber the equity securities of Boomtown and the Gaming
Subsidiary (collectively, "Stock Restrictions"). The Shelf Approval, however,
may be rescinded for good cause without prior notice upon the issuance of an
interlocutory stop order by the Chairman of the Nevada Board. The Shelf
Approval does not constitute a finding recommendation or approval of the Nevada
Gaming Authorities as to the accuracy or the adequacy of the prospectus or the
investment merits of the securities offered thereby. Any representation to the
contrary is unlawful.
Changes in control of a Registered Corporation through merger, consolidation,
stock or asset acquisitions, management or consulting agreements, or any act or
conduct by a person whereby he obtains control, may not occur without the prior
approval of the Nevada Commission. Entities seeking to acquire control of a
Registered Corporation must satisfy the Nevada Board and Nevada Commission in a
variety of stringent standards prior to assuming control of such Registered
Corporation. The Nevada Commission may also require controlling stockholders,
officers, directors and other persons having a material relationship or
involvement with the entity proposing to acquire control to be investigated and
licensed as part of the approval process relating to the transaction.
The Nevada legislature has declared that some corporate acquisitions opposed by
management, repurchases of voting securities and corporate defense tactics
affecting Nevada corporate gaming licensees, and Registered Corporations that
are affiliated with those operations, may be injurious to stable and productive
corporate gaming. The Nevada Commission has established a regulatory scheme to
ameliorate the potentially adverse effects of these business practices upon
Nevada's gaming industry and to further Nevada's policy to: (i) assure the
financial stability of corporate gaming licensees and their affiliates; (ii)
preserve the beneficial aspects of conducting business in the corporate form;
and (iii) promote a neutral environment for the orderly governance of corporate
affairs. Approvals are, in certain circumstances,
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required from the Nevada Commission before the Registered Corporation can make
exceptional repurchases of voting securities above the current market price
thereof and before a corporate acquisition opposed by management can be
consummated. The Nevada Act also requires prior approval of a plan of
recapitalization proposed by the Registered Corporation's Board of Directors in
response to a tender offer made directly to the Registered Corporation's
stockholders for the purposes of acquiring control of the Registered
Corporation.
License fees and taxes, computed in various ways depending on the type of gaming
or activity involved, are payable to the State of Nevada and to Washoe County,
in which the Gaming Subsidiary's operations are conducted. Depending upon the
particular fee or tax involved, these fees and taxes are payable either monthly,
quarterly or annually and are based upon either: (i) a percentage of the gross
revenues received; (ii) the number of gaming devices operated; or (iii) the
number of table games operated. A casino entertainment tax is also paid by
casino operations where entertainment is furnished in a cabaret, nightclub,
cocktail lounge or casino showroom in connection with the serving or selling of
food or refreshments, or the selling of any merchandise.
Any person who is licensed, required to be licensed, registered, required to be
registered, or is under common control with such persons (collectively,
"Licensees"), and who proposes to become involved in a gaming venture outside of
Nevada, is required to deposit with the Nevada Board, and thereafter maintain, a
revolving fund in the amount of $10,000 to pay the expenses of investigation by
the Nevada Board of such Licensee's participation in such foreign gaming. The
revolving fund is subject to increase or decrease in the discretion of the
Nevada Commission. Thereafter, Licensees are required to comply with certain
reporting requirements imposed by the Nevada Act. Licensees are also subject to
disciplinary action by the Nevada Commission if they knowingly violate any laws
of the foreign jurisdiction pertaining to the foreign gaming operation, fail to
conduct the foreign gaming operation in accordance with the standards of honesty
and integrity required of Nevada gaming operations, engage in activities or
enter into associations that are harmful to the State of Nevada or its ability
to collect gaming taxes and fees, or employ, contract with, or associate with a
person in the foreign operation who has been denied a license or finding of
suitability in Nevada on the ground of personal unsuitability.
California Operation of California card club casinos such as the Hollywood
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Park-Casino and the Crystal Park Casino is governed by the Gambling Control Act
(the "GCA") and is subject to the oversight of the California Attorney General
and the California Gambling Control Commission. Under the GCA, a California
card club casino may only offer certain forms of card games, including Poker,
Pai Gow, and California Blackjack. A card club casino may not offer many of the
card games and other games of chance permitted in Nevada and other jurisdictions
where the Company conducts business.
Although the California Attorney General takes the position that, under the GCA,
only individuals, partnerships or privately-held companies (as opposed to
publicly-traded companies such as Hollywood Park) are eligible to operate card
club casinos, the enactment of California Senate Bill 100 ("SB-100") in 1995,
and the subsequent enactment of Senate Bill-8 permit a publicly-owned racing
association to own and operate a card club casino if it also owns and operates a
race track on the same premises.
Pursuant to the GCA, the operator of a card club casino, and its officers,
directors and certain stockholders are required to be registered by the Attorney
General and licensed by the municipality in which it is located. In September
1995, the Attorney General granted Hollywood Park a provisional registration
under SB-100 to operate the Hollywood Park-Casino which was renewed effective
January 1, 1999. A permanent registration will not be granted until the
California Department of Justice completes its review of the applications of
Hollywood Park and its corporate officers and directors. The Attorney General
has broad discretion to deny a gaming registration and may impose reasonably
necessary conditions upon the granting of a gaming registration. Grounds for
denial include felony convictions, criminal acts, convictions involving
dishonesty, illegal gambling activities, and false statements on a gaming
application. Such grounds also generally include having a financial interest in
a business or organization that engages in gaming activities that are illegal
under California law; however, this provision contains an exception for
publicly-traded racing
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associations such as Hollywood Park. In addition, the Attorney General possesses
broad authority to suspend or revoke a gaming registration on any of the
foregoing grounds, as well as for violation of any federal, state or local
gambling law, failure to take reasonable steps to prevent dishonest acts or
illegal activities on the premises of the card club casino, failure to cooperate
with the Attorney General in its oversight of the card club casino and failure
to comply with any condition of the registration.
Hollywood Park's operations at the Hollywood Park-Casino are also regulated by a
City of Inglewood ordinance (the "Inglewood Ordinance"). The Inglewood
Ordinance provides for a single card club casino located on the premises of the
Hollywood Park Race Track and requires Hollywood Park, as the operator of the
Hollywood Park-Casino, to be licensed by the City of Inglewood and to obtain a
card club operations certificate. The Inglewood City Council has approved
Hollywood Park's application for a gaming license and on August 21, 1996
Hollywood Park was granted the required card club operations certificate.
Hollywood Park's city gaming license and operations certificate are valid for
five years unless revoked, suspended or surrendered, and are renewable annually
thereafter.
In addition to Hollywood Park, the Inglewood Ordinance also requires all
employees, each beneficial owner of at least 10% of the outstanding Hollywood
Park common stock, and certain key employees of Hollywood Park to have either a
permit or a valid registration from the City of Inglewood. The license to
operate the card club casino may be suspended or revoked if such a stockholder
or employee fails to obtain a permit. Without the prior consent of the City of
Inglewood, a 10% stockholder may not transfer or sell its Hollywood Park shares
to any person who is, or by reason of such transaction would become, a 10%
stockholder. These licensing requirements and transfer restrictions apply to
all 10% stockholders of Hollywood Park, and no waiver from such requirements or
restrictions are provided for institutional or other investors who purchase for
investment purposes only.
The City of Compton has granted the operator of the Crystal Park Casino all
municipal gaming licenses necessary for operation of the Crystal Park Casino,
and the operator has received a provisional registration from the California
Department of Justice.
The California Horse Racing Board ("CHRB") has jurisdiction and supervision over
all horse race meets in the State of California. Licenses granted by the CHRB
must be obtained annually by Hollywood Park in order to conduct both the
Spring/Summer and Autumn race meets. The CHRB has the authority, when granting
any license, to vary the number of weeks allocated to any applicant and the time
of year in which such allocation falls. The CHRB may, at its discretion, refuse
to issue a license to a race track operator such as Hollywood Park that has a
financial interest in another licensed race track operation or in the conduct of
horse racing meets by any other person at any other race track in California.
Although no future assurance can be given, Hollywood Park has applied for and
received a license to conduct thoroughbred horse race meets every year since
1938, except for 1942 and 1943 due to wartime activities.
Indiana On September 14, 1998, the Indiana Gaming Commission ("Indiana
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Commission") voted to award a Certificate of Suitability to Pinnacle Gaming
Development Corporation ("Pinnacle Gaming"), ninety-seven percent (97%) of the
equity of which is owned and controlled by affiliates of the Company. The
Certificate of Suitability authorizes Pinnacle Gaming to develop a $150,000,000
riverboat gaming resort, including a hotel and golf course, in Switzerland
County, Indiana. Upon completion of development of the project in accordance
with the Certificate of Suitability and satisfaction of other conditions, the
Indiana Commission is expected to issue a license to Pinnacle Gaming. That
license would be the fifth and final license authorized under Indiana law for
riverboat gaming operations conducted from sites on the Ohio River.
The ownership and operation of riverboat casinos docked at Indiana-based sites
are subject to extensive state regulation under the Indiana Riverboat Gaming Act
("Indiana Act") and regulations which the Indiana Commission has adopted under
the Indiana Act. The Indiana Act and the regulations adopted to date are
significant to the Company's prospects for successfully developing and operating
the Switzerland County, Indiana based riverboat casino and associated
developments through its Indiana affiliate.
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The Indiana Act extends broad and pervasive regulatory powers and authority to
the Indiana Commission. The Indiana Commission has adopted a comprehensive set
of regulations covering ownership and reporting for licensed riverboat casinos
together with "rules of the game" governing the actual operation of riverboat
casinos. The Indiana Commission has also adopted a set of regulations under the
Indiana Act which covers numerous operational matters concerning riverboat
casinos licensed by the Commission.
Among the regulations adopted by the Indiana Commission is one dealing with
riverboat excursions, routes and public safety. The Indiana Act requires
licensed riverboat casinos to be cruising vessels and the regulations carry out
the legislative intent with appropriate recognition of public safety needs. The
regulations explicitly preclude "dockside gambling". Riverboat gaming
excursions are limited to a duration of up to four hours unless otherwise
expressly approved by the Indiana Commission. All excursion routes and
schedules are subject to the approval of the Indiana Commission. No gaming may
be conducted while the boat is docked except: (1) for thirty-minute embarkment
and disembarkment periods at the beginning and end of a cruise; (2) if the
master of the riverboat reasonably determines that specific weather or water
conditions present a danger to the riverboat, its passengers and crew; (3) if
either the vessel or the docking facility is undergoing mechanical or structural
repair; (4) if water traffic conditions present a danger to the riverboat,
riverboat passengers and crew, or to other vessels on the water, or (5) if the
master has been notified that a condition exists that would cause a violation of
Federal law if the riverboat were to cruise.
For Ohio River excursions, such as those Pinnacle Gaming will conduct from its
Switzerland County development, "full excursions" must be conducted at all times
during the year unless the master determines otherwise, for the above-stated
reasons. A "full excursion" is a cruise on the Ohio River. The Ohio River has
waters in both Indiana and Kentucky. The Company believes there is ample room
to cruise fully in Indiana waters on the Ohio River with no need or likelihood
of entering Kentucky waters. Therefore, the provisions of Kentucky law (which
preclude any kind of casino gaming) will not have any impact on the Company's
prospective Indiana operations.
An Indiana riverboat owner's license has an initial effective period of five
years; thereafter, a license is subject to annual renewal. The Indiana
Commission has broad discretion over the initial issuance of licenses and over
the renewal, revocation, suspension and control of riverboat owner's licenses.
Pinnacle Gaming has received a Certificate of Suitability designed to lead to
issuance of a license upon completion of project development and satisfaction of
various conditions. The Indiana Act requires a reinvestigation after three
years to ensure the owner continues to be in compliance with the Indiana Act.
Officers, directors and principal owners of the actual license holder and
employees who are to work on the riverboat are subject to substantial disclosure
requirements as a part of securing and maintaining necessary licenses.
Significant contracts to which Pinnacle Gaming is party are subject to
disclosure and approval processes imposed by the regulations. A riverboat
owner's licensee may not enter into or perform any contract or transaction in
which it transfers or receives consideration which is not commercially
reasonable or which does not reflect the fair market value of the goods or
services rendered or received. All contracts are subject to disapproval by the
Indiana Commission. Suppliers of gaming equipment and materials must also be
licensed under the Indiana Act.
Licensees are statutorily required to disclose to the Indiana Commission the
identity of all directors, officers and persons holding direct or indirect
beneficial interests of 1% or greater. The Indiana Commission also requires a
broad and comprehensive disclosure of financial and operating information on
licensees and their principal officers, and those parent corporations and other
upstream owners. The Company and Pinnacle Gaming have provided full information
and documentation to the Indiana Commission. As part of the process leading up
to the issuance of the Certificate of Suitability they must continue to do so
until issuance of the license and then throughout the period of licensure.
Appropriate disclosures are currently being prepared for the executive officers
of the Company employed subsequent to December 1998. The Indiana Act prohibits
contributions to a candidate for a state, legislative, or local office, or to a
candidate's committee or to a regular party committee by the holder of a
riverboat owner's license or a supplier's license, by an officer of a licensee,
by an officer of a person that holds at least a 1% interest in the licensee or
by a person
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holding at least a 1% interest in the licensee. The Indiana Commission has
promulgated a rule requiring quarterly reporting by such licensees, officers,
and persons.
As a condition to receiving a license to conduct riverboat casino operations
from the Indiana Commission, the Company will be required to obtain permits and
approvals from the United States Army Corp of Engineers to develop the
facilities it will use to conduct operations. Clearances will be required to be
received from the Indiana Department of Natural Resources for portions of the
proposed development. Alcoholic beverage permits for riverboat excursions and
for the hotel and boarding facilities will be required as will various other
permits and governmental consents or clearances.
Adjusted gross receipts from gambling games authorized under the Indiana Act are
subject to a tax at the rate of 20% on adjusted gross receipts. "Adjusted gross
receipts" means the total of all cash and property received from gaming
operations less cash paid out as winnings and uncollectible gaming receivables
(not to exceed 2%). The Indiana Act also prescribes an additional tax for
admissions, based upon $3 per person per excursion. Property taxes may be
imposed on riverboats at rates determined by local taxing authorities. Income
to the Company from Pinnacle Gaming will be subject to the Indiana gross income
tax, the Indiana adjusted gross income tax and the Indiana supplemental
corporate net income tax. Sales on a riverboat and at related resort facilities
are subject to applicable use, excise and retail taxes. The Indiana Act
requires a riverboat owner licensee to directly reimburse the Indiana Commission
for the costs of inspectors and agents required to be present while authorized
gaming is conducted.
Through the establishment of purchasing "goals," the Indiana Act encourages
minority and women's business enterprise participation in the riverboat gaming
industry. Any person issued a riverboat owner's license must establish goals of
at least 10% of the total dollar value of the licensee's contracts for goods and
services with minority business enterprises and 5% of the total dollar value of
the licensee's contracts for goods and services with women's business
enterprises. Compliance with these conditions is incorporated into the Indiana
Affiliate's Certificate of Suitability. The Indiana Commission may suspend,
limit or revoke the owner's license or impose a fine for failure to comply with
the statutory requirements.
Minimum and maximum wagers on games on the riverboat are left to the discretion
of the licensee. Wagering may not be conducted with money or other negotiable
currency. There are no statutory restrictions on extending credit to patrons;
however, the matter of credit may come under scrutiny in future legislative
sessions.
If an institutional investor acquires 5% or more of any class of voting
securities of a holding company of a licensee, the investor is required to
notify the Indiana Commission and to provide additional information, and may be
subject to a finding of suitability. Any other person who acquires 5% or more
of any class of voting securities of a holding company of a licensee is required
to apply to the Indiana Commission for a finding of suitability. A riverboat
licensee or an affiliate may not enter into a debt transaction of $1,000,000 or
more without approval of the Indiana Commission. The Indiana Commission has
taken the position that a "debt transaction" includes increases in maximum
amount available under reducing revolving credit facilities. A riverboat
owner's license is a revocable privilege and is not a property right under the
Indiana Act. A riverboat owner licensee or any other person may not lease,
hypothecate, borrow money against or loan money against or otherwise scrutinize
or monetize a riverboat owner's license.
The Governor of Indiana has appointed a study commission on the impact of
legalized wagering in Indiana. Its work product may result in calls for changes
to the legislative landscape surrounding gaming in Indiana.
Arizona The Arizona Racing Commission ("ARC") has jurisdiction and supervision
- -------
over all racing activities in the State of Arizona. The ARC issues live racing
permits that are valid for three years, and off-track permits are granted on a
year to year basis. In June 1997, Turf Paradise received a live racing permit
from the ARC, which will remain in force through the 1999/2000 race year. The
permit specifies that live racing may be conducted between the first week of
September through the third week of May and that, so long as there is
22
<PAGE>
live racing at Turf Paradise at least five days a week, Turf Paradise may have
simulcast wagering on days when there is no live racing.
Argentina The Provincial Government of Neuquen, Argentina enacted a casino
- ---------
privatization program to issue twelve-year exclusive concession agreements to
operate existing casinos. The Company's two casinos are the only casinos in the
province of Neuquen, in west central Argentina, and are located in Neuquen City
and San Martin de los Andes. The casinos had previously been operated by the
provincial government. The Ministry of Finance of Argentina has adopted a
modified regulatory system for casinos, based on the regulatory system utilized
by the State of Nevada, and such regulatory system is being administered by the
Provincial Government of Neuquen. The Company cannot predict what effect the
enactment of other laws, regulations or pronouncements relating to casino
operations may have on the operations of Casino Magic Argentina.
Competition Hollywood Park faces significant competition in each of the
- -----------
jurisdictions in which it has established gaming operations, and such
competition is expected to intensify as new gaming operations enter these
markets and existing competitors expand their operations. The Company's
properties compete directly with other gaming properties in Nevada, Mississippi,
Louisiana, California, Arizona, and Argentina. To a lesser extent, Hollywood
Park also competes for customers with other casino operators in North American
markets, including casinos located on Indian reservations, and other forms of
gaming such as lotteries. Several of Hollywood Park's competitors have
substantially greater name recognition and marketing resources as well as access
to lower cost sources of financing. Moreover, consolidation of companies in the
gaming industry could increase the concentration of large gaming companies in
Louisiana and Mississippi, and other emerging gaming markets, and may result in
Hollywood Park's competitors having even greater resources, name recognition and
licensing prospects than such competitors currently enjoy.
Mississippi and Louisiana Gulf Coast Markets The Company operates four gaming
- ---------------------------------------------
properties in this market; Boomtown New Orleans, Boomtown Biloxi, Casino Magic
Bay St. Louis and Casino Magic Biloxi. Competition in this market has expanded
and, as a result, a number of casinos in the Gulf Coast market have failed.
Further, Mississippi law does not limit the number of gaming licenses that may
be granted. In March 1999, Mirage Resorts opened a $650,000,000, 1,800 room
hotel and casino in Biloxi, and Park Place Entertainment has acquired and is
expected to further develop Grand Casino's Biloxi property. In Bay St. Louis,
Circus Circus has announced plans to construct a $225,000,000, 1,500 room hotel
and casino, and Grand Casino is presently constructing a 600 room hotel
expansion to its Gulfport property (located near Bay St. Louis), that is
expected to open in mid-1999.
Bossier City/Shreveport Market The Company operates its 188 room luxury hotel
- ------------------------------
and riverboat Casino Magic Bossier City property in this market, which directly
competes with three other gaming facilities. Two of the competitors are
substantially similar in size and quality of facility to Casino Magic Bossier
City. The third, Horseshoe Casino, recently completed construction of a 606
room luxury hotel and has the largest riverboat, at 62,400 square feet (though
all of the casinos in Louisiana are limited to 30,000 square feet of gaming
space). Isle of Capri Casinos is currently constructing a 305 room hotel, which
is expected to open in mid-1999. Additionally, a consortium led by Hollywood
Casino (which is not affiliated with Hollywood Park) recently received approval
for a $185,000,000 hotel and riverboat casino in Shreveport, and Harrah's
announced a 500 room hotel addition at its Shreveport gaming facility.
New Orleans Market The Company operates its Boomtown New Orleans property in
- ------------------
Harvey, Louisiana, approximately ten miles from the French Quarter of New
Orleans, on the "West Bank" in Jefferson Parish. Harrah's is currently
constructing a land-based casino and entertainment facility in New Orleans,
which is expected to open in late 1999.
California and Reno Markets, Proposition 5 In California, the Company operates
- ------------------------------------------
the Hollywood Park Race Track and Hollywood Park-Casino, and leases the Crystal
Park Casino to a third party operator, and operates Boomtown Reno in Nevada.
Indian tribes have operated casinos in California for approximately ten years,
and currently there are approximately 40 Indian tribes operating gambling halls,
though most are
23
<PAGE>
significantly smaller than the typical Las Vegas casino. In November 1998,
California voters passed Proposition 5, a ballot initiative that, upon becoming
effective, would allow Indian tribes to conduct various gaming activities
including horse race wagering, gaming devices (including slot machines), banked
card games (as in traditional Las Vegas card games) and lotteries. On December
2, 1998, the California Supreme Court issued a stay of Proposition 5 and ordered
a hearing on the constitutionality of the Proposition. The Company is not
certain if, or when Proposition 5 will become effective or how it will affect
the Company; however, if Proposition 5 is implemented, increased Indian gaming
competition could adversely affect Hollywood Park's gaming operations in
California and Nevada.
The Hollywood Park-Casino and the Crystal Park Casino also face competition from
other card club casinos in neighboring cities.
Arizona Market The Company operates the Turf Paradise Race Track in this
- --------------
market. Turf Paradise's primary competition is from local Indian run Las Vegas-
style casinos. Twenty of the twenty-one tribes in Arizona are currently
involved in gaming at some level, with five of the state's eleven Indian run
casinos operating within 60 miles of Turf Paradise.
General While the Company believes that it has been able to effectively compete
- -------
in these markets to date, increasing competition may adversely affect gaming
operations in the future. The Company believes that increased legalized gaming
in other states, particularly in areas close to our existing gaming properties,
such as in Texas and Alabama, could adversely affect its operations.
Federal Income Tax Matters The Company accounts for income taxes under
Statement of Financial Accounting Standards No. 109 Accounting for Income Taxes,
whereby deferred tax assets and liabilities are recognized for the future tax
consequences attributable to differences between the financial statement
carrying amounts of existing assets and liabilities and their respective tax
bases.
As of December 31, 1998, the Company had federal net operating loss ("NOL") and
capital loss ("CL") carryforwards of approximately $84,400,000, and $10,200,000,
respectively, comprised principally of NOL carryforwards acquired in the Casino
Magic and Boomtown Mergers, and CL carryforwards resulting from the disposition
of Boomtown's Las Vegas property. The NOL carryforwards expire on various dates
through 2018, and the CL carryforwards expire on various dates through 2002. In
addition, the Company has approximately $400,000 of foreign tax credits related
to Casino Magic Argentina operations, which expire in 2000, and approximately
$7,200,000 of alternative minimum tax credits which do not expire. The
alternative minimum tax credits can reduce future federal income taxes but
generally cannot reduce federal income taxes paid below the amount of
alternative minimum tax.
Under several provisions of the Internal Revenue Code (the "Code") and the
regulations promulgated thereunder, the utilization of NOL, CL and tax credit
carryforwards to reduce tax liability is restricted under certain circumstances.
Events which cause such a limitation include, but are not limited to, certain
changes in the ownership of a corporation. Both the Boomtown Merger and the
Casino Magic Merger caused such a change in ownership with respect to Boomtown
and Casino Magic. As a result, the Company's use of approximately $14,000,000
and $70,400,000 of Boomtown and Casino Magic's NOL carryforwards, respectively;
$1,400,000 of Boomtown's CL carryforwards; and $1,700,000 and $5,200,000 of
Boomtown and Casino Magic's tax credit carryforwards, respectively, is subject
to certain limitations imposed by Sections 382 and 383 of the Code and by the
separate return limitation year rules of the consolidated return regulations.
Section 382 of the Code generally provides that in each taxable year following
an ownership change with respect to a corporation, the corporation (or
consolidated group of which the corporation is a part) is subject to a
limitation on the amount of the corporation's pre-ownership change NOLs which
maybe used equal to the value of the stock of the corporation (determined
immediately prior to the ownership change and subject to certain adjustments)
multiplied by the "long term tax exempt rate" which is in effect at the time of
the ownership change. For ownership changes occurring during June 1997
(Boomtown) and October 1998 (Casino Magic), the long term tax exempt rates were
5.64% and 5.02%, respectively. Section 383 of the Code imposes a comparable and
related set of rules for limiting the use of CL and tax credit carryforwards in
the
24
<PAGE>
event of an ownership change. In addition, the separate return limitation year
rules of the consolidated return regulations generally provide that Boomtown and
Casino Magic's pre-merger NOLs can be used in computing post-merger taxable
income of the Company only to the extent that Boomtown and Casino Magic,
respectively, contribute to the Company's consolidated income. The separate
return limitation year rules also impose similar limitations with respect to CL
and tax credit carryforwards of Boomtown and Casino Magic. Furthermore, the
utilization of the foreign tax credit is also subject to certain limitations
imposed by Section 904 of the Code which generally provides that foreign tax
credits cannot be used to reduce U.S. tax liability on income sources with the
U.S. These various limitations restrict the amount of NOL, CL and tax credit
carryforwards that may be used by the Company in any taxable year and,
consequently, are expected to defer the Company's use of a substantial portion
of such carryforwards and may ultimately prevent the Company's use of a portion
thereof. Therefore, a valuation allowance has been recorded related to the
Boomtown and Casino Magic carryforwards.
For California tax purposes, as of December 31, 1998, the Company also had
approximately $11,700,000 of Los Angeles Revitalization Zone ("LARZ") tax
credits. The LARZ tax credits can only be used to reduce certain California tax
liability and cannot be used to reduce federal tax liability. A valuation
allowance has been recorded with respect to the LARZ tax credits because the
Company may not generate enough income subject to California tax to utilize the
LARZ tax credits before they expire.
Employees The following is a summary of Hollywood Park's employees by property:
<TABLE>
<CAPTION>
Permanent Seasonal Total Staffing
Property Staff Staff Range
--------------------------- --------------- ------------- -------------------
<S> <C> <C> <C>
Hollywood Park-Casino 1,415 -- 1,415
Boomtown Reno 800 300 800 - 1,100
Boomtown New Orleans 1,100 -- 1,100
Boomtown Biloxi 970 -- 970
Casino Magic Bay St. Louis 1,250 50 1,250 - 1,300
Casino Magic Biloxi 1,160 -- 1,160
Casino Magic Bossier City 1,425 -- 1,425
Casino Magic Argentina 255 -- 255
Hollywood Park Race Track 390 1,020 390 - 1,410
Turf Paradise 85 425 85 510
Corporate 35 -- 35
Total 8,885 1,795 8,885 -10,680
============== ============ ==================
</TABLE>
The Company does not employ the staff at the Crystal Park Casino.
The Company's staff is non-union, with the exception of the janitorial and food
service employees at the Hollywood Park-Casino and the majority of the seasonal
staff at the Hollywood Park Race Track. The Company believes that it has good
relationships with its employees. The Hollywood Park Race Track is presently in
discussions with the union representing its food service employees. The Company
believes that this contract will be renewed without incident, though there can
be no assurance that labor problems will be avoided.
Other Information concerning backlog, sources and availability of raw materials
is not essential to an understanding of the Company's business.
The Company does not engage in material research activities relating to
development of new products or services or improvement of existing products or
services.
Compliance with federal, state and local provisions which have been enacted or
adopted regulating the discharge of materials into the environment or otherwise
relating to the protection of the environment have not had a material effect
upon capital expenditures, earnings or the competitive position of the Company.
25
<PAGE>
As of the October 15, 1998, Casino Magic Merger, the Company is a 51% partner in
two land-based casinos in Argentina. Casino Magic Argentina's contribution to
the Company's net income is immaterial as compared with the contributions of the
Company's domestic gaming operations.
Item 2. Properties
- ------------------
The following describes the Company's principal real estate properties:
Hollywood Park Race Track and Hollywood Park-Casino Hollywood Park owns
- ---------------------------------------------------
approximately 378 acres and all associated improvements, in Inglewood,
California. The property contains the Hollywood Park Race Track, the 60,000
square foot Hollywood Park-Casino and the Company's executive offices. The
Hollywood Park Race Track, Hollywood Park-Casino and required parking covers
approximately 218 acres, leaving approximately 160 acres available for
development.
The Crystal Park Casino The Crystal Park LLC owns approximately six acres, upon
- -----------------------
which sits a parking structure, and owns the ground floor of the Crystal Park
Casino, which houses the approximately 40,000 square feet of gaming space. The
Crystal Park LLC leases the hotel, along with approximately 35 acres of
unimproved land (to be used for expansion, if ever needed) from the City of
Compton under a 50 year lease. An unaffiliated third party operates the Crystal
Park Casino under a four year triple net lease.
Boomtown Reno The Company owns 569 acres in Verdi, Nevada, with current
- -------------
operations presently utilizing approximately 61 acres. The Company considers
approximately 250 of the excess acreage as available for development. The
Company owns all of the improvements and facilities at the property, including
the casino, hotel, truck stop, recreational vehicle park and service station,
along with the related water rights.
Boomtown New Orleans The Company owns approximately 50 acres in Harvey,
- --------------------
Louisiana which are utilized by Boomtown New Orleans. The Company owns the
facilities and associated improvements at the property, including the riverboat
casino.
Boomtown Biloxi The Company leases substantially all of the 19 acres that
- ---------------
Boomtown Biloxi utilizes for operations, under a 99 year lease, entered into in
1994. In addition, the Company leases property for parking under several lease
agreements ranging from 10 to 25 years. The Company leases approximately 5.1
acres of submerged tidelands, underneath the barge where the casino sits, from
the state of Mississippi under a ten year lease with a five year option to
renew. The Company owns the barge and all of the land-based facilities.
Casino Magic Bay St. Louis The Company owns approximately 591 acres in Bay St.
- --------------------------
Louis, Mississippi, including the 17 acre marina where the gaming barge is
moored. There are approximately 50 acres available for development. The
property includes a golf course, a hotel, a recreational vehicle park, and other
land-based facilities, all of which are owned by the Company.
Casino Magic Biloxi Casino Magic Biloxi is located on approximately 16 acres,
- -------------------
of which 4.5 acres are owned and approximately 11.5 acres are leased, inclusive
of approximately 6.4 acres of submerged tidelands leased from the state of
Mississippi. The tidelands are under a ten year lease with a five year option
to renew. The Company owns the barge on which the casino is located and all of
the land-base facilities including the hotel.
Casino Magic Bossier City The Company owns 23 acres on the Red River in Bossier
- -------------------------
City, Louisiana. The property contains a dockside riverboat casino, hotel,
parking structure and other land-based facilities, all of which are owned by the
Company. The property secures the Casino Magic 13% Notes (discussed in more
detail in `Liquidity and Capital Resources').
Casino Magic Argentina The Company operates two casinos in west central
- ----------------------
Argentina, in the cities of Neuquen and San Martin de los Andes. The Company
does not own any real property at these sites.
26
<PAGE>
Turf Paradise Turf Paradise owns approximately 275 acres and all associated
- -------------
improvements in the northwest region of Phoenix, Arizona, with approximately 100
acres available for future development.
Item 3. Legal Proceedings
- -------------------------
Poulos Lawsuit A class action lawsuit was filed on April 26, 1994, in the
United States District Court, Middle District of Florida (the "Poulos Lawsuit"),
naming as defendants 41 manufacturers, distributors and casino operators of
video poker and electronic slot machines, including Casino Magic. The lawsuit
alleges that the defendants have engaged in a course of fraudulent and
misleading conduct intended to induce people to play such games based on false
beliefs concerning the operation of the gaming machines and the extent to which
there is an opportunity to win. The suit alleges violations of the Racketeer
Influenced and Corrupt Organization Act, as well as claims of common law fraud,
unjust enrichment and negligent misrepresentation, and seeks damages in excess
of $6 billion. On May 10, 1994, a second class action lawsuit was filed in the
United States District Court, Middle District of Florida (the "Ahern Lawsuit"),
naming as defendants the same defendants who were named in the Poulos Lawsuit
and adding as defendants the owners of certain casino operations in Puerto Rico
and the Bahamas, who were not named as defendants in the Poulos Lawsuit. The
claims in the Ahern Lawsuit are identical to the claims in the Poulos Lawsuit.
Because of the similarity of parties and claims, the Poulos Lawsuit and Ahern
Lawsuit were consolidated into one case file in the United States District
Court, Middle District of Florida. On December 9, 1994 a motion by the
defendants for change of venue was granted, transferring the case to the United
States District Court for the District of Nevada, in Las Vegas. In an order
dated April 17, 1996, the court granted motions to dismiss filed by Casino Magic
and other defendants and dismissed the Complaint without prejudice. The
plaintiffs then filed an amended Complaint on May 31, 1996 seeking damages
against Casino Magic and other defendants in excess of $1 billion and punitive
damages for violations of the Racketeer Influenced and Corrupt Organizations Act
and for state common law claims for fraud, unjust enrichment and negligent
misrepresentation. Casino Magic and other defendants have moved to dismiss the
amended Complaint. Casino Magic believes that the claims are without merit and
does not expect that the lawsuit will have a materially adverse effect on the
financial condition or results of operations of Casino Magic.
Casino America Litigation On or about September 6, 1996, Casino America, Inc.
commenced litigation in the Chancery Court of Harrison County, Mississippi,
Second Judicial District, against Casino Magic, and James Edward Ernst, its
Chief Executive Officer, seeking injunctive relief and unspecified compensatory
damages in an amount to be proven at trial as well as punitive damages. The
plaintiff claims, among other things, that the defendants (i) breached the terms
of an agreement they had with the plaintiff, (ii) tortiously interfered with
certain of the plaintiff's business relations; and (iii) breached covenants of
good faith and fair dealing they allegedly owed to the plaintiff. On or about
October 8, 1996, the defendants interposed an answer, denying the allegations
contained in the Complaint. The discovery phase of this litigation is
continuing and a trial date was initially set for August 1998, but was postponed
to mid-1999 after the plaintiff requested a continuance. While Casino Magic's
management cannot predict the outcome of this action, it believes plaintiff's
claims are without merit and intends to vigorously defend this action.
Astoria Entertainment, Inc. v. Edwin W. Edwards, et als., United States District
Court for the Eastern District of Louisiana, No. 98-3359. On February 2, 1999,
the plaintiff, Astoria Entertainment, Inc., voluntarily dismissed its complaint
(as presented below), without prejudice, as to the three Hollywood Park/Boomtown
defendants, and other defendants.
This civil action was filed on November 12, 1998 in federal district court in
New Orleans against 21 defendants, including Edwin W. Edwards, Stephen Edwards,
Edward J. Debartolo, Jr., Debartolo Entertainment Louisiana Gaming, Inc.,
Hollywood Casino Corporation, Boyd Kenner, Inc., Treasure Chest Casino, L.L.C.,
five members of the former Louisiana Riverboat Gaming Commission, Hollywood
Park, Inc., Louisiana Gaming Enterprises, Inc., and Robert List (an employee of
Boomtown, Inc.) (the latter three hereafter are referred to as the "Hollywood
Park/Boomtown defendants"). The complaint alleged violations of the Racketeer
Influenced and Corrupt Organizations ("RICO") Act in connection with the
awarding of riverboat gaming licenses in Louisiana. The plaintiff, Astoria
Entertainment, Inc. ("Astoria"), contends that it had sustained damages due to
alleged
27
<PAGE>
racketeering activities of the defendants, allegedly resulting in corruption of
the licensing process and Astoria's failure to receive a license for riverboat
gaming in, inter alia, the West Bank of Jefferson Parish (suburban New Orleans).
The Complaint sought damages of "not less than $340 million," plus treble
damages, costs, and attorneys' fees. On January 15, 1998, the Hollywood
Park/Boomtown defendants filed a motion to dismiss Astoria's Complaint for
failure to state a claim against those defendants.
Astoria Entertainment, Inc. v. Edward J. DeBartolo, Jr., et als., Civil District
Court for the Parish of Orleans, State of Louisiana, No. 98-20315. On March 5,
1999, Astoria Entertainment, Inc. voluntarily dismissed, without prejudice all
claims asserted (as presented below) against the Hollywood Park/Boomtown
defendants.
This action was filed on or about December 1, 1998 in state district court in
New Orleans against twelve defendants, including Edward J. Debartolo, Jr.,
Debartolo Entertainment Louisiana Gaming, Inc., Hollywood Casino Corporation,
Robert Guidry, Boyd Gaming, Inc., Boyd Kenner, Inc., Treasure Chest Casino,
L.L.C., Hollywood Park, Inc., Robert List (an employee of Boomtown, Inc.),
Louisiana Gaming Enterprises, Inc., Boomtown, Inc., and Louisiana-I Gaming, L.P.
(the latter five hereafter are referred to as the "Hollywood Park/Boomtown
defendants"). The petition sought damages against the Hollywood Park/Boomtown
defendants and others "in excess of $300 million" for alleged "intentional
interference with economic advantage and/or prospective economic advantage" and
alleged "unjust enrichment" in connection with the licensing of riverboat gaming
in Louisiana. The plaintiff, Astoria Entertainment, Inc. ("Astoria"), alleged
that the defendants were obligated to refrain from intentional acts that would
interfere with Astoria's alleged ability to obtain a license for riverboat
gaming in the West Bank of Jefferson Parish (suburban New Orleans) and that the
Hollywood Park/Boomtown defendants breached the obligation by participating in
alleged unlawful practices designed to gain an improper advantage in obtaining a
certificate of preliminary approval and license for such riverboat gaming.
Item 4. Submission of Matters to a Vote of Security Holders
- -----------------------------------------------------------
No matters were submitted to a vote of security holders during the fourth
quarter of 1998, through the solicitation of proxies or otherwise.
Part II
-------
Item 5. Market for the Registrant's Common Equity and Related Stockholder
- -------------------------------------------------------------------------
Matters
- -------
Hollywood Park's common stock is listed on the New York Stock Exchange and is
traded under the name Hollywood Park, Inc., identified by the symbol "HPK".
(Prior to December 1, 1997, the Company's common stock was listed on the NASDAQ
National Market System.)
28
<PAGE>
The following table sets forth the high and low sales prices per common share of
the Company's common stock on the New York Stock Exchange, and for periods prior
to December 1, 1997, on the NASDAQ National Market System. All sales prices are
rounded to the nearest 0.125. The prices shown are between dealers and do not
reflect retail markups, markdowns, or commissions, nor do they necessarily
represent actual transactions.
<TABLE>
<CAPTION>
Price Range
--------------------------------------
High Low
------------- -------------
<S> <C> <C>
1998
----
First Quarter $22.1875 $11.7500
Second Quarter 13.2500 11.0000
Third Quarter 12.3750 10.0000
Fourth Quarter 10.5625 8.1250
1997
----
First Quarter $15.1250 $11.8750
Second Quarter 15.3750 11.8750
Third Quarter 15.3750 14.7500
Fourth Quarter 22.3125 17.3125
</TABLE>
As of March 15, 1999, there were approximately 3,676 stockholders of record of
the Company's common stock.
On June 30, 1997, the Company finalized the acquisition of Boomtown, and issued
approximately 5,362,850 shares of Hollywood Park common stock. Concurrently
with the Boomtown Merger, Hollywood Park purchased and retired 446,491 shares of
Hollywood Park common stock received by Mr. Roski in the Boomtown Merger.
Dividends The Company did not pay any common stock dividends in 1998 or 1997.
Payments of future common stock dividends would be at the discretion of the
Company's Board of Directors and would depend upon, among other things, future
earnings, operational and capital requirements, the overall financial condition
of the Company and general business conditions. The Board of Directors does not
anticipate paying any cash dividends on the Company's common stock in the near
future.
Item 6. Selected Financial Data
- -------------------------------
The following selected financial information for the years 1994 through 1998 was
derived from the consolidated financial statements of the Company. Casino Magic
was acquired on October 15, 1998 and Boomtown was acquired on June 30, 1997,
with both acquisitions accounted for under the purchase method of accounting for
a business combination, and therefore Casino Magic's and Boomtown's financial
results were not included in periods prior to their respective acquisitions.
Turf Paradise was acquired on August 11, 1994, and accounted for under the
pooling of interests method of accounting. The Hollywood Park-Casino began
operations on July 1, 1994, with the gaming floors operated by an unaffiliated
third party. On November 17, 1995, Hollywood Park acquired the gaming floor
business from the unaffiliated operator. The Crystal Park Casino began
operations on October 25, 1996, under a lease with an unaffiliated third party,
and Sunflower was acquired on March 23, 1994, accounted for under the purchase
method of accounting. As of March 31, 1996, Sunflower's results of operations
were no longer consolidated with Hollywood Park's due to Sunflower's May 17,
1996, filing for reorganization under Chapter 11 of the Bankruptcy Code. The
information set forth below should be read in conjunction with "Management's
Discussion and Analysis of Financial Condition and Results of Operations", the
financial statements and related notes thereto.
29
<PAGE>
Hollywood Park, Inc.
Selected Financial Data
<TABLE>
<CAPTION>
For the years ended December 31,
------------------------------------------------------------------------
1998 1997 1996 1995 1994
------------------------------------------------------------------------
(in thousands, except per share data)
<S> <C> <C> <C> <C> <C>
Statement of Operations Data:
Revenues:
Gaming $ 293,057 $137,659 $ 50,717 $ 26,656 $ 11,745
Racing 66,871 68,844 71,308 79,862 78,719
Food and beverage 30,510 19,894 13,947 19,783 20,540
Other 36,529 21,731 7,253 4,271 6,320
--------- -------- -------- -------- --------
426,967 248,128 143,225 130,572 117,324
--------- -------- -------- -------- --------
Expenses:
Gaming 161,549 74,733 27,249 5,291 0
Racing 29,316 30,304 30,167 30,960 23,393
Food and beverage 38,860 25,745 19,573 24,749 21,852
Administrative and other 117,978 74,887 43,962 48,647 51,151
Depreciation and amortization 32,121 18,157 10,695 11,384 9,563
REIT restructuring 419 2,483 0 0 0
Write off of investment in Sunflower 0 0 11,412 0 0
Lawsuit settlement 0 0 0 6,088 0
Hollywood Park-Casino pre-opening 0 0 0 0 2,337
Turf Paradise acquisition costs 0 0 0 0 627
--------- -------- -------- -------- --------
380,243 226,309 143,058 127,119 108,923
--------- -------- -------- -------- --------
Operating income 46,724 21,819 167 3,453 8,401
Loss on write off of assets 2,221 0 0 0 0
Interest expense 22,518 7,302 942 3,922 3,061
--------- -------- -------- -------- --------
Income (loss) before income taxes and
minority interests 21,985 14,517 (775) (469) 5,340
Minority interests 374 (3) 15 0 0
Income tax expense 8,442 5,850 3,459 693 1,568
--------- -------- -------- -------- --------
Net income (loss) $ 13,169 $ 8,670 ($4,249) ($1,162) $ 3,772
========= ======== ======= ======= ========
======================================================================================================================
Dividends on convertible preferred stock $ 0 $ 1,520 $ 1,925 $ 1,925 $ 1,925
--------- -------- -------- -------- --------
Net income (loss) available to (allocated to)
common shareholders $ 13,169 $ 7,150 ($6,174) ($3,087) $ 1,847
========= ======== ======= ======= ========
Per common share:
Net income (loss):
Basic $0.50 $0.33 ($0.33) ($0.17) $0.10
Diluted $0.50 $0.32 ($0.33) ($0.17) $0.10
Dividends $0.00 $0.00 $0.00 $0.00 $0.00
Other Data:
Cash flows provided by (used in):
Operating activities $ 38,219 $ 18,454 $ 13,137 $ 20,291 ($7,287)
Investing activities (136,532) (16,236) (19,893) (31,322) (7,331)
Financing activities 118,498 9,609 (3,728) (3,685) (8,877)
Capital expenditures 56,747 32,505 23,786 25,150 27,584
Balance Sheet Data:
Total assets $ 891,339 $419,029 $205,886 $283,303 $246,573
Other liabilities 132,744 65,573 47,444 101,928 36,518
Long term obligations 527,619 132,102 282 15,629 42,800
Stockholders' equity 230,976 221,354 158,160 165,746 167,255
</TABLE>
30
<PAGE>
Item 7. Management's Discussion and Analysis of Financial Condition and Results
- -------------------------------------------------------------------------------
of Operations
-------------
Except for the historical information contained herein, the matters addressed in
this Annual Report on Form 10-K may constitute "forward-looking statements"
within the meaning of Section 27A of the Securities Act of 1933, as amended and
Section 21E of the Securities and Exchange Act of 1934, as amended. Such
forward-looking statements are subject to a variety of risks and uncertainties
that could cause actual results to differ materially from those anticipated by
the Company's management. Factors that may cause actual performance of
Hollywood Park to differ materially from that contemplated by such forward-
looking statements include, among others: the failure to complete or
successfully operate planned expansion projects (including the Indiana Project);
the failure to obtain adequate financing to meet strategic goals; possible Year
2000 issues (discussed in more detail below); the failure to adequately
integrate Casino Magic into Hollywood Park's operations; the failure to obtain
or retain gaming licenses or regulatory approvals; severe weather conditions;
the failure to meet the Company's debt service obligations; and the saturation
of, or other adverse changes in the gaming markets in which the Company operates
(particularly in the southeastern United States). The Private Securities
Litigation Reform Act of 1995 (the "Act") provides certain "safe harbor"
provisions for forward-looking statements. All forward-looking statements made
in this Annual Report on Form 10-K are made pursuant to the Act. For more
information on the potential factors which could affect the Company's financial
results, please review the Company's filings with the Securities and Exchange
Commission, including the Company's Form S-4 Registration Statement dated March
26, 1999, and the discussion contained therein under the caption "Risk Factors".
Year 2000 The Company is actively evaluating and resolving any potential impact
of the Year 2000 problem on the processing of date-sensitive information by its
information systems, and the information systems of vendors upon whom the
Company is dependent. The Year 2000 problem exists because computer systems and
applications were historically designed to use two digit fields (rather than
four) to designate a year, and date sensitive systems may not properly recognize
2000, which could result in miscalculations or system failures.
Hollywood Park has established a Year 2000 project team composed of individuals
from each business unit and each corporate function to identify and mitigate
Year 2000 issues, with respect to the Company's information systems, products,
facilities, suppliers and customers.
Internal Computer Systems The Company believes that its various financial
reporting software and associated hardware are Year 2000 compatible. The
Company has identified the following software and hardware applications that
will need to be upgraded or replaced at an estimated cost of $2,000,000: (a)
point of sale cash register systems; (b) personal computer networks; and (c)
gaming patron player tracking systems. This cost estimate is based on numerous
assumptions, including the assumptions that the Company has already identified
the most significant Year 2000 issues. There can be no guarantee that these
assumptions are accurate, and actual results could differ materially from those
anticipated.
External Computer Systems Both the Hollywood Park and the Turf Paradise Race
Tracks lease pari-mutuel wagering software and associated hardware, though from
different providers, which are essential to operations. Each pari-mutuel
wagering service provider has assured the Company, in writing, that they will be
Year 2000 compatible by the end of March 1999. The Company does not have an
alternative software system to handle pari-mutuel wagering, and if the pari-
mutuel wagering service providers are unable to overcome any potential Year 2000
issues, this would have a materially adverse effect on the Company's operations.
The Company cannot be assured that its Year 2000 program will be effective, or
that estimates about timing and costs of completing the Year 2000 program will
be accurate, or that third party suppliers will timely resolve any or all Year
2000 problems with their systems. Any failure of a third party supplier to
timely resolve their Year 2000 issues could result in material disruption of the
Company's business. Such disruption could have a materially adverse effect on
Hollywood Park's business, financial condition and results of operations.
31
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Other On August 5, 1998, the Company announced its intention to repurchase and
retire up to 20%, or approximately 5,256,000, shares of its then issued and
outstanding common stock on the open market or in negotiated transactions. As
of December 31, 1998, the Company had repurchased and retired 500,000 shares at
a total cost of approximately $5,540,000 (with the last purchase being made on
September 28, 1998).
During 1996, the Company announced its intention to repurchase and retire up to
2,000,000 shares of its common stock on the open market or in negotiated
transactions. As of December 31, 1996, the Company had repurchased and retired
(with the last purchase in 1996 made on November 13, 1996) 222,300 common shares
at a cost of approximately $1,962,000.
Results of Operations
Year ended December 31, 1998, compared to the year ended December 31, 1997
--------------------------------------------------------------------------
On October 15, 1998, and on June 30, 1997, Hollywood Park acquired Casino Magic
and Boomtown, respectively, and accounted for each acquisition under the
purchase method of accounting for a business combination. As required under the
rules of the purchase method of accounting for a business combination, Casino
Magic's and Boomtown's results of operations were not consolidated with those of
Hollywood Park, prior to their respective acquisition dates, thus generating
significant variances when comparing 1998's financial results with those of
1997. Boomtown's results of operations include a full year of activity in 1998
and just six months of activity in 1997 (July 1, 1997 through December 31,
1997). Casino Magic's results of operations include the period October 16, 1998
through December 31, 1998, only, and no 1997 results.
Total revenues increased by $178,839,000, or 72.1%, for the year ended December
31, 1998, as compared to the year ended December 31, 1997. Approximately
$174,075,000 ($110,454,000 related to Boomtown and $63,621,000 related to Casino
Magic) of the increase was due to the timing of Boomtown and Casino Magic
acquisitions. Gaming revenues increased by $155,398,000, or 112.9%, with
$150,095,000 of the increase due to the timing of acquisitions. Gaming revenues
increased at the Boomtown properties by $10,687,000 (when comparing the six
months ended December 31, 1998 to the six months ended December 31, 1997) due
primarily to increases at Boomtown New Orleans, generated by the new larger
riverboat placed into service in February 1998. Gaming revenues decreased at
the Hollywood Park-Casino by approximately $4,562,000, primarily a result of the
ban on indoor smoking and economic problems in various Asian countries (a
significant portion of Hollywood Park-Casino's patrons are Asian). Racing
revenues decreased by $1,973,000, or 2.9%, due to there being five fewer live
race days at the Hollywood Park Race Track in 1998 as compared to 1997. Food
and beverage revenues increased by $10,616,000, or 53.4%, with $9,002,000 of the
increase due to the timing of acquisitions, and the balance of the increase
primarily attributable to increased sales at both Boomtown New Orleans and
Boomtown Biloxi, a result of successful marketing programs. Hotel and
recreational vehicle park revenues increased by $2,139,000, or 228.3%, due to
the timing of acquisitions. Truck stop and service station revenues (all of
which are attributable to Boomtown Reno) increased by $5,866,000, or 67.9%,
primarily due to the timing of the Boomtown acquisition. Other income increased
by $6,793,000, or 55.9%, with $6,456,000 of the increase due to the timing of
acquisitions.
Total operating expenses increased by $153,934,000, or 68.0%, during the year
ended December 31, 1998, as compared to the year ended December 31, 1997.
Approximately $151,578,000 ($96,996,000 related to Boomtown and $54,582,000
related to Casino Magic) of the increase related to the timing of acquisitions.
Gaming expenses increased by $86,816,000, or 116.2%, with $85,538,000 of the
increase due to the timing of acquisitions, with the balance of the increase
primarily a corresponding result of the increased gaming revenues at the
Boomtown properties. Food and beverage expenses increased by $13,115,000, or
50.9%, with $10,801,000 of the increase due to the timing of acquisitions. The
balance of the increase was primarily due to increased costs at Boomtown New
Orleans and Boomtown Biloxi, where food and beverage marketing promotions were
increased and successfully attracted additional gaming patrons to the
properties. Hotel and recreational vehicle expenses increased by $857,000, or
240.7%, primarily due to the timing of acquisitions. Truck stop and service
station expenses (all of which are attributable to Boomtown
32
<PAGE>
Reno) increased by $5,310,000, or 66.6%, due primarily to the timing of the
Boomtown acquisition. Administrative expenses increased by $33,977,000, or
55.2%, with $33,361,000 of the increase attributable to the timing of
acquisitions, with the balance of the increase primarily due to additional
staffing at Hollywood Park corporate, and expansion related expense increases.
Other expenses increased by $2,947,000, or 58.4%, with $2,892,000 of the
increase due to the timing of acquisitions. Depreciation and amortization
increased by $13,964,000, or 76.9%, with $12,236,000 of the increase due to the
timing of acquisitions, with the balance of the increase primarily due to
Boomtown New Orleans' February 1998 placement of the new riverboat into service,
and its July 1998 opening of the land-based Great Escape arcade and restaurant.
REIT restructuring expenses decreased because in early 1998 the Company ceased
pursuing the possibility of restructuring the Company into a real estate
investment trust. Loss on write off of assets was $2,221,000 for the year ended
December 31, 1998, of which $1,086,000 related to the closing of the Hollywood
Park Golf Center; $500,000 related to the abandonment of a project in Kansas,
with the balance related to the write off of obsolete assets at Boomtown Reno.
Interest expense increased by $15,216,000, or 208.4%, due to interest on the
9.5% Notes, which were issued in August 1997, and interest on bank borrowings,
including borrowing to purchase Casino Magic and to retire the Casino Magic
11.5% Notes. Income tax expense increased by $2,592,000, or 44.3%, due to
increased pre-tax income in 1998.
Year ended December 31, 1997 compared to the year ended December 31, 1996
-------------------------------------------------------------------------
On June 30, 1997, Hollywood Park acquired Boomtown, with the acquisition
accounted for under the purchase method of accounting for a business
combination, and therefore, Boomtown's results of operations are not
consolidated with those of Hollywood Park's prior to this date. As of April 1,
1996, Sunflower's results of operations were no longer consolidated with
Hollywood Park's results, thus the results of operations for the year ended
December 31, 1997, are exclusive of Sunflower's results of operations, but the
financial results for the year ended December 31, 1996, included Sunflower's
results of operations through March 31, 1996. Also included in the results of
operations for the year ended December 31, 1996, was the $11,412,000 one time,
non-cash write off of Hollywood Park's investment in Sunflower.
Total revenues for the year ended December 31, 1997, increased by $104,903,000
or 73.2%, as compared to the year ended December 31, 1996, primarily due to the
inclusion of $105,781,000 of Boomtown revenues in 1997, with no corresponding
revenues recorded in 1996. Gaming revenues increased by $86,942,000, or 171.4%,
due primarily to Boomtown gaming revenues of $84,620,000, and Crystal Park LLC
rent revenues of $2,222,000, in 1997, with no corresponding Boomtown or Crystal
Park LLC revenues in 1996. (The Crystal Park Casino opened in late October
1996.) As of December 19, 1997, the Company had leased the Crystal Park Casino
to CCM, an unaffiliated third party. Previously, the Crystal Park Casino was
under lease to CEI. On November 4, 1997, the Company obtained a judgment in an
action for unlawful detainer against CEI, due to CEI's failure to pay a portion
of the June 1997 rent and to make required additional rent payments. In October
1997, the California Attorney General revoked CEI's conditional gaming
registration, and the City of Compton revoked CEI's city gaming license. Racing
revenues decreased by $2,464,000, or 3.5%, due primarily to one fewer live race
day at the Hollywood Park Race Track, and the inclusion of $1,317,000 of racing
revenues attributable to Sunflower in 1996, with no corresponding Sunflower
revenues in 1997. Food and beverage revenues increased by $5,947,000, or 42.6%,
due primarily to the inclusion of Boomtown food and beverage revenues in 1997,
with no corresponding revenues in 1996. Hotel and recreational vehicle park and
truck stop and service station revenues related to Boomtown Reno, and there are
no corresponding revenues in 1996. Other income increased by $4,908,000, or
67.7%, due primarily to the inclusion of Boomtown revenues in 1997 with no
corresponding revenues in 1996.
Total operating expenses (inclusive of approximately $93,072,000 of Boomtown
expenses in 1997, with no corresponding expenses in 1996) increased by
$83,251,000, or 58.2%, during the year ended December 31, 1997, as compared to
the year ended December 31, 1996. Gaming expenses increased by $47,484,000, or
174.3%, primarily due to the inclusion of Boomtown expenses of $46,380,000, and
increased tournament costs at the Hollywood Park-Casino. Food and beverage
expenses increased by $6,172,000, or 31.5%, due primarily to Boomtown food and
beverage expenses of $7,510,000, netted against expense reductions at the
Hollywood Park-Casino, that included labor savings due to the closing of some
food service outlets. Hotel
33
<PAGE>
and recreational vehicle park expenses and truck stop and service station
expenses related to Boomtown Reno, and there are no corresponding expenses in
1996. Administrative expenses increased by $20,037,000, or 48.3%, which included
$22,054,000 of Boomtown expenses, netted against Sunflower related
administrative costs included in the 1996 financial results, for which there are
no similar costs in the 1997 results. Other expenses increased by $2,563,000, or
103.1%, due primarily to the inclusion of Boomtown expenses in 1997 with no
corresponding expenses in 1996. Depreciation and amortization increased by
$7,462,000, or 69.8%, primarily due to the Boomtown and Crystal Park LLC
depreciation expense in 1997, with no corresponding expenses in 1996. REIT
restructuring expenses consisted primarily of legal and tax consulting expenses
incurred by Hollywood Park with respect to the reinstatement of the Company's
paired share REIT status. Interest expense increased by $6,360,000, due to
interest on the Company's $125,000,000 9.5% Notes that were issued in August
1997, short term bank borrowings (all of which had been repaid as of December
31, 1997), and bank commitment fees. Income tax expense increased by $2,391,000,
or 69.1%, due to increased income before income taxes in 1997 as compared to
1996.
Liquidity and Capital Resources
Hollywood Park's principal source of liquidity as of December 31, 1998, was cash
and cash equivalents of $43,934,000. Cash and cash equivalents increased by
$20,185,000 during the year ended December 31, 1998. Net cash provided by
operating activities was $38,219,000. Net cash used in investing activities was
$136,532,000, which included net cash used of $65,749,000 spent to acquire
Casino Magic. Cash of $56,747,000 was used to purchase capital assets,
including amounts spent to build a major hotel expansion, build out the land-
based facility and build a hotel, at Boomtown Reno, Boomtown New Orleans and
Casino Magic Bossier City, respectively. Net cash provided by financing
activities was $118,498,000, which included approximately $80,904,000 used to
purchase Casino Magic's common stock, and $141,515,000 used to redeem Casino
Magic's 11.5% Notes (or $135,000,000 of principal, plus accrued interest and
premium). The Company used $5,540,000 to repurchase and retire 500,000 shares
of its common stock on the open market or in negotiated transactions. Cash
payments were made on a variety of secured and unsecured notes payable including
the purchase of the barge at Boomtown Biloxi, the notes payable to Mr. Roski and
other operations related notes.
Hollywood Park's principal source of liquidity as of December 31, 1997 was cash
and cash equivalents of $23,749,000. Cash and cash equivalents increased by
$11,827,000 during the year ended December 31, 1997. Net cash provided by
operating activities was $18,454,000. Net cash used in investing activities was
$16,236,000. Cash of $32,505,000 was used to purchase capital assets, including
amounts spent for the purchase of a new riverboat for Boomtown New Orleans, the
down payment on the purchase of the barge for Boomtown Biloxi, and normal and
necessary capital improvements. Cash provided by investing activities related
to the cash acquired from Boomtown in the Boomtown Merger (net of Hollywood
Park's merger costs) and by the liquidation of the Company's short term
corporate bond investments. Net cash provided by financing activities was
$9,609,000. Cash of $125,000,000 was raised with the August 6, 1997, issuance
of the 9.5% Notes (defined below), with associated offering costs of
approximately $1,630,000. Cash of approximately $110,924,000 was used to redeem
a majority of Boomtown's 11.5% Notes. Cash was used for the payment of the
convertible preferred stock dividend through the August 28, 1997, conversion.
Cash payments were also made on a variety of secured notes for operating assets
for the Boomtown properties.
Hollywood Park Bank Credit Facility On October 14, 1998, the Company executed
--------------------
the Amended and Restated Reducing Revolving Loan Agreement with a bank syndicate
lead by Bank of America National Trust and Savings Association NT&SA ("Bank of
America") (the "Bank Credit Facility") for up to $300,000,000, with an option to
increase this amount to $375,000,000. The Bank Credit Facility also provides
for sub-facilities for letters of credit up to $30,000,000, and swing line loans
of up to $10,000,000. Prior to the execution of the Bank Credit Facility, the
Company was operating with a former Bank Credit Facility which was initially for
$225,000,000, and was reduced to $100,000,000 with the August 1997 issuance of
the 9.5% Hollywood Park Senior Subordinated Notes due 2007 (the "9.5% Notes").
The Bank Credit Facility extended the maturity of the former Bank Credit
Facility to December 31, 2003, reduced interest and commitment fee rates, and
amended certain covenants, as compared to the former Bank Credit Facility.
34
<PAGE>
As of December 31, 1998, the Company had outstanding borrowings under the Bank
Credit Facility of $270,000,000 (inclusive of $225,000,000 borrowed on October
15, 1998, of which $80,904,000 was used to purchase Casino Magic's common stock,
$141,515,000 to redeem Casino Magic's 11.5% First Mortgage Notes, with the
balance used for general corporate needs) at a weighted average interest rate of
7.30%. Through February 8, 1999, the Company borrowed an additional
$17,000,000, for total outstanding borrowings under the Bank Credit Facility of
$287,000,000, all of which was paid in full on February 18, 1999, with a portion
of the funds from the Company's February 18, 1999 private placement of
$350,000,000 aggregate principal amount of 9.25% Senior Subordinated Notes due
2007 (the "9.25% Notes") (more fully discussed below).
Under the Bank Credit Facility, the Company is not required to make any
principal payments prior to March 31, 2001, but must make monthly interest
payments. Starting March 31, 2001, and on the last day of each subsequent
calendar quarter, through December 31, 2002, the then amount available under the
Bank Credit Facility will decrease by $15,000,000 and on the last day of each
calendar quarter for the period March 31, 2003, through September 30, 2003, it
will decrease by $25,000,000, with the balance of any principal outstanding due
on December 31, 2003. If the Company has borrowings in excess of the reduced
availability of the Bank Credit Facility, these amounts are due on the same day
as the scheduled reductions.
The annual interest rate under the Bank Credit Facility is determined, at the
Company's election, by reference to the "Eurodollar Rate" (for Eurodollar loans)
(for interest periods of one, two, three or six months) or the "Alternative Base
Rate", (for Base Rate loans) as these terms are defined in the Bank Credit
Facility, plus margins that vary upon the Company's ratio of funded debt to
earnings before interest, taxes, depreciation and amortization ("EBITDA"). With
a funded debt to EBITDA ratio of less than 2.00 to 1.00, the margin for
Eurodollar loans is 1.00% and nothing for Base Rate loans. The margin for each
type of loan will increase by 25 basis points (except the initial price increase
for Eurodollar loans, which increases by 12.5 basis points) for each 50 basis
point increase in the funded debt to EBITDA ratio. The maximum margin for
Eurodollar loans is 2.25%, and for Base Rate loans is 1.125%. The margin for
the period December 1, 1998 through February 28, 1999 for Eurodollar loans was
2.25% and 1.125% for Base Rate loans.
The Bank Credit Facility requires the payment of a quarterly commitment fee,
based on the Company's ratio of funded debt to EBITDA, applied to the average
amount of the unused portion of the Bank Credit Facility. The commitment fee
starts at 25 basis points when the ratio of funded debt to EBITDA is less than
2.00 to 1.00, and increases by 6.25 basis points for the first two increases in
the ratio of 50 basis points, then remains unchanged for the next 50 basis
points increase in the ratio, and thereafter increases by 6.25 basis points, to
a maximum of 50 basis points, for each 50 basis point increase in the ratio.
When the ratio of funded debt to EBITDA is greater than 3.00 to 1.00, but less
than 3.50 to 1.00, the commitment fee does not increase. The commitment fee for
the period December 1, 1998, through May 31, 1999, will be 50.00 basis points.
The Bank Credit Facility allows for interest rate swap agreements, or other
interest rate protection agreements, up to a maximum notional amount of
$300,000,000. Presently, the Company does not use such financial instruments.
9.5% Notes On August 6, 1997, Hollywood Park and Hollywood Park Operating
- ----------
Company co-issued $125,000,000 aggregate principal amount of 9.5% Notes. The
Company paid liquidated damages at an annual rate of 0.5% of the principal
amount of the 9.5% Notes for the period January 27, 1998 to March 20, 1998 (the
date of consummation of the required registered exchange offer for the 9.5%
Notes). The 9.5% Notes are redeemable, at the option of Hollywood Park and
Hollywood Park Operating Company, in whole or in part, on or after August 1,
2002, at a premium to face amount, plus accrued interest, as follows: (a) August
1, 2002 at 104.75%; (b) August 1, 2003 at 102.375%; (c) August 1, 2004 at
101.188%; and (d) August 1, 2005 and thereafter at 100%. The 9.5% Notes are
unsecured obligations of Hollywood Park and Hollywood Park Operating Company,
guaranteed by all other material restricted subsidiaries of either Hollywood
Park or Hollywood Park Operating Company. Certain Casino Magic subsidiaries,
including Casino Magic of Louisiana, Corp., which owns and operates Casino Magic
Bossier City, and the entities which conduct the
35
<PAGE>
Casino Magic Argentina operations, are unrestricted subsidiaries under the
indenture governing the 9.5% Notes and do not guarantee the 9.5% Notes.
On January 29, 1999, Hollywood Park received the required number of consents to
modify selected covenants associated with the 9.5% Notes. Among other things,
the modifications lower the required minimum consolidated coverage ratio for
debt assumption to 2.00:1.00 and increased the size of Hollywood Park's allowed
borrowings under the Bank Credit Facility from $100,000,000 to $350,000,000.
The Company paid a consent fee of $50.00 per $1,000 principal amount of the 9.5%
Notes, or a total cost of approximately $6,781,000, inclusive of transaction
related expenses.
The indenture governing the 9.5% Notes contains certain covenants that, among
other things, limit the ability of Hollywood Park, Hollywood Park Operating
Company and their restricted subsidiaries to incur additional indebtedness and
issue preferred stock, pay dividends or make other distributions, repurchase
equity interests (the previously discussed stock repurchase falls within the
parameters of the indenture) or subordinated indebtedness, create certain liens,
enter into certain transactions with affiliates, sell assets, issue or sell
equity interests in their respective subsidiaries or enter into certain mergers
and consolidations.
9.25% Notes On February 18, 1999, Hollywood Park issued $350,000,000 aggregate
- -----------
principal amount of 9.25% Notes, pursuant to a private offering. Hollywood Park
has filed a registration statement with the Securities and Exchange Commission
covering an exchange offer of a like principal amount of registered 9.25% Notes
with substantially identical terms as the outstanding 9.25% Notes. The 9.25%
Notes are redeemable, at the option of the Company, in whole or in part, on or
after February 15, 2003, at a premium to face amount, plus accrued interest, as
follows: (a) February 15, 2003 at 104.625%; (b) February 15, 2004 at 103.083%;
(c) February 15, 2005 at 101.542%; and (d) February 15, 2006 and thereafter
100%. The 9.25% Notes are unsecured obligations of Hollywood Park, guaranteed
by all other material restricted subsidiaries of Hollywood Park excluding
certain Casino Magic subsidiaries, principally Casino Magic of Louisiana, Corp.
and the Casino Magic Argentina subsidiaries.
Hollywood Park received net proceeds of approximately $339,900,000 from the
9.25% Note offering. Of these proceeds, Hollywood Park used $287,000,000 to
repay all outstanding borrowings under the Bank Credit Facility. The remaining
proceeds of approximately $52,900,000 are currently invested in various short
term investments and are expected to be used to fund Hollywood Park's capital
expenditures. The repayment of all borrowings outstanding under the Bank Credit
Facility does not reduce the size of the bank's commitment to lend and, if
Hollywood Park meets the relevant conditions for borrowing, Hollywood Park could
borrow the full amount available under the Bank Credit Facility in the future,
including the amounts repaid with the proceeds from the 9.25% Note offering.
The indenture governing the 9.25% Notes contains 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 interest in its subsidiaries, or enter into certain mergers
and consolidations.
Other Information Hollywood Park, through its wholly owned subsidiary HP
- -----------------
Yakama, loaned approximately $9,618,000 to the Yakama Tribal Corporation to
construct the Legends Casino. The Tribal Corporation gave HP Yakama a
promissory note for the $9,618,000, payable in 84 equal installments at a 10%
rate of interest.
As of December 31, 1998, the Company has invested approximately $3,179,000
(inclusive of an unrealized gain of approximately $470,000) in equity
securities, which are presently being held as available-for-sale.
As of August 31, 1998, the Company holds a promissory note for up to $3,500,000
from Paul Alanis, who as of January 1, 1999, is employed by the Company as its
President and Chief Operating Officer. The Company has lent Mr. Alanis
$3,232,000, who used the funds to purchase 300,000 shares of the Company's
common stock. Interest on the promissory note is the prime interest rate, but
not more than 10%. The principal
36
<PAGE>
amount of the promissory note, along with any accrued interest is due in full,
no later than December 31, 1999. The promissory note is secured by Mr. Alanis'
interest in Horseshoe Gaming LLC, which has an approximate value well in excess
of $3,500,000.
Boomtown 11.5% Notes In November 1993, Boomtown issued $103,500,000 of 11.5%
-----------
First Mortgage Notes (the "Boomtown 11.5% Notes"). On July 3, 1997, pursuant to
a tender offer made in connection with the Boomtown Merger, Boomtown repurchased
and retired approximately $102,142,000 in principal amount of the Boomtown 11.5%
Notes, at a purchase price of $1,085 per $1,000, along with accrued interest
thereon. An additional $105,000 of the remaining Boomtown 11.5% Notes were
tendered in the post Boomtown Merger change of control purchase offer, at a
price of $1,010 for each $1,000, completed August 12, 1997. As permitted in the
indenture governing the Boomtown Notes (the "Boomtown Indenture"), in June 1998,
Boomtown elected to satisfy and discharge its obligation regarding the remaining
$1,253,000 of Boomtown 11.5% Notes. As of June 9, 1998, Boomtown had satisfied
all conditions required to discharge its obligations under the Boomtown
Indenture. The total cost to retire the remaining Boomtown 11.5% Notes was
$1,378,000.
Other Information As consideration for the sale of its Las Vegas property,
- -----------------
Boomtown received two promissory notes receivable from Mr. Roski, the former
lessor of Boomtown's Las Vegas property, totaling approximately $8,465,000. The
first note is for $5,000,000, bearing interest at Bank of America's reference
rate plus 1.5% per year, with annual principal payments of $1,000,000 plus
accrued interest commencing on July 1, 1998. The second note is for
approximately $3,465,000, bearing interest at Bank of America's reference rate
plus 0.5% per year, with the principal and accrued interest payable, in full, on
July 1, 2000.
Casino Magic Casino Magic 11.5% Notes In October 1993, Casino Magic (through a
------------------------
wholly owned subsidiary) issued $135,000,000 in aggregate principal amount of
11.5% First Mortgage Notes (the "Casino Magic 11.5% Notes"). On October 15,
1998, concurrent with the completion of the Casino Magic Merger, Casino Magic
exercised its right to redeem the Casino Magic 11.5% Notes, at 103.833%, and as
of October 15, 1998, Casino Magic had satisfied all conditions required to
discharge its obligations at a total cost of $141,515,000. The funds used to
redeem the Casino Magic 11.5% Notes were borrowed under the Bank Credit
Facility.
Casino Magic 13% Notes On August 22, 1996, Casino Magic of Louisiana, Corp.,
- ----------------------
(owner of Casino Magic Bossier City) a wholly owned subsidiary of Jefferson
Casino Corporation, which is a wholly owned subsidiary of Casino Magic, issued
$115,000,000 in aggregate principal amount of 13% First Mortgage Notes (the
"Casino Magic 13% Notes"), with contingent interest at 5% of Casino Magic
Bossier City's adjusted consolidated cash flow (as defined under the indenture
governing these notes). The Casino Magic 13% Notes are secured by a first
priority lien and security interest in substantially all of the assets of Casino
Magic Bossier City, and Jefferson Casino Corporation guarantees the Casino Magic
13% Notes, and the guarantee is secured by all of the assets of Jefferson Casino
Corporation including all of the capital stock of Casino Magic of Louisiana,
Corp. The Casino Magic 13% Notes are redeemable, in whole or in part, on or
after August 15, 2000, at a premium to face amount, plus accrued interest, as
follows: (a) August 15, 2000, at 106.5%; (b) August 15, 2001, at 104.332%; and
(c) August 15, 2002, and thereafter at 102.166%.
On December 23, 1998, the Company completed the post Casino Magic Merger change
of control purchase offer, whereby $2,125,000 in principal amount of the Casino
Magic 13% Notes were tendered, at a price of $1,010 for each $1,000 of principal
amount.
The indenture governing the Casino Magic 13% Notes contains certain covenants
limiting Casino Magic of Louisiana, Corp. and its subsidiaries to engage in any
line of business other than the current gaming operations of Casino Magic
Bossier City and incidental related activities, to borrow funds or otherwise
become liable for additional debt, to pay dividends, issue preferred stock, make
investments and certain types of payments, to grant liens on its property, enter
into mergers or consolidations, or to enter into certain specified transactions
with affiliates.
37
<PAGE>
Other Information As of December 31, 1998, Casino Magic had various secured
- -----------------
notes payable totaling $14,069,000, primarily secured by various fixed assets at
Casino Magic Biloxi and Casino Magic Bossier City. As with the Boomtown Merger,
the Company is currently evaluating the various Casino Magic notes payable for
early retirement. Casino Magic also had unsecured notes payable totaling
$2,251,000 and capital leases of $641,000.
Capital Commitments As previously discussed, the Company was approved to
receive the last available gaming license to own and operate a riverboat casino
on the Ohio River in Indiana. As a result the Company has capital commitments
of approximately $3,700,000 for the purchase of the common stock of Pinnacle
Gaming Development Corporation (the entity that initially applied for the
Indiana gaming license). The Indiana Project is expected to cost approximately
$150,000,000 (inclusive of land and pre-opening costs, and exclusive of
capitalized interest), to be spent over the next 18 to 24 months. The Company
believes that the Bank Credit Facility, the unused proceeds from the 9.25% Note
offering, and available future cash flow will be sufficient to fund the
construction of the Indiana Project; however, there can be no assurance that
additional funds will not be required to complete anticipated projects.
The Company anticipates spending approximately $26,000,000 in 1999 for
maintenance capital expenditures.
General Hollywood Park is continually evaluating future growth opportunities in
the gaming industry. Hollywood Park expects that funding for the Indiana
Project, payment of interest on the 9.5% Notes, 9.25% Notes and the Casino Magic
13% Notes, payment of notes payable, and normal and necessary capital
expenditure needs will come from existing cash balances generated from operating
activities and borrowings from the Bank Credit Facility. In the opinion of
management, these resources will be sufficient to meet Hollywood Park's
anticipated cash requirements for the foreseeable future and in any event for at
least the next twelve months.
Item 7A. Quantitative and Qualitative Disclosures About Market Risk
- -------------------------------------------------------------------
Hollywood Park's primary exposure to market risk (or the risk of loss arising
from adverse changes in market rates and prices, such as interest rates, foreign
currency exchange rates and commodity prices) is with respect to potential
interest rate risk associated with the long term floating interest rate on
borrowings under the Bank Credit Facility (see Liquidity and Capital
Resources). As of March 25, 1999, Hollywood Park had no outstanding borrowings
under the Bank Credit Facility
As of December 31, 1998, Hollywood Park did not hold any investments in market
risk sensitive instruments of the type described in Item 305 of Regulation S-K.
Item 8. Financial Statements
- -----------------------------
Financial statements and accompanying footnotes are attached hereto.
Item 9. Changes in and Disagreements with Accountants on Accounting and
- -----------------------------------------------------------------------
Financial Disclosure
- --------------------
None
38
<PAGE>
Part III
Item 10. Directors and Executive Officers of the Registrant
- -----------------------------------------------------------
The following table sets forth certain information with respect to the Directors
and Executive Officers of the Company:
<TABLE>
<CAPTION>
Name Age Position
- -------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
R.D. Hubbard (a) 63 Chairman of the Board of Directors, Chief Executive Officer
and Member of the Office of the Chairman
J.R. Johnson (b) 78 Director
Robert T. Manfuso 61 Director
Michael Ornest (c) 41 Director
Timothy J. Parrott (a) 50 Director and Member of the Office of the Chairman for Administration
of Boomtown
Lynn P. Reitnouer (a), (b) 66 Director
Herman Sarkowsky (c) 73 Director
Marlin Torguson 54 Director
Warren B. Williamson (b), (c) 70 Director
G. Michael Finnigan 50 President and Chief Executive Officer of Realty Investment Group, Inc.,
a subsidiary of Hollywood Park, Inc.; Executive Vice President,
Treasurer, Chief Financial Officer and Member of the Office of the
Chairman
Paul R. Alanis 50 President and Chief Operating Officer
J. Michael Allen 51 Senior Vice President, Chief Operating Officer of Gaming Operations
Donald M. Robbins 51 Secretary and President of Racing of Hollywood Park Operating
Company and Turf Paradise, Inc.
</TABLE>
- -----
(a) Member of Executive Committee
(b) Member of Compensation Committee
(c) Member of Audit Committee
Mr. Hubbard has been a Director of the Company since 1990; Chairman of the Board
- -----------
and Chief Executive Officer of the Company since September 1991; Chairman of the
Board and Chief Executive Officer, Hollywood Park Operating Company since
February 1991; President, Hollywood Park Operating Company from February to July
1991; Chairman, AFG Industries, Inc. and its parent company, Clarity Holdings
Corp. (glass manufacturing), and director of AFG Industries, Inc.'s
subsidiaries, from 1978 to July 1993; Chairman of the Board (and 60% stockholder
until March 1994), Sunflower (The Woodlands Race Tracksgreyhound racing and
horse racing) from 1988 to March 1994; President, Director, and majority owner,
Ruidoso Downs Racing, Inc. (horse racing) since 1988; Chairman of the Board,
Chief Executive Officer and sole stockholder, Multnomah Kennel Club, Inc.
(greyhound racing) from December 1991 to April 1998; and owner and breeder of
numerous thoroughbreds and quarter horses since 1962.
Mr. Johnson has been a Director of the Company since 1991; Director, Hollywood
- -----------
Park Operating Company from February 1991 to January 1992; Chairman, President
and Chief Executive Officer, NEWMAR (marine electronics manufacturing) since
1980; Director, Logicon, Inc. (defense oriented intelligence); and Trustee,
Westminster College.
Mr. Manfuso has been a Director of the Company since 1991; Director, Hollywood
- -----------
Park Operating Company from February 1991 to January 1992; Co-Chairman of the
Board, Laurel Racing Association (horse race track management) from 1984 to
February 1994; Vice Chairman of the Board, The Maryland Jockey Club (horse
racing) from 1986 to February 1994; Executive Vice President, Laurel Racing
Association from 1984 to May 1990; Executive Vice President, The Maryland Jockey
Club from 1986 to June 1990; Director, Maryland Horse Breeders Association from
1984 to 1992; and Member, Executive Committee, Maryland Million since 1991.
39
<PAGE>
Mr. Ornest has been a Director of the Company since October 1998 and his family
- ----------
has been a shareholder of the Company since 1962; Director of the Ornest Family
Partnership since 1983; Director of the Ornest Family Foundation since 1993;
Director of the Toronto Argonauts Football Club from 1988 to 1990; President of
the St. Louis Arena and Vice President of the St. Louis Blues Hockey Club from
1983 to 1986; and Managing Director of the Vancouver Canadians Baseball Club,
Pacific Coast League from 1979 to 1980.
Mr. Parrott has been a Director of the Company since June 1997; Chairman of the
- -----------
Board and Chief Executive Officer, Boomtown, Inc. from September 1992 to October
1998; President and Treasurer, Boomtown, Inc. from June 1987 to September 1992;
Director, Boomtown, Inc. since 1987; Chairman of the Board and Chief Executive
Officer, Boomtown Hotel & Casino, Inc. since May 1988; Chief Executive Officer,
Parrott Investment Company (a family-held investment company with agricultural
interests in California) since April 1995; and Director, The Chronicle
Publishing Company since April 1995.
Mr. Reitnouer has been a Director of the Company since 1991; Director, Hollywood
- -------------
Park Operating Company from September 1991 to January 1992; Partner, Crowell
Weedon & Co. (stock brokerage) since 1969; Director and Chairman of the Board,
COHR, Inc. since 1986; Director and President, Forest Lawn Memorial Parks
Association since 1975; and Trustee, University of California Santa Barbara
Foundation (and former Chairman) since 1992.
Mr. Sarkowsky has been a Director of the Company since 1991; Director, Hollywood
- -------------
Park Operating Company from February 1991 to January 1992; Owner, Sarkowsky
Investment Corporation and SPF Holding, Inc. (real estate development and
investments) since 1980; Director, The Sarkowsky Foundation (charitable
foundation) since 1982; thoroughbred horse breeder and owner since 1959;
Director, Synetics, Inc. (porous plastic manufacturing); and Director, Eagle
Hardware & Garden, since 1990.
Mr. Torguson has been a Director of the Company since October 1998; served as
- ------------
the Chairman of the Board of Casino Magic from December 1, 1994 to October 15,
1998; President and Chief Executive Officer of Casino Magic from April 1992
through November 1994; Chief Financial Officer and Treasurer of Casino Magic
from April 1992 to February 1993; and 50% owner and a Vice President of G.M.T.
Management Co. (casino management and operations) from December 1983 to December
1994.
Mr. Williamson has been a Director of the Company since 1991; Vice President and
- --------------
Secretary of the Company from September 1991 to August 1996; Chairman of the
Board and Chief Executive Officer of the Company from 1989 to September 1991;
Director, Hollywood Park Operating Company since 1985; Vice President and
Secretary, Hollywood Park Operating Company from February 1991 to August 1996;
Secretary and Treasurer, Hollywood Park Operating Company from 1985 to November
1990; Chairman of Chandler Trusts since 1985; Director, Times Mirror Company;
Trustee, Hospital of the Good Samaritan; Trustee, California Thoroughbred
Breeders Foundation; Trustee, Claremont McKenna College; Chairman Emeritus, Art
Center College of Design; breeder and racer of thoroughbreds since 1970.
Mr. Finnigan has served as the President and Chief Executive Officer of Realty
- ------------
Investment Group, Inc., a wholly-owned subsidiary of the Company which conducts
all of the Company's real estate business and related development activities,
since December 1998; the Chief Financial Officer of the Company and of Hollywood
Park Operating Company since March 1989; President, Sports and Entertainment,
from January 1996 to December 1998; President, Gaming and Entertainment from
February 1994 to January 1996; Executive Vice President of the Company and of
Hollywood Park Operating Company since March 1989; and Treasurer of the Company
and of Hollywood Park Operating Company since March 1992; Chairman of the Board,
Southern California Special Olympics since 1996; Chairman of the Board,
Centinela Hospital since 1996; and Director, Shoemaker Foundation since 1993.
Mr. Alanis has served as the President and Chief Operating Officer since January
- ----------
1999. Mr. Alanis served as President of Horseshoe Gaming, Inc., which is the
manager and a member of Horseshoe Gaming, LLC, and of Horseshoe GP, Inc., a
wholly-owned subsidiary of Horseshoe Gaming, LLC from January 1996 to December
40
<PAGE>
1998; President, KII-Pasadena, Inc. since December 1988; and President, Koar
International, Inc. from 1991 until 1995.
Mr. Allen has served as the Company's Senior Vice President, Gaming Operations,
- ---------
since January 1999. Mr. Allen served as Senior Vice President of Horseshoe
Gaming, Inc. from October 1, 1995 to December 31, 1998 and prior to that as
General Manager of the Horseshoe Casino Center from May 1994; and Principal of
Gaming Associates, Inc. from September 1992 to May 1994.
Mr. Robbins served as the Company's President of Racing since February 1994;
- -----------
President of the Company since September 1991; Secretary of the Company since
1996 (formerly Assistant Secretary since September 1991); General Manager of
Hollywood Park Operating Company from 1986 to February 1994; Executive Vice
President of Hollywood Park Operating Company since 1988, and President and
Secretary of Hollywood Park Operating Company since July 1991.
In addition, upon the consummation of the Boomtown Merger, the Company
established an Office of the Chairman comprised of Messrs. Hubbard, Finnigan and
Parrott. The Office of the Chairman provides advice to the Chief Executive
Officer of Hollywood Park on such matters as he may request and undertakes such
other responsibilities as he may delegate to the Office of the Chairman from
time to time.
Item 11. Executive Compensation
- --------------------------------
The following tables summarize the annual and long term compensation of, and
stock options held by, Hollywood Park's Chief Executive Officer and the two
additional most highly compensated executive officers whose annual salaries and
bonuses exceeded $100,000 in total during the fiscal year ended December 31,
1998 (collectively, the "Named Officers").
Summary Compensation Table
<TABLE>
<CAPTION>
Long Term
Compensation
Awards
------------------
Securities
Annual Compensation Underlying All Other
--------------------------
Name and Principal Salary Bonus Other Annual Options/ Comp-
Position Year ($) ($) Compensation SARs (#) ensation
- --------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
R. D. Hubbard 1998 $500,000 $160,000 $0 50,000 $2,370 (a)
Chairman of the Board 1997 400,000 40,235 0 45,000 4,740 (a)
and Chief Executive 1996 400,000 0 0 85,000 0
Officer
G. Michael Finnigan 1998 $307,600 $75,000 $0 35,000 $23,633 (b)
President and Chief 1997 307,608 0 0 25,000 3,555 (a)
Executive Officer of Realty 1996 262,608 25,000 0 40,000 0
Investment Group, Inc.,
Executive Vice President,
Treasurer and Chief
Financial Officer
Donald M. Robbins 1998 $295,000 $35,000 $0 15,000 $30,484 (c)
Secretary and President 1997 295,008 0 0 25,000 3,373 (a)
of Racing of Hollywood 1996 250,008 25,000 0 40,000 0
Park Operating Company
and Turf Paradise, Inc.
</TABLE>
_________
(a) Reflects Company matching contributions under the Hollywood Park 401(k)
Plan.
(b) Includes Company matching contribution under the Hollywood Park 401(k) Plan
of $2,370, and $21,262 of distribution related to the termination of the
Company's Supplemental Executive Retirement Plan.
41
<PAGE>
(c) Includes Company matching contribution under the Hollywood Park 401(k) Plan
of $2,249, and $28,235 of distribution related to the termination of the
Company's Supplemental Executive Retirement Plan.
On January 1, 1999, the Company appointed Paul Alanis as President and Chief
Operating Officer and Michael Allen as Senior Vice President, Chief Operating
Officer of Gaming Operations. Mr. Alanis' annual base salary will be $600,000
and Mr. Allen's will be $400,000. Mr. Alanis and Mr. Allen were granted 400,000
and 200,000 stock options, respectively, on September 10, 1998, but they were
not eligible to exercise any of the options until January 2, 1999. (These
options were granted outside of the 1993 and 1996 Stock Option Plans.)
Stock Option Plans In 1993 and 1996, the stockholders of Hollywood Park adopted
Stock Options Plans, which provided for the issuance of up to 625,000 and
900,000 shares of Hollywood Park common stock upon exercise of the options,
respectively. Except for the provisions governing the number of shares issuable
thereunder, and except for certain provisions which reflect changes in tax and
securities laws, the provisions of the Stock Option Plans are substantially
similar. The Hollywood Park Stock Option Plans are administered and terms of
option grants are established by the Compensation Committee of the Board of
Directors. Under the Hollywood Park Stock Option Plans, options alone or
coupled with stock appreciation rights may be granted to selected key employees,
directors, consultants and advisors of Hollywood Park. Options become
exercisable according to a vesting period as determined by the Compensation
Committee at the date of grant, and expire on the earlier of one month after
termination of employment, six months after the death or permanent disability of
the optionee, or the expiration of the fixed option term set by the Compensation
Committee at the grant date (not to exceed ten years from the grant date). The
exercise prices of all options granted under the Hollywood Park Stock Option
Plans are determined by the Compensation Committee on the grant date, provided
that the exercise price of an incentive stock option may not be less than the
fair market value of the common stock at the date of grant.
As of December 31, 1998, all of the 625,000 shares eligible for issuance under
the 1993 Stock Option Plan had either been issued or were subject to outstanding
options, and of the 900,000 shares eligible for issuance under the 1996 Stock
Option Plan, 274,688 were subject to outstanding options. In addition, 968,111
and 303,924 shares of Hollywood Park common stock are issuable upon exercise of
options granted under pre-merger plans of Boomtown and Casino Magic,
respectively, which Hollywood Park assumed in each Merger. Hollywood Park has
filed registration statements with the Securities and Exchange Commission
covering an aggregate of 2,883,215 shares of Hollywood Park common stock
issuable upon exercise of options granted under the Hollywood Park Stock Option
Plans, the Boomtown Stock Option Plans and the Casino Magic Stock Option Plans.
Options/SAR Grants in Last Fiscal Year The following table summarizes the
option grants to Named Officers during the year ended December 31, 1998:
<TABLE>
<CAPTION>
Individual Grants
- --------------------------------------------------------------------------------------------------
Percent of
Total Potential Realizable Value
Number of Options/ at Assumed Annual Rates
Securities SARs of Stock Price Appreciation
Underlying Granted to Exercise for Option Term
Options/SARs Employees or ---------------------------
Granted in Fiscal Base Price Expiration
Name (#) Year ($/Sh) Date 5% ($) 10% ($)
- ---------------------- -------------- ------------- ----------- -------------- ----------- ----------
<S> <C> <C> <C> <C> <C> <C>
R.D. Hubbard 50,000 5% $13.6250 Feb. 3, 2008 $428,000 $1,086,000
G. Michael Finnigan 35,000 3% 13.6250 Feb. 3, 2008 300,000 760,000
Paul R. Alanis 300,000 29% 10.1875 Sept. 10, 2008 1,922,000 4,871,000
100,000 10% 18.0000 Sept. 10, 2008 0 842,000
J. Michael Allen 150,000 14% 10.1875 Sept. 10, 2008 961,000 2,435,000
50,000 5% 18.0000 Sept. 10, 2008 0 421,000
Donald M. Robbins 15,000 1% 13.6250 Feb. 3, 2008 129,000 326,000
</TABLE>
42
<PAGE>
Aggregated Options/SAR Exercises in Last Fiscal Year and Fiscal Year-End
Options/SAR Values The following table sets forth information with respect to
the exercise of stock options during the year ended December 31, 1998, and the
final year end value of unexercised options. None of the Named Officers
exercised, nor held, stock appreciation rights during the year ended December
31, 1998.
<TABLE>
<CAPTION>
Number of
Securities Value of
Underlying Unexercised
Unexercised In-the-Money
Shares Options/SARs Options/SARs
Acquired At Fiscal At Fiscal
On Value Year-End (#) Year-End ($)
Exercise Realized Exercisable/ Exercisable/
Name (#) ($) Unexercisable Unexercisable (a)
- ---------------------- --------------- -------------------- --------------------- ---------------------
<S> <C> <C> <C> <C>
R.D. Hubbard 0 $0 71,688/108,332 $0/$0
G. Michael Finnigan 0 0 60,001/64,999 $0/$0
Paul R. Alanis 0 0 100,000/300,000 $0/$0
J. Michael Allen 0 0 50,000/150,000 $0/$0
Donald M. Robbins 0 0 60,001/44,999 $0/$0
</TABLE>
___
(a) All of the options were granted at an exercise price greater than the
closing price of the Company's common stock on December 31, 1998.
Pension Plan
<TABLE>
<CAPTION>
Years of Qualified Service
---------------------------------------------------------------------------------
Final Average Annual Salary 10 15 20 25 30
- -------------------------------- -------------- --------------- --------------- --------------- --------------
<S> <C> <C> <C> <C> <C>
$100,000 $24,745 $37,118 $49,490 $61,863 $ 66,863
$150,000 to $500,000 (a) 37,995 56,993 75,990 94,988 102,488
</TABLE>
____
(a) Under current provisions of the Internal Revenue Code, the maximum average
salary that may be used in calculating retirement benefits in 1996 was $150,000.
Benefits accrued on April 1, 1994 (based on prior compensation limits) are
grandfathered. Pension benefits were frozen as of September 1, 1996, for all
plan participants, except retained participants, whose benefits were frozen as
of December 31, 1996.
Hollywood Park elected to terminate the Hollywood Park Pension Plan (the
"Pension Plan") as of January 31, 1997. Accrued Pension Plan benefits were
frozen as of September 1, 1996, for all Pension Plan participants, except
retained participants, (participants who, because of legal requirements,
including the provisions of the National Labor Relations Act, are represented by
a collective bargaining agent) whose benefits were frozen as of December 31,
1996.
The Pension Plan was a non-contributory, defined benefit plan covering employees
of Hollywood Park, Inc., and all employees of Hollywood Park Operating Company,
not eligible for participation in a multi-employer defined benefit plan, who met
the Pension Plan's service requirement. R.D. Hubbard, G. Michael Finnigan, and
Donald M. Robbins, were the only officers or directors of the Company who
participated in the Pension Plan, and their Pension Plan benefits were frozen as
of September 1, 1996, and as of that date, Messers. Hubbard, Finnigan and
Robbins had two, six and ten years, respectively, of qualified years of service.
Only amounts earned by Messers. Hubbard, Finnigan and Robbins listed under
"Annual Compensation Salary" as shown in the Summary Compensation Table, were
considered in determining their Pension Plan benefit levels.
The amounts listed in the above Pension Plan table are estimated annual
retirement benefits under the Pension Plan (assuming payments were made on the
normal life annuity basis, and not under the provisions of survivor benefits) at
a normal retirement age of 65 in 1996, after various years of qualified service,
at
43
<PAGE>
selected average annual compensation levels. However, due to the Pension Plan
benefits being frozen as of September 1, 1996, and based on their actual years
of qualified service, and annual compensation levels, Messers. Hubbard, Finnigan
and Robbins annual benefits, expressed as a joint and survivor annuity payment,
starting at age 65, are $7,521, $29,082 and $51,009, respectively.
The amounts required to fund the Pension Plan were determined actuarially, and
were paid by Hollywood Park to a life insurance company under an unallocated
annuity contract.
Effective January 31, 1997, in conjunction with the termination of the Pension
Plan, Hollywood Park elected to terminate its non-qualified Supplementary
Employment Retirement Plan (the "SERP"). The SERP was an unfunded plan,
established primarily for the purpose of restoring the retirement benefits for
highly compensated employees that were eliminated by the Internal Revenue
Service in 1994, when the maximum annual earnings allowed for qualified pension
plans was reduced to $150,000 from $235,850. Messers, Hubbard, Finnigan and
Robbins participated in the SERP, prior to its termination.
Board Committees and Director Compensation Hollywood Park has a standing
Executive Committee which is chaired by Mr. Hubbard and currently consists of
Messrs. Hubbard, Reitnouer, and Parrott. The Executive Committee has and may
exercise all the powers and authority of the Board of Directors in the
management of the business and affairs of Hollywood Park to the fullest extent
authorized by Delaware law. The Executive Committee had two formal meetings in
1998 and acted by unanimous written consent on two occasions.
Hollywood Park has a standing Audit Committee which is chaired by Mr. Williamson
and currently consists of Messrs. Sarkowsky, Williamson and Ornest. The
functions of the Audit Committee are to review the audits of Hollywood Park's
books performed by outside independent auditors, to consider matters of
accounting policy and to investigate and recommend to the Board independent
auditors for the following year. The Audit Committee met once in 1998.
Hollywood Park has a standing Compensation Committee, which currently consists
of Messrs. Johnson, Reitnouer and Williamson. Mr. Johnson chairs the
Compensation Committee. The functions of the Compensation Committee are to make
recommendations to the Board of Directors regarding the annual salaries and
other compensation of the officers of Hollywood Park, to provide assistance and
recommendations with respect to the compensation policies and practices of
Hollywood Park and to assist with the administration of Hollywood Park's
compensation plans. The Compensation Committee met two times in 1998 and acted
by unanimous written consent on one occasion.
The Executive Committee acts as Hollywood Park's nominating committee. The
Executive Committee generally does not consider nominees recommended by
Hollywood Park's stockholders.
The full Board of Directors of the Company had four formal meetings in 1998.
During 1998, each incumbent director of Hollywood Park attended at least 75% of
the aggregate of (i) the four meetings of the Board of Directors, and (ii) the
total number of meetings of the committees on which he served (during the
periods that he served).
All directors hold office until the next annual meeting of stockholders and
until their successors are duly elected and qualified. Directors are entitled
to receive, and in 1998 received, an annual retainer of $25,000 per year plus
$1,000 for each Board meeting attended, which they may take in cash or in
deferred compensation under Hollywood Park's Directors Deferred Compensation
Plan as outlined below, and a minimum of 2,000 stock options. In addition,
members of the Executive Committee, Audit Committee and Compensation Committee
receives $1,000 for each committee meeting attended, and such amounts are also
eligible for the Directors Deferred Compensation Plan.
On December 16, 1998, each of Messrs. Hubbard, Johnson, Manfuso, Ornest,
Parrott, Reitnouer, Sarkowsky, Torguson and Williamson was granted a non-
qualified stock option to purchase 2,000 shares of Hollywood Park common stock
at an exercise price of $8.75 per share. One-third of the shares purchasable
upon
44
<PAGE>
exercise of these options was vested on the grant date, with an additional
one-third to vest on each of the first and second anniversary of the grant date.
All of these options expire on the tenth anniversary of the grant date and
(except for the options granted to Messrs. Johnson, Reitnouer, and Williamson)
were granted under the Hollywood Park 1996 Stock Option Plan.
Directors Deferred Compensation Plan Participation in Hollywood Park's
Directors Deferred Compensation Plan is limited to directors of Hollywood Park,
and each eligible director may elect to defer all or a portion of his annual
retainer and any fees for meetings attended. Any such deferred compensation is
credited to a deferred compensation account, either in cash or in shares of
Hollywood Park Common Stock, at each director's election. As of the date the
director's compensation would otherwise have been paid, and depending on the
director's election, the director's deferred compensation account will be
credited with either (i) cash, (ii) the number of full and/or fractional shares
of Hollywood Park common stock obtained by dividing the amount of the director's
compensation for the calendar quarter or month which he elected to defer, by the
average of the closing price of Hollywood Park common stock on the principal
stock exchange on which the Company's common stock listed (or, if the common
shares are not listed on a stock exchange, the NASDAQ National Market System) on
the last ten business days of the calendar quarter or month for which such
compensation is payable or (iii) a combination of cash and shares of Hollywood
Park common stock as described in clause (i) and (ii). All cash amounts
credited to the director's deferred compensation account bear interest at an
amount to be determined from time to time by the Board of Directors.
If a director has elected to receive shares of Hollywood Park common stock in
lieu of his retainer, such director's deferred compensation account is credited
at the end of each calendar quarter with the number of full and/or fractional
shares of Hollywood Park common stock obtained by dividing the dividends which
would have been paid on the shares credited to the director's deferred
compensation account as of the dividend record date, if any, occurring during
such calendar quarter if such shares had been shares of issued and outstanding
Hollywood Park common stock on such date, by the closing price of the Hollywood
Park common stock on the New York Stock Exchange on the date such dividend(s)
was paid. In addition, if Hollywood Park declares a dividend payable in shares
of Hollywood Park common stock, the director's deferred compensation account is
credited at the end of each calendar quarter with the number of full and/or
fractional shares of Hollywood Park common stock which such shares would have
been entitled to if such shares had been shares of issued and outstanding
Hollywood Park common stock on the record date for such stock dividend(s).
Participating directors do not have any interest in the cash and/or Hollywood
Park common stock credited to their deferred compensation accounts until
distributed in accordance with the Directors Deferred Compensation Plan, nor do
they have any voting rights with respect to such shares until shares credited to
their deferred compensation accounts are distributed. The rights of a director
to receive payments under the Deferred Compensation Plan are no greater than the
rights of an unsecured general creditor of Hollywood Park. Each participating
director may elect to have the aggregate amount of cash and shares credited to
his deferred compensation account distributed to him in one lump sum payment or
in a number of approximately equal annual installments over a period of time not
to exceed fifteen years. The lump sum payment or the first installment will be
paid as of the first business day of the calendar quarter immediately following
the cessation of the director's service as a director of Hollywood Park. Prior
to the beginning of any calendar year, a director may elect to change the method
of distribution, but amounts credited to a director's account prior to the
effective date of such change may not be affected, but rather will be
distributed in accordance with the election at the time such amounts were
credited to the director's deferred compensation account.
The maximum number of shares of Hollywood Park common stock that can be issued
pursuant to the Directors Deferred Compensation Plan is 125,000 shares.
Hollywood Park is not required to reserve or set aside funds or shares of
Hollywood Park common stock for the payment of its obligations pursuant to the
Directors Deferred Compensation Plan. Hollywood Park is obligated to make
available, as and when required, a sufficient number of shares of common stock
to meet the needs of the Directors Plan. The shares
45
<PAGE>
of Hollywood Park Common Stock to be issued under the Directors Deferred
Compensation Plan may be either authorized and unissued shares or reacquired
shares.
Amendment, modification or termination of the Directors Deferred Compensation
Plan may not (i) adversely affect any eligible director's rights with respect to
amounts then credited to his account or (ii) accelerate any payments or
distributions under the Directors Deferred Compensation Plan (except with regard
to bona fide financial hardships).
Employment Contracts, Termination of Employment and Change-in-Control
Arrangements The Company has entered into a three year employment agreement
with G. Michael Finnigan, effective January 1, 1999. Mr. Finnigan's annual
compensation will be $400,000 with an annual bonus of up to $200,000. The bonus
is payable as follows: (a) an amount at the discretion of the Board in the first
year, and (b) in each of the remaining years, $100,000 based on Realty
Investment Group, Inc.'s performance, and $100,000 at the discretion of the
Board. If Mr. Finnigan terminates his employment for good reason (defined for
present purposes as a material breach of the employment agreement by the Company
and failure to timely remedy such breach), or if the Company terminates him
without cause, Mr. Finnigan will receive his annual compensation for one year
(including salary and bonus), with health and disability coverage for six
months. Mr. Finnigan will also immediately vest in all of his stock options.
The Company has entered into a three year employment agreement with Paul Alanis,
effective January 1, 1999. Mr. Alanis's annual compensation will be $600,000,
with an annual bonus of not less than $100,000 and up to $600,000. The bonus is
payable as follows: (a) $100,000 if Mr. Alanis remains employed by Hollywood
Park for the year in question; (b) $200,000 based on the Company's actual
earnings before interest, taxes, depreciation and amortization as compared to
budget, and not exceeding the capital budget; and (c) the remaining $300,000 to
be awarded at the discretion of the Board of Directors. If Mr. Alanis
terminates his employment for good reason, or if the Company terminates Mr.
Alanis without cause, Mr. Alanis will receive an annual salary of $700,000
through the balance of the contract period, and retain his health and disability
insurance for six months after termination. Mr. Alanis will also immediately
vest in all stock option grants. If Mr. Alanis terminates his employment upon
failure to be promoted to the Company's Chief Executive Officer by December 31,
1999, he will be entitled to a lump sum severance payment of $700,000, and
continued health and disability insurance coverage for six months. Mr. Alanis
would also immediately vest in 75% of the 400,000 options granted to him on
September 10, 1999.
The Company has entered into a three year employment agreement with J. Michael
Allen, effective January 1, 1999. Mr. Allen's annual compensation will be
$400,000, with a possible bonus of up to $200,000. The bonus is payable as
follows: (a) $100,000 based on the Company's actual earnings before interest,
taxes, depreciation and amortization as compared to budget, and not exceeding
the capital budget, and (b) $100,000 at the discretion of the Board of
Directors. If Mr. Allen terminates his employment for good reason, or if the
Company terminates him without cause, and so long as he does not compete with
the Company or its subsidiaries in the gaming business prior to the end of the
employment contract term, he will be entitled to $400,000 per year for the
balance of the employment contract term, with health and disability insurance
coverage for six months. Mr. Allen will also immediately vest in all stock
option grants. If Mr. Allen terminates his employment due to Mr. Alanis'
failure to be promoted to the Company's Chief Executive Officer by December 31,
1999, he will receive any accrued but unpaid salary and vacation benefits.
The Company, through its wholly owned subsidiary, Hollywood Park Operating
Company, has entered into a three year employment agreement with Donald M.
Robbins, effective January 1, 1999. Mr. Robbins' annual compensation will be
$295,000, with a possible bonus at the discretion of the Board of Directors. If
Hollywood Park Operating Company terminates Mr. Robbins without cause prior to
January 1, 2000, he will be entitled to receive a lump sum amount equal to twice
his annual compensation (including salary and bonus). If Hollywood Park
Operating Company terminates Mr. Robbins without cause after January 1, 2000, he
will be entitled to receive a lump sum payment equal to his annual compensation
for the balance of the term of the employment agreement (including salary and
bonus), but not less than his annual compensation for one year (including salary
and bonus). In either situation, Mr. Robbins will retain his health and
disability
46
<PAGE>
insurance coverage for six months after termination, and will vest in all stock
options grants. If Hollywood Park Operating Company terminates Mr. Robbins
without cause at any time after the term of the employment agreement, he will be
entitled to receive a lump sum payment equal to one year's compensation
(including salary and bonus), will retain health and disability insurance
coverage for six months after termination, and will vest in all stock option
grants.
Compensation Committee Interlocks and Insider Participation The members of the
Compensation Committee currently are Messrs. Johnson, Reitnouer and Williamson.
None of the members of the Compensation Committee were officers or employees or
former officers or employees of the Company or its subsidiaries.
Compensation Committee Report on Executive Compensation The Compensation
Committee of the Board of Directors, which is composed entirely of independent
outside directors, is responsible for making recommendations to the Board
regarding the annual salaries and other compensation of the officers of
Hollywood Park, providing assistance and recommendations with respect to the
compensation policies and practices of Hollywood Park and assisting with the
administration of Hollywood Park's compensation plans.
In order to attract and retain well-qualified executives, which the Compensation
Committee believes is crucial to Hollywood Park's success, the Compensation
Committee's general approach to compensating executives is to pay cash salaries
which are commensurate with the executives' experience and expertise and, where
relevant, are competitive with the salaries paid to executives in Hollywood
Park's main industries and primary geographic locations, which are currently
land-based, dockside and riverboat casinos in Nevada, Louisiana, Mississippi,
and other jurisdictions, thoroughbred horse racing tracks in California and
Arizona, and card clubs in Southern California. In addition, to align its
executives' compensation with Hollywood Park's business strategies, values and
management initiatives, both short and long term, the Compensation Committee
may, with the Board's approval, authorize the payment of discretionary bonuses
based upon an assessment of each executive's contributions to Hollywood Park.
In general, the Compensation Committee believes that these discretionary bonuses
should be related to Hollywood Park's and the executive's performance, although
specific performance criteria have not been established.
The Compensation Committee also believes that stock ownership by key executives
provides a valuable incentive for such executives and helps align executives'
and stockholders' interests. To facilitate these objectives, Hollywood Park
adopted Stock Option Plans in 1993 and 1996, pursuant to which Hollywood Park
may grant stock options to executives (as well as other employees and directors)
to purchase up to 625,000 shares and 900,000 shares, respectively, of Hollywood
Park common stock. The Compensation Committee believes that the key officers of
Hollywood Park have provided excellent services and been diligent in their
commitment to Hollywood Park. The Compensation Committee believes that stock
ownership by such officers provides an important incentive for their continued
efforts and diligence. In February 1998, options of 50,000, 35,000 and 15,000
shares were granted to Messrs. Hubbard, Finnigan and Robbins, respectively, at
an exercise price of $13.625 per share. Under the terms of Mr. Alanis'
employment contract on, September 10, 1998, he was granted 300,000 and 100,000
stock options at exercise prices of $10.1875 and $18.00, respectively. Under
the terms of Mr. Allen's employment contract, on September 10, 1998, he was
granted 150,000 and 50,000 stock options at exercise prices of $10.1875 and
$18.00, respectively.
As of January 1, 1999, Mr. Alanis was hired as the Company's President and Chief
Operating Officer, and Mr. Allen was hired as the Company's Senior Vice
President, Chief Operating Officer of Gaming Operations, at annual salaries of
$600,000 and $400,000, respectively. These salaries were based upon review and
analysis of (a) the prior experience of Messers. Alanis and Allen, (b) annual
compensation of individuals in similar positions, at gaming companies of similar
size to Hollywood Park, and (c) the level of contribution that the Compensation
Committee and the Board of Directors expect Messers. Alanis and Allen to make to
Hollywood Park.
47
<PAGE>
As of January 1, 1999, the Compensation Committee increased Mr. Finnigan's
annual salary to $400,000, based upon their review of the level and value of the
contribution that Mr. Finnigan has made to Hollywood Park, and can make in the
future.
As of January 1, 1998, Mr. Hubbard's annual compensation was increased to
$500,000, from $400,000. The Compensation Committee based Mr. Hubbard's annual
salary upon the following factors: (a) the Company's expansion into the casino
gaming business; (b) the annual salaries of the Company's Named Officers; (c)
the prominence of Mr. Hubbard in the business community; (d) the level and value
of the contribution that the Compensation Committee believes that Mr. Hubbard
has made to the Company, and can make in the future; and (e) the fact that Mr.
Hubbard is willing to accept this amount even though the Compensation Committee
believes that Mr. Hubbard could command a much higher compensation level based
on his business experience and expertise. Mr. Hubbard's base salary is not
dependent upon Hollywood Park's performance, and it is anticipated that any
bonuses that the Compensation Committee may recommend and the Board of Directors
approve, would be, at least in part, so dependent.
December 31, 1998
Compensation Committee
J.R. Johnson (Chairman)
Lynn P. Reitnouer
Warren B. Williamson
48
<PAGE>
Item 12. Security Ownership of Certain Beneficial Owners and Management
- -----------------------------------------------------------------------
The following table sets forth the name, address (address is provided for
persons listed as beneficial owners of 5% or more of the outstanding Hollywood
Park common stock), number of shares and percent of the outstanding Hollywood
Park common stock beneficially owned as of March 15, 1999, by each person known
to the Board of Directors of Hollywood Park to be the beneficial owner of 5% or
more of the outstanding shares of Hollywood Park common stock, each Director,
each Named Officer and all current Directors and Executive Officers as a group.
<TABLE>
<CAPTION>
Shares Percent of
Beneficially Shares
Name and Address of Beneficial Owner Owned Outstanding (a)
- ---------------------------------------------------------------- ----------------------- ------------------------
<S> <C> <C>
R.D. Hubbard 2,736,488 (b) 10.6%
Hollywood Park, Inc.
1050 South Prairie Avenue
Inglewood, California 90301
Legg Mason, Inc. 2,709,095 (c) 10.5%
111 South Calvert Street
Baltimore, Maryland 21202
State of Wisconsin Investment Board 1,611,000 (d) 6.2%
P.O. Box 7842
Madison, Wisconsin 53707
Timothy J. Parrott 443,716 (e) 1.7%
J.R. Johnson 380,760 (f) 1.5%
Michael Ornest 299,833 (g) 1.2%
Warren B. Williamson 159,917 (h) *
Lynn P. Reitnouer 62,000 (i) *
Herman Sarkowsky 66,708 (j) *
Robert T. Manfuso 40,333 (k) *
Marlin Torguson 30,667 (l) *
G. Michael Finnigan 110,417 (m) *
Paul Alanis 400,000 (n) 1.6%
J. Michael Allen 50,000 (o) *
Donald M. Robbins 80,672 (p) *
Current Directors and Executive
Officers as a group (13 persons) 4,861,511 (q) 18.8%
</TABLE>
____
* Less than one percent (1%) of the outstanding common shares.
(a) Assumes exercise of stock options beneficially owned by the named
individual or entity into shares of Hollywood Park Common Stock. Based on
25,800,069 shares outstanding as of March 15, 1999.
(b) Includes 116,668 shares of Hollywood Park Common Stock which Mr. Hubbard
has the right to acquire upon the exercise of options which are
exercisable within 60 days of March 15, 1999.
(c) Based upon information provided by the stockholder in Schedule 13G filed
with the Securities and Exchange Commission on February 16, 1999.
According to such Schedule 13G, 2,515,000 (9.75%) shares are held by Legg
Mason Special Investment Trust, Inc., with Legg Mason Fund Adviser, Inc.
having power to dispose thereof. The Schedule 13G further reports that the
remaining shares are held by various clients of Legg Mason Capital
Investment, Inc. and Legg Mason Wood Walker, Inc., which have power to
dispose thereof. Legg Mason Fund Advisor, Inc., Legg Mason Capital
Management, Inc., and Legg Mason Wood Walker, Inc. are subsidiaries of
Legg Mason, Inc.
(d) Based upon information provided by the stockholder in Schedule 13G filed
with the Securities and Exchange Commission February 2, 1999.
(e) Includes 270,945 shares of Hollywood Park Common Stock which Mr. Parrott
has the right to acquire upon exercise of options which are exercisable
within 60 days of March 15, 1999,
49
<PAGE>
including 270,278 options assumed by the Company in connection with the
Boomtown Merger.
(f) Includes 12,000 shares of Hollywood Park Common Stock, which Mr. Johnson
has the right to acquire upon the exercise of options, which are
exercisable within 60 days of March 15, 1999.
(g) Includes 667 shares of Hollywood Park Common Stock, which Mr. Ornest has
the right to acquire upon the exercise of options, which are exercisable
within 60 days of March 15, 1999.
(h) Includes 12,000 shares of Hollywood Park Common Stock, which Mr.
Williamson has the right to acquire upon the exercise of options, which
are exercisable within 60 days of March 15, 1999.
(i) Includes 12,000 shares of Hollywood Park Common Stock, which Mr. Reitnouer
has the right to acquire upon the exercise of options, which are
exercisable within 60 days of March 15, 1999.
(j) Includes 12,000 shares of Hollywood Park Common Stock, which Mr. Sarkowsky
has the right to acquire upon the exercise of options, which are
exercisable within 60 days of March 15, 1999.
(k) Includes 12,000 shares of Hollywood Park Common Stock, which Mr. Manfuso
has the right to acquire upon the exercise of options, which are
exercisable within 60 days of March 15, 1999.
(l) Includes 30,667 shares of Hollywood Park Common Stock, which Mr. Torguson
has the right to acquire upon the exercise of options, which are
exercisable within 60 days of March 15, 1999.
(m) Includes 85,002 shares of Hollywood Park Common Stock, which Mr. Finnigan
has the right to acquire upon the exercise of options, which are
exercisable within 60 days of March 15, 1999.
(n) Includes 100,000 shares of Hollywood Park Common Stock, which Mr. Alanis
has the right to acquire upon the exercise of options, which are
exercisable within 60 days of March 15, 1999.
(o) Includes 50,000 shares of Hollywood Park Common Stock, which Mr. Allen has
the right to acquire upon the exercise of options, which are exercisable
within 60 days of March 15, 1999.
(p) Includes 78,334 shares of Hollywood Park Common Stock, which Mr. Robbins
has the right to acquire upon the exercise of options, which are
exercisable within 60 days of March 15, 1999.
(q) Includes 792,283 shares of Hollywood Park Common Stock of which the
Directors and Executive Officers may be deemed to have beneficial
ownership following the exercise of options to purchase Hollywood Park
Common Stock, which are exercisable within 60 days of March 15, 1999.
Excluding such shares, the Directors and Executive Officers of Hollywood
Park have beneficial ownership of 4,057,228 shares of Hollywood Park
Common Stock, which represents 15.7% of the shares of Hollywood Park
Common Stock outstanding as of March 15, 1999.
Item 13. Certain Relationships and Related Transactions
- -------------------------------------------------------
On June 2, 1998, Hollywood Park and R.D. Hubbard Enterprises, Inc. ("Hubbard
Enterprises"), which is wholly owned by Mr. Hubbard, entered into a new Aircraft
Time Sharing Agreement. The former agreement was entered into in November 1993.
The June 2, 1998 Aircraft Time Sharing Agreement is identical to the former
agreement, in all aspects, except for the type of aircraft covered by the
agreement. The Aircraft Time Sharing Agreement expires on December 31, 1999,
and then automatically renews each month unless written notice of termination is
given by either party at least two weeks before a renewal date. Hollywood Park
reimburses Hubbard Enterprises for expenses incurred as a result of Hollywood
Park's use of the aircraft, which totaled approximately $72,000 in 1998,
$106,000 in 1997, and $120,000 in 1996.
On August 31, 1998, the Company received a promissory note for up to $3,500,000
from Paul Alanis. As of December 31, 1998, the Company had loaned Mr. Alanis
$3,232,000, who used the funds to purchase 300,000 shares of the Company's
common stock. Interest on the promissory note is at least the prime interest
rate, but not more than 10%. The principal amount of the promissory note, along
with accrued interest is due, in full, no later than December 31, 1999. The
promissory note is secured by Mr. Alanis' interest in Horseshoe Gaming LLC, with
an approximate value well in excess of $3,500,000.
Timothy J. Parrott purchased 270,738 shares of Boomtown common stock in
connection with Boomtown's 1988 acquisition of Boomtown Hotel & Casino, Inc.
(which operates Boomtown Reno). Mr. Parrott paid an aggregate purchase price,
for the common stock, of $222,000, of which $1,000 was paid in cash and $221,000
was paid by a promissory note secured by pledge to Boomtown of all of the shares
owned by Mr. Parrott. As of October 31, 1998, Mr. Parrott resigned his position
as Chairman of Boomtown, and was retained by Hollywood Park as a consultant to
provide services relating to gaming and other business issues. Mr. Parrott was
retained for a three year period, with an annual retainer of $350,000 with
health and disability benefits equivalent to those he received as Chairman of
Boomtown. Mr. Parrott's $221,000 note will be forgiven in three equal parts on
each anniversary of the consulting agreement.
50
<PAGE>
Marlin Torguson, who beneficially owned approximately 21.5% of the outstanding
common shares of Casino Magic, agreed, in connection with the Casino Magic
acquisition, to vote his Casino Magic shares in favor of the acquisition by
Hollywood Park. In addition, Mr. Torguson agreed to continue to serve as an
employee of Casino Magic for three years following the acquisition, and during
such three year period, not to compete with Hollywood Park or Casino Magic in
any jurisdiction in which either Hollywood Park or Casino Magic operates.
Hollywood Park appointed Mr. Torguson to its board of directors. Hollywood Park
has agreed to issue to Mr. Torguson 20,000 shares of Hollywood Park common stock
and pay him $300,000 for each year, during a three year period. In addition,
Hollywood Park issued Mr. Torguson 30,000 options to acquire Hollywood Park
common stock as of the October 15, 1998, acquisition of Casino Magic, priced at
the closing price of Hollywood Park's common stock on that date. The foregoing
payments will be made to Mr. Torguson whether or not Hollywood Park or Casino
Magic terminates Mr. Torguson's employment, except for termination for cause.
Part IV
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K
- -------------------------------------------------------------------------
(a) Documents filed as a part of this report.
1. The consolidated financial statements are set forth in the index to
Consolidated Financial Statements attached hereto.
2. Exhibits
Exhibit
Number Description of Exhibit
- --------- -------------------------------------------------------------------
2.1 Agreement and Plan of Merger, by and among Hollywood Park, Inc., HP
Acquisition, Inc. and Boomtown, Inc., dated April 23, 1996, is
hereby incorporated by reference to Exhibit 2.1 to the Company's
Current Report on Form 8-K, filed May 3, 1996.
2.2 Agreement and Plan of Merger, dated as of February 19, 1998, among
Casino Magic Corp., Hollywood Park, Inc. and HP Acquisition II,
Inc., is hereby incorporated by reference to Exhibit 2.1 to the
Company's Current Report on Form 8-K, filed February 26, 1998.
3.1 Certificate of Incorporation of Hollywood Park, Inc., is hereby
incorporated by reference to Exhibit 3.1 to the Company's Amendment
No. 1 to Form S-4 Registration Statement dated March 26, 1999.
3.2 Restated By-laws of Hollywood Park, Inc. are hereby incorporated by
reference to Exhibit 3.2 to the Company's Amendment No. 1 to Form S-
4 Registration Statement dated March 26, 1999.
3.3 Certificate of Incorporation of Hollywood Park Operating Company, is
hereby incorporated by reference to Exhibit 3.3 to the Company's
Form S-4 Registration Statement dated August 27, 1997.
3.4 Amended By-laws of Hollywood Park Operating Company, are hereby
incorporated by reference to Exhibit 3.4 to the Company's Form S-4
Registration Statement dated August 27, 1997.
3.5 Certificate of Incorporation of Hollywood Park Fall Operating
Company, is hereby incorporated by reference to Exhibit 3.5 to the
Company's Amendment No. 1 to Form S-4 Registration Statement dated
October 30, 1997.
3.6 By-laws of Hollywood Park Fall Operating Company are hereby
incorporated by reference to Exhibit 3.6 to the Company's Amendment
No. 1 to Form S-4 Registration Statement dated October 30, 1997.
3.7 Articles of Incorporation of Hollywood Park Food Services, Inc., are
hereby incorporated by reference to Exhibit 3.7 to the Company's
Amendment No. 1 to Form S-4 Registration Statement dated October 30,
1997.
3.8 By-laws of Hollywood Park Food Services, Inc., are hereby
incorporated by reference to Exhibit 3.8 to the Company's Amendment
No. 1 to Form S-4 Registration Statement dated October 30, 1997.
3.9 Articles of Incorporation of HP/Compton, Inc., are hereby
incorporated by reference to Exhibit 3.9 to the Company's Amendment
No. 1 to Form S-4 Registration dated October 30, 1997.
3.10 By-laws of HP/Compton, Inc., are hereby incorporated by reference to
Exhibit 3.10 to the Company's Amendment No. 1 to Form S-4
Registration Statement dated October 30, 1997.
51
<PAGE>
3.11 Articles of Organization of Crystal Park Hotel and Casino
Development Company, LLC, are hereby incorporated by reference to
Exhibit 3.11 to the Company's Amendment No. 1 to Form S-4
Registration Statement dated October 30, 1997.
3.12 Operating Agreement of Crystal Park Hotel and Casino Development
Company, LLC, are hereby incorporated by reference to Exhibit 3.12
to the Company's Amendment No. 1 to Form S-4 Registration Statement
dated October 30, 1997.
3.13 Restated Articles of Incorporation of Turf Paradise, Inc., are
hereby incorporated by reference to Exhibit 3.13 to the Company's
Amendment No. 1 to Form S-4 Registration Statement dated October 30,
1997.
3.14 By-laws of Turf Paradise, are hereby incorporated by reference to
Exhibit 3.14 to the Company's Amendment No. 1 to Form S-4
Registration Statement dated October 30, 1997.
3.15 Certificate of Incorporation of HP Yakama, Inc., is hereby
incorporated by reference to Exhibit 3.15 to the Company's Amendment
No. 1 to Form S-4 Registration Statement dated October 30, 1997.
3.16 By-laws of HP Yakama, Inc., are hereby incorporated by reference to
Exhibit 3.16 to the Company's Amendment No. 1 to Form S-4
Registration Statement dated October 30, 1997.
3.17 Amended and Restated Certificate of Incorporation of Boomtown, Inc.,
is hereby incorporated by reference to Exhibit 3.17 to the Company's
Amendment No. 1 to Form S-4 Registration Statement dated October 30,
1997.
3.18 By-laws of Boomtown, Inc., are hereby incorporated by reference to
Exhibit 3.18 to the Company's Amendment No. 1 to Form S-4
Registration Statement dated October 30, 1997.
3.19 Certificate of Amended and Restated Articles of Incorporation of
Boomtown Hotel & Casino, Inc., are hereby incorporated by reference
to Exhibit 3.19 to the Company's Amendment No. 1 to Form S-4
Registration Statement dated October 30, 1997.
3.20 Revised and Restated By-laws of Boomtown Hotel & Casino, Inc., are
hereby incorporated by reference to Exhibit 3.20 to the Company's
Amendment No. 1 to Form S-4 Registration Statement dated October 30,
1997.
3.21 Articles of Incorporation of Bayview Yacht Club, Inc., are hereby
incorporated by reference to Exhibit 3.21 to the Company's Amendment
No. 1 to Form S-4 Registration Statement dated October 30, 1997.
3.22 By-laws of Bayview Yacht Club, Inc., are hereby incorporated by
reference to Exhibit 3.22 to the Company's Amendment No. 1 to
Form S-4 Registration Statement dated October 30, 1997.
3.23 Certificate of Mississippi Limited Partnership of Mississippi - I
Gaming, L.P., are hereby incorporated by reference to Exhibit 3.23
to the Company's Amendment No. 1 to Form S-4 Registration Statement
dated October 30, 1997.
3.24 Amended and Restated Agreement of Limited Partnership of
Mississippi - I Gaming, L.P., is hereby incorporated by reference to
Exhibit 10.31 to the Company's Quarterly Report on Form 10-Q for
quarter ended June 30, 1997.
3.25 Articles of Incorporation of Louisiana Gaming Enterprises, Inc., are
hereby incorporated by reference to Exhibit 3.25 to the Company's
Amendment No. 1 to Form S-4 Registration Statement dated October 30,
1997.
3.26 Second Amended and Restated Partnership Agreement of Louisiana - I
Gaming, a Louisiana Partnership in Commendam, is hereby incorporated
by reference to Exhibit 3.26 to the Company's Amendment No. 1 to
Form S-4 Registration Statement dated March 26, 1999.
3.27 Certificate of Incorporation of HP Yakama Consulting, Inc., is
hereby incorporated by reference to Exhibit 3.27 to the Company's
Amendment No. 1 to Form S-4 Registration Statement dated March 26,
1999.
3.28 By-laws of HP Yakama Consulting, Inc., are hereby incorporated by
reference to Exhibit 3.28 to the Company's Amendment No. 1 to
Form S-4 Registration Statement dated March 26, 1999.
3.29 Articles of Incorporation of Casino Magic Corp., are hereby
incorporated by reference to Exhibit 3.29 to the Company's Amendment
No. 1 to Form S-4 Registration Statement dated March 26, 1999.
3.30 Amended By-laws of Casino Magic Corp., are hereby incorporated by
reference to Exhibit 3.30 to the Company's Amendment No. 1 to
Form S-4 Registration Statement dated March 26, 1999.
52
<PAGE>
3.31 Articles of Incorporation of Casino Magic American Corp., are hereby
incorporated by reference to Exhibit 3.31 to the Company's Amendment
No. 1 to Form S-4 Registration Statement dated March 26, 1999.
3.32 By-laws of Casino Magic American Corp., are hereby incorporated by
reference to Exhibit 3.32 to the Company's Amendment No. 1 to
Form S-4 Registration Statement dated March 26, 1999.
3.33 Articles of Incorporation of Biloxi Casino Corp., are hereby
incorporated by reference to Exhibit 3.33 to the Company's Amendment
No. 1 to Form S-4 Registration Statement dated March 26, 1999.
3.34 By-laws of Biloxi Casino Corp., are hereby incorporated by reference
to Exhibit 3.34 to the Company's Amendment No. 1 to Form S-4
Registration Statement dated March 26, 1999.
3.35 Articles of Incorporation of Casino Magic Finance Corp., are hereby
incorporated by reference to Exhibit 3.35 to the Company's Amendment
No. 1 to Form S-4 Registration Statement dated March 26, 1999.
3.36 By-laws of Casino Magic Finance Corp., are hereby incorporated by
reference to Exhibit 3.36 to the Company's Amendment No. 1 to
Form S-4 Registration Statement dated March 26, 1999.
3.37 Articles of Incorporation of Casino One Corporation, are hereby
incorporated by reference to Exhibit 3.37 to the Company's Amendment
No. 1 to Form S-4 Registration Statement dated March 26, 1999.
3.38 By-laws of Casino One Corporation, are hereby incorporated by
reference to Exhibit 3.38 to the Company's Amendment No. 1 to
Form S-4 Registration Statement dated March 26, 1999.
3.39 Articles of Incorporation of Bay St. Louis Casino Corp., are hereby
incorporated by reference to Exhibit 3.39 to the Company's Amendment
No. 1 to Form S-4 Registration Statement dated March 26, 1999.
3.40 By-laws of Bay St. Louis Casino Corp., are hereby incorporated by
reference to Exhibit 3.40 to the Company's Amendment No. 1 to
Form S-4 Registration Statement dated March 26, 1999.
3.41 Articles of Incorporation of Mardi Gras Casino Corp., are hereby
incorporated by reference to Exhibit 3.41 to the Company's Amendment
No. 1 to Form S-4 Registration Statement dated March 26, 1999.
3.42 By-laws of Mardi Gras Casino Corp., are hereby incorporated by
reference to Exhibit 3.42 to the Company's Amendment No. 1 to
Form S-4 Registration Statement dated March 26, 1999.
3.43 Articles of Incorporation of Boomtown Hoosier, Inc., are hereby
incorporated by reference to Exhibit 3.43 to the Company's Amendment
No. 1 to Form S-4 Registration Statement dated March 26, 1999.
3.44 By-laws of Boomtown Hoosier, Inc., are hereby incorporate by
reference to Exhibit 3.44 to the Company's Amendment No. 1 to
Form S-4 Registration Statement dated March 26, 1999.
3.45 Articles of Incorporation of Indiana Ventures LLC, are hereby
incorporated by reference to Exhibit 3.45 to the Company's Amendment
No. 1 to Form S-4 Registration Statement dated March 26, 1999.
3.46 Operating Agreement of Indiana Ventures LLC, is hereby incorporated
by reference to Exhibit 3.46 to the Company Amendment No. 1 to Form
S-4 Registration Statement dated March 26, 1999.
3.47 Amended Articles of Incorporation of Switzerland County Development
Corp. (f/k/a Conrad (New Zealand) Corporation), are hereby
incorporated by reference to Exhibit 3.47 to the Company's Amendment
No. 1 to Form S-4 Registration Statement dated March 26, 1999.
3.48 By-laws of Switzerland County Development Corp. (f/k/a Conrad (New
Zealand) Corporation) are hereby incorporated by reference to
Exhibit 3.48 to the Company's Amendment No. 1 to Form S-4
Registration Statement dated March 26, 1999.
3.49 Amended Articles of Incorporation of Pinnacle Gaming Development
Corp., are hereby incorporated by reference to Exhibit 3.49 to the
Company's Amendment No. 1 to Form S-4 Registration Statement dated
March 26, 1999.
3.50 By-laws of Pinnacle Gaming Development Corp., are hereby
incorporated by reference to Exhibit 3.50 to the Company's Amendment
No. 1 to Form S-4 Registration Statement dated March 26, 1999.
3.51 Articles of Incorporation of HP Casino, Inc., are hereby
incorporated by reference to Exhibit 3.51 to the Company's Amendment
No. 1 to Form S-4 Registration Statement dated March 26, 1999.
53
<PAGE>
3.52 By-laws of HP Casino, Inc., are hereby incorporated by reference to
Exhibit 3.52 to the Company's Amendment No. 1 to Form S-4
Registration Statement dated March 26, 1999.
4.1 Hollywood Park 1996 Stock Option Plan is hereby incorporated by
reference to Exhibit 10.24 to the Company's Registration Statement
on Form S-4 dated September 18, 1996.
4.2 Hollywood Park 1993 Stock Option Plan is hereby incorporated by
reference to Exhibit 4.2 to the Company's Amendment No. 1 to
Form S-4 Registration Statement dated March 26, 1999.
4.3 Indenture, dated August 1, 1997, by and among the Company, Hollywood
Park Operating Company, Hollywood Park Food Services, Inc.,
Hollywood Park Fall Operating Company, HP/Compton, Inc., Crystal
Park Hotel and Casino Development Company, LLC, HP Yakama, Inc.,
Turf Paradise, Inc., Boomtown, Inc., Boomtown Hotel & Casino, Inc.,
Louisiana - I Gaming, Louisiana Gaming Enterprises, Inc.,
Mississippi - I Gaming, L.P., Bayview Yacht Club, Inc. and The Bank
of New York, as trustee, is hereby incorporated by reference to
Exhibit 10.37 to the Company's Quarterly Report on Form 10-Q for the
quarter ended June 30, 1997.
4.4 First Supplemental Indenture, dated as of February 5, 1999, to
Indenture dated as of August 1, 1997 governing the 9.5% Senior
Subordinated Notes due 2007, by and among the Company and Hollywood
Park Operating Company, as co-issuers, and Bayview Yacht Club, Inc.,
Boomtown Hotel & Casino, Inc., Boomtown, Inc., Crystal Park Hotel
and Casino Development Company, LLC, Hollywood Park Fall Operating
Company, Hollywood Park Food Services, Inc., Hollywood Park
Operating Company, HP/Compton, Inc., HP Yakama, Inc., Louisiana
Gaming Enterprises, Inc., Louisiana - I Gaming, a Louisiana
Partnership in Commendam, Mississippi - I Gaming, LP, and Turf
Paradise, Inc. as guarantors, and The Bank of New York, as trustee,
is hereby incorporated by reference to Exhibit 4.4 to the Company's
S-4 Registration dated March 2, 1999.
4.5 Form of Series B 9.5% Senior Subordinated Notes due 2007 (included
in Exhibit 4.3), is hereby incorporated by reference to the
Company's Amendment No.1 to Registration Statement on Form S-4 dated
October 30, 1997.
4.6 Indenture, dated as of February 18, 1999, governing the 9.25% Senior
Subordinated Notes due 2007, by and among the Company as issuer, and
Bay St. Louis Casino Corp., Bayview Yacht Club, Inc., Biloxi Casino
Corp., Boomtown Hoosier, Inc., Boomtown Hotel & Casino, Inc.,
Boomtown, Inc., Casino Magic American Corp., Casino Magic Corp.,
Casino Magic Finance Corp., Casino One Corporation, Crystal Park
Hotel and Casino Development Company, LLC, Hollywood Park Fall
Operating Company, Hollywood Park Food Services, Inc., Hollywood
Park Operating Company, HP Casino, Inc., HP/Compton, Inc., HP
Yakama, Inc., HP Yakama Consulting, Inc., Indiana Ventures LLC,
Louisiana Gaming Enterprises, Inc., Louisiana - I Gaming, a
Louisiana Partnership in Commendam, Mardi Gras Casino Corp.,
Mississippi - I Gaming, L.P., Pinnacle Gaming Development Corp.,
Switzerland County Development Corp., and Turf Paradise, Inc. as
initial guarantors, and The Bank of New York, as trustee, is hereby
incorporated by reference to Exhibit 4.6 to the Company's S-4
Registration Statement dated March 2, 1999.
4.7 Form of Series B 9.25% Senior Subordinated Notes due 2007 (included
in Exhibit 4.6), is hereby incorporated by reference to Exhibit 4.7
to the Company's S-4 Registration Statement dated March 2, 1999.
10.1 Directors Deferred Compensation Plan for Hollywood Park, Inc. is
hereby incorporated by reference to Exhibit 10.1 to the Company's
Amendment No. 1 to Form S-4 Registration Statement dated March 26,
1999.
10.2 Aircraft Time Sharing Agreement dated June 2, 1998, by and between
Hollywood Park, Inc. and R.D. Hubbard Enterprises, Inc. is hereby
incorporated by reference to Exhibit 10.2 to the Company's Amendment
No.1 to Form S-4 Registration Statement dated March 26, 1999.
10.3 Amended and Restated Disposition and Development Agreement of
Purchase and Sale, and Lease with Option to Purchase, dated August
2, 1995, by and between The Community Redevelopment Agency of the
City of Compton and Compton Entertainment, Inc., is hereby
incorporated by reference to Exhibit 10.16 to the Company's
Quarterly Report on Form 10-Q for the quarter ended September 30,
1995.
10.4 Guaranty, dated July 31, 1995, by Hollywood Park, Inc., in favor of
the Community Redevelopment Agency of the City of Compton, is hereby
incorporated by reference to Exhibit 10.17 to the Company's
Quarterly Report on Form 10-Q for the quarter ended September 30,
1995.
54
<PAGE>
10.5 Assignment, Assumption and Consent Agreement, by and among
HP/Compton, Inc., and Crystal Park Hotel and Casino Development
Company LLC, Hollywood Park, Inc. and The Community Redevelopment
Agency of the City of Compton, dated July 18, 1996, is hereby
incorporated by reference to Exhibit 10.20 to the Company's
Quarterly Report on Form 10-Q for the quarter ended September 30,
1996.
10.6 Operating Agreement for Crystal Park Hotel and Casino Development
Company, LLC, a California Limited Liability Company, dated July 18,
1996, effective August 28, 1996, is hereby incorporated by reference
to Exhibit 10.24 to the Company's Quarterly Report on Form 10-Q for
the quarter ended September 30, 1996.
10.7 Lease, by and between Crystal Park Hotel and Casino Development
Company, LLC and California Casino Management, Inc., dated December
19, 1997, is hereby incorporated by reference to Exhibit 10.41 to
the Company's Annual Report on Form 10-K for the year ended December
31, 1997.
10.8 Addendum to the Lease Agreement dated December 19, 1997, by and
between Crystal Park Hotel and Casino Development Company, LLC and
California Casino Management, Inc., dated June 30, 1998, is hereby
incorporated by reference to Exhibit 10.46 of the Company's
Quarterly Report on Form 10-Q for the quarter ended June 30, 1998.
10.9 Blue Diamond Swap Agreement by and among Boomtown, Inc., Blue
Diamond Hotel & Casino, Inc., Hollywood Park, Inc., Edward P. Roski,
Jr., IVAC and Majestic Realty Co., dated August 12, 1996, is hereby
incorporated by reference to Exhibit 10.22 to the Company's
Registration Statement on Form S-4 filed September 18, 1996.
10.10 Stock Purchase Agreement, by and between Hollywood Park, Inc. and
Edward P. Roski, Jr., dated August 12, 1996, is hereby incorporated
by reference to Exhibit 10.23 to the Company's Registration
Statement on Form S-4 filed September 18, 1996.
10.11 Second Addendum to the Lease Agreement dated December 19, 1997, by
and between Crystal Park Hotel and Casino Development Company, LLC
and California Casino Management, Inc. dated March 8, 1999, is
hereby incorporated by reference to Exhibit 10.11 to the Company's
Amendment No.1 to Form S-4 Registration Statement dated March 26,
1999.
10.12 Ground Lease, dated October 19, 1993, between Raphael Skrmetta as
Landlord and Mississippi - I Gaming, L.P. as Tenant, is hereby
incorporated by reference to Exhibit 10.33 to the Company's
Quarterly Report on Form 10-Q for the quarter ended June 30, 1997.
10.13 First Amendment to Ground Lease dated October 19, 1993, between
Raphael Skrmetta and Mississippi - I Gaming, L.P., is hereby
incorporated by reference to Exhibit 10.34 to the Company's
Quarterly Report on Form 10-Q for the quarter ended June 30, 1997.
10.14 Second Amendment to Ground Lease dated October 19, 1993, between
Raphael Skrmetta and Mississippi -I Gaming, L.P., is hereby
incorporated by reference to Exhibit 10.35 to the Company's
Quarterly Report on Form 10-Q for the quarter ended June 30, 1997.
10.15 Purchase Agreement, dated August 1, 1997, by and among the Company,
Hollywood Park Operating Company, Hollywood Park Food Services,
Inc., HP/Compton, Inc., Crystal Park Hotel and Casino Development
Company, LLC, Hollywood Park Fall Operating Company, HP Yakama,
Inc., Turf Paradise, Inc., Boomtown, Inc., Boomtown Hotel & Casino,
Inc., Louisiana Gaming - I Gaming, Louisiana Gaming Enterprises,
Inc., Mississippi - I Gaming, L.P., Bayview Yacht Club, Inc., and
the Initial Purchasers named therein, is hereby incorporated by
reference to Exhibit 10.36 to the Company's Quarterly Report on Form
10-Q for the quarter ended June 30, 1997.
10.16 Registration Rights Agreement, dated August 1, 1997, by and among
the Company, Hollywood Park Operating Company, Hollywood Park Food
Services, Inc., HP/Compton, Inc., Crystal Park Hotel and Casino
Development Company, LLC, Hollywood Park Fall Operating Company, HP
Yakama, Inc., Turf Paradise, Inc., Boomtown, Inc., Boomtown Hotel &
Casino, Inc., Louisiana - I Gaming, Louisiana Gaming Enterprises,
Inc., Mississippi - I Gaming, L.P., Bayview Yacht Club, Inc., and
the Initial Purchasers named therein is hereby incorporated by
reference to Exhibit 10.38 to the Company's Quarterly Report on Form
10-Q for the quarter ended June 30, 1997.
10.17 Profit Participation Agreement, by and between Hollywood Park, Inc.,
and North American Sports Management, Inc., dated July 14, 1997, is
hereby incorporated by reference to Exhibit 10.40 to the Company's
Quarterly Report on Form 10-Q for the quarter ended September 30,
1997.
55
<PAGE>
10.18 Loan Agreement, by and between Yakama Tribal Gaming Corporation and
HP Yakama, Inc., dated September 11, 1997, is hereby incorporated by
reference Exhibit 10.41 to the Company's Quarterly Report on
Form 10-Q for the quarter ended September 30, 1997.
10.19 Security Agreement, by and between Yakama Tribal Gaming Corporation
and HP Yakama, Inc., dated September 11, 1997, is hereby
incorporated by reference to Exhibit 10.42 to the Company's
Quarterly Report on Form 10-Q for the quarter ended September 30,
1997.
10.20 Master Lease, by and between The Confederated Tribes and Bands of
the Yakama Indian Nation and HP Yakama, Inc., dated September 11,
1997, is hereby incorporated by reference to Exhibit 10.43 to the
Company's Quarterly Report on Form 10-Q for the quarter ended
September 30, 1997.
10.21 Sublease, by and between HP Yakama, Inc. and Yakama Tribal Gaming
Corporation, dated September 11, 1997, is hereby incorporated by
reference to Exhibit 10.44 to the Company's Quarterly Report on Form
10-Q for the quarter ended September 30, 1997.
10.22 Construction and Development Agreement, by and between Yakama Tribal
Gaming Corporation and HP Yakama Consulting, Inc., dated September
11, 1997, is hereby incorporated by reference to Exhibit 10.45 to
the Company's Quarterly Report on Form 10-Q for the quarter ended
September 30, 1997.
10.23 Consulting Agreement, by and between Yakama Tribal Gaming
Corporation and HP Yakama Consulting, Inc., dated September 11,
1997, is hereby incorporated by reference to Exhibit 10.46 to the
Company's Quarterly Report on Form 10-Q for the quarter ended
September 30, 1997.
10.24 Termination of Consulting Agreement, among Yakama Tribal Gaming
Corporation, HP Yakama, Inc., and the Confederated Tribes and Bands
of the Yakama Indians, dated January 1, 1998, is hereby incorporated
by reference to Exhibit 10.42 to the Company's Annual Report on Form
10-K for the year ended December 31, 1997.
10.25 Voting Agreement, dated as of February 25, 1998, by and between
Hollywood Park, Inc., and Marlin F. Torguson, is hereby incorporated
by reference to Exhibit 10.1 to the Company's Current Report on Form
8-K, filed February 26, 1998.
10.26 Public Trust Tidelands Lease, dated August 15, 1994, by and between
the Secretary of State on behalf of the State of Mississippi and
Mississippi - I Gaming, L.P., is hereby incorporated by reference to
Exhibit 10.43 of the Company's Annual Report on Form 10-K for the
year ended December 31, 1997.
10.27 Public Trust Tidelands Lease Amendment, dated March 31, 1997, by and
between the Secretary of State on behalf of the State of Mississippi
and Mississippi - I Gaming, L.P., is hereby incorporated by
reference to Exhibit 10.43 to the Company's Annual Report on
Form 10-K for the year ended December 31, 1997.
10.28 Option agreement, by and among The Webster Family Limited
Partnership and The Diuguid Family Limited Partnership, and Pinnacle
Gaming Development Corp., dated June 2, 1998, is hereby incorporated
by reference to Exhibit 10.47 of the Company's Quarterly Report on
Form 10-Q for the quarter ended June 30, 1998.
10.29 Memorandum of Option Agreement, by and between the Webster Family
Limited Partnership and The Duiguid Family Limited Partnership, and
Pinnacle Gaming Development Corp., dated June 2, 1998, is hereby
incorporated by reference to Exhibit 10.48 of the Company's
Quarterly Report on Form 10-Q for the quarter ended June 30, 1998.
10.30 Amended and Restated Option Agreement, by and among Daniel Webster,
Marsha S. Webster, William G. Duiguid, Sara T. Diuguid, J.R.
Showers, III and Carol A. Showers, and Pinnacle Gaming Development
Corp., dated June 2, 1998, is hereby incorporated by reference to
Exhibit 10.49 of the Company's Quarterly Report on Form 10-Q for the
quarter ended June 30, 1998.
10.31 Memorandum of Amended and Restated Option Agreement, by and between
Daniel Webster, Marsha S. Webster, William Diuguid, Sara T. Diuguid,
J.R. Showers, III and Carol A. Showers, and Pinnacle Gaming
Development Corp., dated June 4, 1998, is hereby incorporated by
reference to Exhibit 10.50 of the Company's Quarterly Report on Form
10-Q for the quarter ended June 30, 1998.
10.32 Assignment of Option Agreement, by Daniel Webster and Marsha S.
Webster, and Pinnacle Gaming Development Corp., dated June 2, 1998,
is hereby incorporated by reference to Exhibit 10.51 of the
Company's Quarterly Report on Form 10-Q for the quarter ended June
30, 1998.
56
<PAGE>
10.33 Amended and Restated Reducing Revolving Loan Agreement, dated
October 14, 1998, among Hollywood Park, Inc., and the banks named
therein, Societe Generale and Bank of Scotland (as Managing Agents),
First National Bank of Commerce (as Co-Agent), and Bank of America
National Trust and Savings Association (as Administrative Agent), is
hereby incorporated by reference to Exhibit 2 of the Company's
Current Report on Form 8-K, filed October 30, 1998.
10.34 Purchase Agreement, dated February 12, 1999, by and among the
Company and Bay St. Louis Casino Corp., Bayview Yacht Club, Inc.,
Biloxi Casino Corp., Boomtown Hoosier, Inc., Boomtown Hotel &
Casino, Inc., Boomtown, Inc., Casino Magic American Corp., Casino
Magic Corp., Casino Magic Finance Corp., Casino One Corporation,
Crystal Park Hotel and Casino Development Company, LLC, Hollywood
Park Fall Operating Company, Hollywood Park Food Services, Inc.,
Hollywood Park Operating Company, HP Casino, Inc., HP/Compton, Inc.,
HP Yakama, Inc., HP Yakama Consulting, Inc., Indiana Ventures LLC,
Louisiana Gaming Enterprises, Inc., Louisiana - I Gaming, a
Louisiana Partnership in Commendam, Mardi Gras Casino Corp.,
Mississippi - I Gaming, L.P., Pinnacle Gaming Development Corp.,
Switzerland County Development Corp., and Turf Paradise, Inc., and
Lehman Brothers, Inc., CIBC Oppenheimer Corp., Morgan Stanley & Co.,
Incorporated, NationsBanc Montgomery Securities LLC, SG Cowen
Securities Corporation, and Wasserstein Perella Securities, Inc., as
initial purchasers, is hereby incorporated by reference to Exhibit
10.34 to the Company's S-4 Registration Statement dated March 2,
1999.
10.35 Registration Rights Agreement, dated as of February 18, 1999, by and
among the Company and Bay St. Louis Casino Corp., Bayview Yacht
Club, Inc., Biloxi Casino, Corp., Boomtown Hoosier, Inc., Boomtown
Hotel & Casino, Inc., Boomtown, Inc., Casino Magic American Corp.,
Casino Magic Finance Corp., Casino One Corporation, Crystal Park
Hotel and Casino Development Company, LLC, Hollywood Park Fall
Operating Company, Hollywood Park Food Services, Inc., Hollywood
Park Operating Company, HP Casino, Inc., HP/Compton, Inc., HP
Yakama, Inc., HP Yakama Consulting, Inc., Indiana Ventures LLC,
Louisiana Gaming Enterprises, Inc., Louisiana - I Gaming, a
Louisiana Partnership in Commendam, Mardi Gras Casino Corp.,
Mississippi - I Gaming L.P., Pinnacle Gaming Development Corp.,
Switzerland County Development Corp., and Turf Paradise, Inc., and
Lehman Brothers Inc., CIBC Oppenheimer Corp., Morgan Stanley & Co.
Incorporated, NationsBanc Montgomery Securities LLC, SG Cowen
Securities Corporation and Wasserstein Perella Securities, Inc., as
initial purchasers, is hereby incorporated by reference to Exhibit
10.35 to the Company's S-4 Registration Statement dated March 2,
1999.
10.36 Employment Agreement, dated December 23, 1998, by and between
Hollywood Park, Inc. and G. Michael Finnigan, is hereby incorporated
by reference to Exhibit 10.36 to the Company's Amendment No. 1 to
Form S-4 Registration Statement dated March 26, 1999.
10.37 Employment Agreement, dated September 10, 1998, by and between
Hollywood Park, Inc. and Paul Alanis, is hereby incorporated by
reference to Exhibit 10.37 to the Company's Amendment No. 1 to Form
S-4 Registration Statement dated March 26, 1999.
10.38 Employment Agreement, dated September 10, 1998, by and between
Hollywood Park, Inc. and Mike Allen, is hereby incorporated by
reference to Exhibit 10.38 to the Company's Amendment No. 1 to Form
S-4 Registration Statement dated March 26, 1999.
10.39 Employment Agreement, dated January 1, 1999, by and between
Hollywood Park, Inc. and Donald M. Robbins, is here by incorporated
by reference to Exhibit 10.39 to the Company's Amendment No. 1 S-4
Registration Statement dated March 26, 1999.
10.40 Purchase Agreement, dated as of February 25, 1998, among Hilton
Gaming (Switzerland County) Corporation and Boomtown Hoosier, Inc.,
is hereby incorporated by reference to Exhibit 10.40 to the
Company's Amendment No. 1 to Form S-4 Registration Statement dated
March 26, 1999.
21.1 Subsidiaries of Hollywood Park, Inc. is hereby incorporated by
reference to Exhibit 21.1 to the Company's Form S-4 Registration
Statement dated March 2, 1999.
23.1 * Consent of Arthur Andersen LLP.
27.1 * Financial Data Schedule
_____
* Filed herewith
57
<PAGE>
(b) Reports on Form 8-K
A Current Report on Form 8-K was filed January 19, 1999, to report
the January 14, 1999, press release announcing that the Company was
commencing a consent solicitation to amend the 9.5% No tes.
A Current Report on Form 8-K was filed March 2, 1999, to report the
February 23, 1999, press release announcing the Company's financial
results for the quarter and the year ended December 31, 1998.
58
<PAGE>
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.
Hollywood Park, Inc.
(Registrant)
By: /s/ R.D. Hubbard Dated: March 29, 1999
-----------------------------------
R.D. Hubbard
Chairman of the Board
and Chief Executive Officer
(Principal Executive Officer)
By: /s/ G. Michael Finnigan Dated: March 29, 1999
-----------------------------------
G. Michael Finnigan
Executive Vice President
and Chief Financial Officer
(Principle Financial and
Accounting Officer)
Hollywood Park Operating Company
(Registrant)
By: /s/ G. Michael Finnigan Dated: March 29, 1999
-----------------------------------
G. Michael Finnigan
Executive Vice President, Treasurer
and Chief Financial Officer
(Principle Financial and
Accounting Officer)
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the registrant and
it the capacities and on the dates indicated:
59
<PAGE>
Hollywood Park, Inc.
\s\ R.D. Hubbard Dated: March 29, 1999
- -------------------------------------
R.D. Hubbard - Director
\s\ J.R. Johnson Dated: March 29, 1999
- -------------------------------------
J.R. Johnson - Director
\s\ Robert T. Manfuso Dated: March 29, 1999
- -------------------------------------
Robert T. Manfuso - Director
\s\ Michael Ornest Dated: March 29, 1999
- -------------------------------------
Michael Ornest - Director
\s\ Timothy J. Parrott Dated: March 29, 1999
- -------------------------------------
Timothy J. Parrott - Director
\s\ Lynn P. Reitnouer Dated: March 29, 1999
- -------------------------------------
Lynn P. Reitnouer - Director
\s\ Marlin Torguson Dated: March 29, 1999
- -------------------------------------
Marlin Torguson - Director
\s\ Warren B. Williamson Dated: March 29, 1999
- -------------------------------------
Warren B. Williamson - Director
\s\ Herman Sarkowsky Dated: March 29, 1999
- -------------------------------------
Herman Sarkowsky - Director
Hollywood Park Operating Company
\s\ R.D. Hubbard Dated: March 29, 1999
- -------------------------------------
R.D. Hubbard - Director
\s\ Warren B. Williamson Dated: March 29, 1999
- -------------------------------------
Warren B. Williamson - Director
60
<PAGE>
Hollywood Park, Inc.
Index to Consolidated Financial Statements
<TABLE>
<CAPTION>
Hollywood Park, Inc.
--------------------
<S> <C>
Report of Independent Public Accountants
Report of Arthur Andersen LLP................................ 62
Consolidated Balance Sheets as of December 31, 1998 and 1997... 63
Consolidated Statements of Operations for the years
ended December 31, 1998, 1997 and 1996.................... 64
Consolidated Statements of Changes in Stockholders' Equity
for the years ended December 31, 1998, 1997 and 1996...... 65
Consolidated Statements of Cash Flows for the years
ended December 31, 1998, 1997 and 1996.................... 66
Notes to Financial Statements.................................. 67
Schedule II.................................................... 92
Other Financial Data........................................... 93
<CAPTION>
Casino Magic Corp.
------------------
<S> <C>
Report of Independent Public Accountant
Report of Arthur Andersen LLP................................ 95
Balance Sheets as of October 15, 1998, and December 31, 1997... 96
Consolidated Statements of Operations for the period
January 1, 1998 through October 15, 1998 and the years
ended December 31, 1998, and 1997......................... 97
Consolidated Statements of Changes in Stockholders' Equity
for the period January 1, 1998 through October 15, 1998
and the years ended December 31, 1998, and 1997........... 98
Consolidated Statements of Cash Flows for the period
January 1, 1998 through October 15, 1998 and the years
ended December 31, 1998, and 1997......................... 99
Notes to Consolidated Financial Statements..................... 100
</TABLE>
Schedules not included herewith have been omitted because they are not
applicable or the required information is shown in the financial statements or
notes thereto.
61
<PAGE>
Report of Independent Public Accountants
To The Board of Directors and Stockholders of
Hollywood Park, Inc.:
We have audited the accompanying consolidated balance sheets of Hollywood Park,
Inc. (a Delaware corporation) and subsidiaries (the "Company") as of December
31, 1998, and 1997, and the related consolidated statements of operations,
stockholders' equity and cash flows for each of the three years in the period
ended December 31, 1998. These financial statements are the responsibility of
the Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Hollywood Park, Inc. and
subsidiaries as of December 31, 1998, and 1997, and the results of their
operations and their cash flows for each of the three years in the period ended
December 31, 1998 in conformity with generally accepted accounting principles.
Arthur Andersen LLP
Los Angeles, California
February 23, 1999
62
<PAGE>
Hollywood Park, Inc.
Consolidated Balance Sheets
<TABLE>
<CAPTION>
As of December 31,
-------------------------------
1998 1997
------------ ------------
(in thousands)
<S> <C> <C>
Assets
Current Assets:
Cash and cash equivalents $ 43,934 $ 23,749
Restricted cash 300 407
Short term investments 3,179 0
Other receivables, net 16,783 9,417
Prepaid expenses and other assets 15,207 10,948
Deferred tax assets 18,425 8,118
Current portion of notes receivable 2,320 42
-------- --------
Total current assets 100,148 52,681
Notes receivable 17,852 9,548
Property, plant and equipment, net 602,912 300,666
Goodwill, net 97,098 33,017
Gaming license, net 36,446 0
Concession agreement, net 7,591 0
Debt issuance costs, net 12,105 5,253
Other assets 17,187 17,864
-------- --------
$891,339 $419,029
======== ========
- ------------------------------------------------------------------------------------------
Liabilities and Stockholders' Equity
Current Liabilities:
Accounts payable $ 20,970 $ 11,277
Accrued lawsuit settlement 0 2,750
Accrued compensation 17,819 7,627
Accrued liabilities 46,541 19,105
Accrued interest 16,741 5,175
Gaming liabilities 8,913 3,853
Racing liabilities 2,395 4,093
Current portion of notes payable 11,564 3,437
-------- --------
Total current liabilities 124,943 57,317
Notes payable 527,619 132,102
Deferred tax liabilities 400 6,310
Other liabilities 3,649 0
-------- --------
Total liabilities 656,611 195,729
Minority interests 3,752 1,946
Stockholders' Equity:
Capital stock --
Preferred - $1.00 par value, authorized 250,000 shares;
none issued and outstanding 0 0
Common - $.10 par value, authorized 40,000,000 shares;
25,800,069 issued and outstanding in 1998, and
26,220,528 in 1997 2,580 2,622
Capital in excess of par value 218,375 222,350
Retained earnings (accumulated deficit) 10,338 (3,532)
Accumulated other comprehensive loss (317) (86)
-------- --------
Total stockholders' equity 230,976 221,354
-------- --------
$891,339 $419,029
======== ========
</TABLE>
- ----------------
See accompanying notes to the consolidated financial statements.
63
<PAGE>
Hollywood Park, Inc.
Consolidated Statements of Operations
<TABLE>
<CAPTION>
Years ended December 31,
-------------------------------------------------------
1998 1997 1996
-------------- --------------- ----------------
(in thousands, except per share data)
<S> <C> <C> <C>
Revenues:
Gaming $293,057 $137,659 $50,717
Racing 66,871 68,844 71,308
Food and beverage 30,510 19,894 13,947
Hotel and recreational vehicle park 3,076 937 0
Truck stop and service station 14,499 8,633 0
Other income 18,954 12,161 7,253
-------------- --------------- ----------------
426,967 248,128 143,225
-------------- --------------- ----------------
Expenses:
Gaming 161,549 74,733 27,249
Racing 29,316 30,304 30,167
Food and beverage 38,860 25,745 19,573
Hotel and recreational vehicle park 1,213 356 0
Truck stop and service station 13,279 7,969 0
Administration 95,491 61,514 41,477
Other 7,995 5,048 2,485
Depreciation and amortization 32,121 18,157 10,695
REIT restructuring 419 2,483 0
Write off of investment in Sunflower 0 0 11,412
-------------- --------------- ----------------
380,243 226,309 143,058
-------------- --------------- ----------------
Operating income 46,724 21,819 167
Loss on write off of assets 2,221 0 0
Interest expense 22,518 7,302 942
-------------- --------------- ----------------
Income (loss) before minority interest
and income taxes 21,985 14,517 (775)
Minority interests 374 (3) 15
Income tax expense 8,442 5,850 3,459
-------------- --------------- ----------------
Net income (loss) $13,169 $8,670 ($4,249)
============== =============== ================
==============================================================================================================
Dividend requirements on convertible preferred stock $0 $1,520 $1,925
Net income (loss) attributable to (allocated to) common
shareholders $13,169 $7,150 ($6,174)
Per common share:
Net income (loss) - basic $0.50 $0.33 ($0.33)
Net income (loss) - diluted $0.50 $0.33 ($0.33)
Number of shares - basic 26,115 22,010 18,505
Number of shares - diluted 26,115 22,340 20,797
- -------
See accompanying notes to the consolidated financial statements.
</TABLE>
64
<PAGE>
Hollywood Park, Inc.
Consolidated Statements of Changes in Stockholders' Equity
For the years ended December 31, 1998, 1997 and 1996
<TABLE>
<CAPTION>
Accumulated Retained
Capital in Other Earnings Total
Preferred Common Excess of Comprehensive (Accumulated) Stockholders'
Stock Stock Par Value Loss Deficit) Equity
----------- ---------- ------------ ------------- ----------- ------------
(in thousands)
<S> <C> <C> <C> <C> <C> <C>
Balance as of December 31, 1995 $28 $1,850 $168,479 $0 ($4,611) $165,746
Net loss 0 0 0 0 (4,249) (4,249)
Issuance of common stock to acquire -
Pacific Casino Management, Inc. 0 5 535 0 0 540
Repurchase and retirement of common stock 0 (22) (1,940) 0 0 (1,962)
Investment in bonds - unrealized holding gain 0 0 0 0 10 10
Preferred stock dividends - $70.00 per share 0 0 0 0 (1,925) (1,925)
----------- ---------- ------------ ----------- ------------ ------------
Balance as of December 31, 1996 28 1,833 167,074 0 (10,775) 158,160
Net income 0 0 0 0 8,670 8,670
Issuance of common stock to acquire -
Pacific Casino Management, Inc. 0 3 497 0 0 500
Issuance of common stock to acquire -
Boomtown, Inc. 0 582 56,425 0 0 57,007
Repurchase and retirement of common stock 0 (45) (3,420) 0 0 (3,465)
Common stock options exercised 0 20 1,975 0 0 1,995
Conversion of convertible preferred stock (28) 229 (201) 0 0 0
Investment in bonds - unrealized holding gain 0 0 0 0 7 7
Comprehensive loss on short term bond investments 0 0 0 (86) 86 0
Preferred stock dividends - $55.27 per share 0 0 0 0 (1,520) (1,520)
----------- ---------- ------------ ----------- ------------ ------------
Balance as of December 31, 1997 0 2,622 222,350 (86) (3,532) 221,354
Net income 0 0 0 0 13,169 13,169
Repurchase and retirement of common stock 0 (50) (5,490) 0 0 (5,540)
Common stock options exercised 0 8 627 0 0 635
Tax benefit associated with exercised
common stock options 0 0 888 0 0 888
Investment in stock - unrealized holding gain 0 0 0 0 470 470
Comprehensive loss on short term bond investments 0 0 0 (231) 231 0
----------- ---------- ------------ ----------- ------------ ------------
Balance as of December 31, 1998 $0 $2,580 $218,375 ($317) $10,338 $230,976
=========== ========== ============ ============ ============ ============
</TABLE>
- ------
See accompanying notes to the consolidated financial statements.
65
<PAGE>
Hollywood Park, Inc.
Consolidated Statements of Cash Flows
<TABLE>
<CAPTION>
For the years ended December 31,
---------------------------------------------
1998 1997 1996
----------- ----------- -----------
(in thousands)
<S> <C> <C> <C>
Cash flows from operating activities:
Net income (loss) $13,169 $8,670 ($4,249)
Adjustments to reconcile net income (loss) to net cash provided
by operating activities:
Depreciation and amortization 32,121 18,157 10,027
Minority interests 374 (3) 15
Changes in accounts due to deconsolidation of subsidiary
in bankruptcy:
Property, plant and equipment 0 0 58,380
Secured notes payable 0 0 (28,918)
Unsecured notes payable 0 0 (15,323)
Goodwill and lease with TRAK East 0 0 6,908
Loss on sale or disposal of property, plant and equipment, net 1,196 632 10
Changes in assets and liabilities, net of the effects of the
purchase of a business:
Decrease (increase) in restricted cash 107 4,079 (1,360)
(Increase) decrease in other receivables, net (2,937) (312) 1,037
Decrease (increase) in prepaid expenses and other assets 2,927 (452) (3,524)
Decrease (increase) in deferred tax assets 1,429 (1,696) (1,534)
Decrease in accounts payable (3,074) (2,468) (2,475)
Decrease in accrued lawsuit settlement (2,750) 0 (2,482)
Increase (decrease) in accrued compensation 107 (1,004) 903
Increase (decrease) in accrued liabilities 441 (8,460) (3,489)
Increase (decrease) in gaming liabilities 3,266 1,354 (1,499)
(Decrease) increase in racing liabilities (1,698) (2,013) 2,270
Increase in accrued interest payable 516 5,175 0
Payments to minority members 0 (89) 0
Decrease in deferred tax liabilities (6,975) (3,126) (1,018)
----------- ----------- -----------
Net cash provided by operating activities 38,219 18,444 13,679
----------- ----------- -----------
Cash flows from investing activities:
Additions to property, plant and equipment (56,747) (32,505) (23,786)
Receipts from sale of property, plant and equipment 980 187 9
Principal collected on notes receivable 2,489 52 34
Note receivable, Paul Alanis (3,232) 0 0
Note receivable, HP Yakama investment (9,618) 0 0
Purchase of short term investments (2,709) (1,936) (16,890)
Proceeds from short term investments 0 6,712 18,569
Payment to buy-out minority interest in Crystal Park LLC (1,946) (1,000) 0
Long term gaming assets 0 0 2,169
Cash paid for the acquisition of Casino Magic, net of
cash acquired (65,749) 0 0
Cash acquired in the acquisition of Boomtown, net of
cash transaction and other costs 0 12,264 0
----------- ----------- -----------
Net cash used in investing activities (136,532) (16,226) (19,895)
----------- ----------- -----------
Cash flows from financing activities:
Proceeds from secured Bank Credit Facility 270,000 112,000 0
Payment of secured Bank Credit Facility 0 (112,000) (3,358)
Payment of secured notes payable (1,571) (4,917) 0
Payment of unsecured notes payable (6,054) (25) (23)
Proceeds from issuance of 9.5% Notes 0 125,000 0
Payment of the 11.5% Casino Magic Notes (135,000) 0 0
Payment of 11.5% Boomtown Notes (1,253) (110,924) 0
Increase in debt issuance costs (2,719) 0 0
Payments from minority interest partners 0 0 3,000
Common stock options exercised 635 1,995 0
Common stock repurchase and retirement (5,540) 0 (1,962)
Dividends paid to preferred stockholders 0 (1,520) (1,925)
----------- ----------- -----------
Net cash provided by (used in) financing activities 118,498 9,609 (4,268)
----------- ----------- -----------
Increase (decrease) in cash and cash equivalents 20,185 11,827 (10,484)
Cash and cash equivalents at the beginning of the period 23,749 11,922 22,406
----------- ----------- -----------
Cash and cash equivalents at the end of the period $43,934 $23,749 $11,922
========== ========== ==========
</TABLE>
See accompanying notes to the consolidated financial statements.
66
<PAGE>
Hollywood Park, Inc.
Notes to Consolidated Financial Statements
Note 1 - Summary of Significant Accounting Policies
General Hollywood Park, Inc. (the "Company" or "Hollywood Park") is a
diversified gaming company that owns and/or operates eight casinos, two pari-
mutuel horse racing facilities, and two card club casinos at locations in
Nevada, Mississippi, Louisiana, California, Arizona and Argentina. Hollywood
Park owns and operates, through its Boomtown, Inc. ("Boomtown") subsidiary,
land-based, dockside and riverboat gaming operations in Verdi, Nevada ("Boomtown
Reno"), Biloxi, Mississippi ("Boomtown Biloxi") and Harvey, Louisiana ("Boomtown
New Orleans"), respectively. As of the Company's October 15, 1998, acquisition
of Casino Magic Corp. ("Casino Magic"), Hollywood Park owns and operates
dockside gaming casinos in the cities of Bay St. Louis and Biloxi, Mississippi
("Casino Magic Bay St. Louis" and "Casino Magic Biloxi"); riverboat gaming in
Bossier City, Louisiana ("Casino Magic Bossier City"), and is a 51% partner in
two land-based casinos in Argentina ("Casino Magic Argentina"). Hollywood Park
also owns two card club casinos in California; both located in the Los Angeles
metropolitan area. The Hollywood Park-Casino is operated by the Company, and
located on the same property as the Hollywood Park Race Track. The Crystal Park
Hotel and Casino (the "Crystal Park Casino") is owned by the Company and is
leased to an unaffiliated operator. The Company's premier thoroughbred racing
facilities include the Hollywood Park Race Track, which the Company has owned
for 60 years, and Turf Paradise, Inc. ("Turf Paradise") located in Phoenix,
Arizona. The Company is in the initial construction planning stages of a hotel
and casino resort in Indiana (the "Indiana Project"), after being approved to
receive the last available license to conduct riverboat gaming operations on the
Ohio River, on September 30, 1998.
Consolidation The consolidated financial statements for the year ended December
31, 1998, included the accounts of Hollywood Park and its wholly owned
subsidiaries: (a) Boomtown, which was acquired by the Company on June 30, 1997,
and was accounted for under the purchase method of accounting for a business
combination, and Boomtown's seven active subsidiaries: (1) Boomtown Hotel &
Casino, Inc., (2) Bayview Yacht Club, Inc., (3) Mississippi - I Gaming, L.P.,
(4) Louisiana Gaming Enterprises, Inc., (5) Louisiana - I Gaming; (6) Boomtown
Hoosier, Inc., and (7) Pinnacle Gaming Development Corporation; (b) Casino Magic
was acquired by the Company on October 15, 1998, and was accounted for under the
purchase method of accounting for a business combination, and Casino Magic's
eleven active subsidiaries: (1) Mardi Gras Casino Corp., (2) Biloxi Casino
Corp., (3) Casino Magic Finance Corp., (4) Jefferson Casino Corporation, (5)
Casino Magic of Louisiana Corp., (6) Casino Magic Neuquen S.A., (7) Casino Magic
Support Services S.A., (8) Casino Magic American Corp., (9) Casino Magic
Management Services Corp., (10) Casino One Corp., and (11) Casino Magic
Advertising, Inc.; (c) Hollywood Park Operating Company, and its two wholly
owned subsidiaries, Hollywood Park Food Services, Inc. and Hollywood Park Fall
Operating Company; (d) Turf Paradise, Inc.; (e) HP Yakama, Inc.; (f) HP Kansas,
Inc.; (g) HP/Compton, Inc. and HP Casino, Inc., which as of December 31, 1997,
own 89.8% and 10.2%, respectively, of the Crystal Park Hotel and Casino
Development Company LLC, ("Crystal Park LLC"), which built and presently leases
the Crystal Park Casino, to an unaffiliated third party. The Hollywood Park-
Casino is a division of Hollywood Park, Inc. As of March 31, 1996, the Company
wrote off its investment in Sunflower and its wholly owned subsidiary SR Food
and Beverage, Inc., due to Sunflower's inability to compete with nearby Missouri
riverboat gaming, and as of April 1, 1996, no longer consolidated Sunflower's
operating results with the Company's. On June 4, 1998, the bankruptcy court
converted Sunflower's case from Chapter 11 to Chapter 7 Sunflower is no longer
operational. In December 1998, the court entered an order authorizing the sale
of substantially all of Sunflower's assets.
Restricted Cash Restricted cash as of December 31, 1998 and 1997, was for
amounts due to horsemen for purses, stakes and awards.
Gaming License In May 1996, Casino Magic acquired Crescent City Capital
Development Corp., which included the Louisiana state gaming license to conduct
the gaming operations of Casino Magic Bossier City. Casino Magic allocated a
portion of the purchase price to the Louisiana state gaming license, which is
being amortized on a straight line basis, over twenty-five years.
67
<PAGE>
Concession Agreement In December 1994, Casino Magic acquired a twelve-year
concession agreement to operate the two Casino Magic Argentina casinos, and
capitalized the costs related to obtaining the concession agreement. The costs
are being amortized on a straight line basis, over the twelve-year life of the
concession agreement.
Goodwill The majority of goodwill is being amortized over 40 years, with the
balance being amortized over fifteen to twenty years.
Racing Revenues and Expenses The Company records pari-mutuel revenues,
admissions, food and beverage and other racing income associated with racing on
a daily basis, except for prepaid admissions, which were recorded ratably over
the racing season. Expenses associated with racing revenues were charged
against income in those periods in which racing revenues were recognized. Other
expenses were recognized as they occurred throughout the year.
Gaming Revenue and Promotional Allowances Gaming revenues at the Boomtown and
Casino Magic properties consisted of the difference between gaming wins and
losses, or net win from gaming activity, and at the Hollywood Park-Casino
consisted of fees collected from patrons on a per seat or per hand basis.
Revenues in the accompanying statements of operations exclude the retail value
of food and beverage, hotel rooms and other items provided to patrons on a
complimentary basis. The estimated cost of providing these promotional
allowances (which is included in gaming expenses) during the years ended
December 31, 1998, 1997, and 1996 was $21,270,000 (which includes Boomtown's
promotional allowances for a full year and Casino Magic's as of October 15,
1998), $8,285,000 (which includes Boomtown's promotional allowances as of June
30, 1997), and $1,316,000, respectively.
Capitalized Interest Interest expense of $2,142,000 and $425,000 was
capitalized during the years ended December 31, 1998 and 1997, respectively. No
capitalized interest was recorded during the year ended December 31, 1996,
because the Company had no outstanding debt.
Estimates Financial statements prepared in accordance with generally accepted
accounting principles require the use of management estimates, including
estimates used to evaluate the recoverability of property, plant and equipment,
to determine the fair value of financial instruments, to account for the
valuation allowance for deferred tax assets and to determine litigation related
obligations. Actual results could differ from estimates.
Property, Plant and Equipment Property, plant and equipment are depreciated on
the straight line method over their estimated useful lives as follows:
<TABLE>
<CAPTION>
Years
--------
<S> <C>
Land improvements 3 to 25
Buildings 5 to 40
Riverboats 25 to 39
Equipment 3 to 10
</TABLE>
Maintenance and repairs were charged to expense, and betterments were
capitalized. The cost of property sold or otherwise disposed of and its
associated accumulated depreciation were eliminated from both the property and
accumulated depreciation accounts with any gain or loss recorded in the expense
accounts.
Property, plant and equipment is carried on the Company's balance sheets at
depreciated cost. Whenever there are recognized events or changes in
circumstances that affect the carrying amount of the property, plant and
equipment, management reviews the assets for possible impairment.
Income Taxes The Company accounts for income taxes under Statement of
Financial Accounting Standards ("SFAS") 109, Accounting for Income Taxes,
whereby deferred tax assets and liabilities are recognized for the future tax
consequences attributable to differences between the financial statement
carrying amounts of
68
<PAGE>
existing assets and liabilities and their respective tax bases. Deferred tax
assets and liabilities are measured using enacted tax rates expected to apply to
taxable income in the years in which those temporary differences are expected to
be recovered or settled. Under SFAS 109, the effect on deferred tax assets and
liabilities of a change in tax rates is recognized in income in the period that
included the enactment date.
Earnings Per Share Basic earnings per share were computed by dividing net
income (loss) attributable to (allocated to) common shareholders (net income
(loss) less preferred stock dividend requirements) by the weighted average
number of common shares outstanding during the period. Diluted per share
amounts were similarly computed, but include the effect, when dilutive, of the
conversion of the convertible preferred shares and the exercise of stock
options.
Cash Flows Cash and cash equivalents consisted of cash, certificates of deposit
and short term investments with original maturities of 90 days or less.
Stock-Based Compensation The Company records stock-based compensation under APB
Opinion No. 25, whereby no stock-based compensation costs are recorded upon
grant of options. The Company discloses the pro forma impact of option grants,
as required under Financial Accounting Standards Board's Statement of Accounting
Standards No. 123 Accounting for Stock-Based Compensation.
Accounting Pronouncements Segment Information Statement of Financial Accounting
Standards No. 131 Disclosures about Segments of an Enterprise and Related
Information ("SFAS No. 131") was effective for years after December 31, 1997,
and has been adopted by the Company for all periods presented in these
consolidated financial statements. SFAS No. 131 establishes revised guidelines
for public companies in determining operating segments based on those used for
internal reporting to management. Based on these guidelines Hollywood Park
reports information under a single gaming segment.
Long-lived Assets The Company periodically reviews the propriety of the carrying
- -----------------
amount of long-lived assets and the related intangible assets as well as the
related amortization period to determine whether current events or circumstances
warrant adjustments to the carrying value and/or the estimates of useful lives.
This evaluation consists of the Company's projection of the undercounted
operating income before depreciation, amortization and interest over the
remaining lives of the excess costs, in accordance with FASB Statement No. 121
Accounting for the Impairment of long-lived Assets to Be Disposed Of. Based on
its review, the Company believes that as of December 31, 1998, there were no
significant impairments of its long-lived assets or related intangible assets.
Start-Up Costs the Company's policy has been to expense start-up costs as
- --------------
incurred. In April 1998, Statement of Position 98-5 Reporting on the Costs of
Start-Up Activities was issued and was effective for years after December 31,
1998. Statement of Position 98-5 required that start-up activities and
organizational costs be expensed as incurred. The adoption of Statement of
Position 98-5 did not have an impact on the financial statements of the Company.
Derivative Instruments and Hedging Activities In September 1998, the Financial
- ---------------------------------------------
Accounting Standards Board issued Statement of Financial Accounting Standards
No. 133 Accounting for Derivative Instruments and Hedging Activities ("SFAS No.
133"). The Company has not made such investments in the past and does not
expect to make such investments in the foreseeable future, and thus SFAS No. 133
has no impact on the financial reporting of the Company.
SFAS No. 133 established accounting and reporting standards with respect to
recording derivative instruments on the balance sheet measured at its fair
value. SFAS No. 133, also sets reporting requirements for changes in the fair
value of a derivative, and for qualifying hedges. SFAS No. 133 will be
effective for accounting years beginning after June 15, 1999.
Comprehensive Income In June 1997, the Financial Accounting Standards Board
- --------------------
issued Statement of Financial Accounting Standard's No. 130, Reporting
Comprehensive Income ("SFAS No. 130"), which became
69
<PAGE>
effective for years beginnings after December 31, 1997. Hollywood Park adopted
SFAS No. 130 in 1998. SFAS No. 130 requires the classification of other
comprehensive income by its nature in a financial statement, and to disclose the
accumulated balance of other comprehensive income separately in the
shareholders' equity section of the balance sheet.
Reclassifications Certain reclassifications have been made to the 1997 and 1996
balances to be consistent with the 1998 financial statement presentation.
Note 2 - Acquisitions
Boomtown, Inc. On June 30, 1997, pursuant to the Agreement and Plan of Merger
dated as of April 23, 1996, by and among Hollywood Park, HP Acquisition, Inc.,
(a wholly owned subsidiary of the Company), and Boomtown, HP Acquisition, Inc.
was merged with and into Boomtown (the "Boomtown Merger"). As result of the
Boomtown Merger, Boomtown became a wholly owned subsidiary of the Company and
each share of Boomtown common stock was converted into the right to receive
0.625 of a share of Hollywood Park's common stock. Approximately 5,362,850
shares of Hollywood Park common stock, valued at $9.8125 per share (excluding
shares repurchased from Edward P. Roski, Jr. and subsequently retired, as
described below) were issued in the Boomtown Merger.
The Boomtown Merger was accounted for under the purchase method of accounting
for a business combination. The purchase price of the Boomtown Merger was
allocated to identifiable assets acquired and liabilities assumed based on their
estimated fair values at the date of acquisition. Based on financial analyses,
which considered the impact of general economic, financial and market conditions
on the assets acquired and the liabilities assumed, the estimated fair values
approximated their carrying values. The Boomtown Merger generated approximately
$15,302,000 of excess acquisition cost over the recorded value of the net assets
acquired, all of which was allocated to goodwill, to be amortized over 40 years.
The amortization of the goodwill is not deductible for income tax purposes.
The Company acquired three of the four Boomtown properties; Boomtown Reno,
Boomtown New Orleans and Boomtown Biloxi. Boomtown's Las Vegas property was
divested following the Boomtown Merger on July 1, 1997. Boomtown and its
subsidiaries exchanged substantially all of their interest in the Las Vegas
property, including substantially all of the operating assets and notes
receivable of approximately $27,300,000 from the landowner/lessor of the Las
Vegas property, IVAC, a California general partnership of which Mr. Roski, a
former Boomtown director, is a general partner, for, among other things, two
unsecured notes receivable totaling approximately $8,465,000, cash, assumption
of certain liabilities and release from certain lease obligations. In addition,
concurrently with the divestiture of the Las Vegas property, Hollywood Park
purchased and retired 446,491 shares of Hollywood Park common stock received by
Mr. Roski in the Boomtown Merger for a price of approximately $3,465,000,
payable in the form of a Hollywood Park promissory note.
Casino Magic Corp. On October 15, 1998, Hollywood Park acquired Casino Magic,
pursuant to the February 19, 1998 Agreement of Merger among Casino Magic Corp.,
Hollywood Park, Inc., and HP Acquisition II, Inc. (a wholly owned subsidiary of
Hollywood Park) (the "Casino Magic Merger"). Hollywood Park paid cash of
approximately $80,904,000 for Casino Magic's common stock. At the date of the
acquisition, Hollywood Park had purchased 792,900 common shares of Casino Magic,
on the open market, at a total cost of approximately $1,615,000. Hollywood Park
paid $2.27 per share for the remaining 34,929,224 Casino Magic common stock
outstanding.
The Casino Magic Merger was accounted for under the purchase method of
accounting for a business combination. The Company has performed a preliminary
purchase price allocation and will finalize this allocation in 1999. The
purchase price of the Casino Magic Merger was allocated to identifiable assets
acquired and liabilities assumed based on their estimated fair values at the
date of acquisition. Based on financial analyses, which considered the impact
of general economic, financial and market conditions on the assets acquired and
the liabilities assumed were, when found to be necessary, written up or down to
their
70
<PAGE>
fair market values. The Casino Magic Merger generated approximately $43,284,000
of excess acquisition cost over the recorded value of the net assets acquired,
all of which was allocated to goodwill, to be amortized over 40 years. The
amortization of the goodwill will not be deductible for income tax purposes.
On February 23, 1998, Hollywood Park entered into a voting agreement with Marlin
F. Torguson pursuant to which, among other things, Mr. Torguson agreed to vote
the 7,954,500 shares of Casino Magic common stock he beneficially owned in favor
of approval and adoption of the Agreement and Plan of Merger and the Casino
Magic Merger, and any matter that could reasonably be expected to facilitate the
Casino Magic Merger. Mr. Torguson also agreed to continue to serve as an
employee of Casino Magic for three years following the Casino Magic Merger, and
to not compete with Hollywood Park or Casino Magic in any jurisdictions in which
either presently operates.
Casino Magic owns and operates dockside casinos in Bay St. Louis, Mississippi,
and Biloxi, Mississippi, riverboat gaming in Bossier City, Louisiana, and is a
51% partner in two land-based casinos in Argentina.
Pro Forma Results of Operations The following unaudited pro forma results of
operations were prepared under the assumption that the acquisitions of Boomtown
and Casino Magic had occurred as of January 1, 1997. The historical results of
operations of Boomtown prior to Hollywood Park's June 30, 1997 acquisition
(excluding the approximately $1,900,000 net loss associated with Boomtown's Las
Vegas property, which was sold on June 30, 1997), and Casino Magic prior to
Hollywood Park's October 15, 1998 acquisition were combined with Hollywood
Park's. Pro forma adjustments were made for the following: (a) the early
retirement of $102,200,000 principal amount of the Boomtown 11.5% Notes; (b) the
issuance of the 9.5% Notes; (c) redemption of the Casino Magic 11.5% Notes; (d)
the borrowing of approximately $222,615,000 to redeem the Casino Magic 11.5%
Notes ($141,515,000) and to purchase Casino Magic's common stock ($81,100,000);
(e) amortization of the costs associated with amending the Bank Credit Facility
to provide the funds necessary to purchase Casino Magic's common stock and
redeem the Casino Magic 11.5% Notes; (f) elimination of compensation expense
associated with three Casino Magic executives who resigned and will not be
replaced; (g) elimination of expenses associated with Casino Magic's board of
directors; (h) the amortization of the excess purchase price over net assets
acquired for both the Casino Magic Merger and the Boomtown Merger; (h) the
amortization of the premium associated with the purchase accounting write-up of
the Casino Magic 13% Notes; and (i) the tax expense associated with the net pro
forma adjustments.
71
<PAGE>
Hollywood Park, Inc.
Unaudited Pro Forma Combined Consolidated Results of Operations
<TABLE>
<CAPTION>
For the years ended
December 31,
-----------------------------------------
1998 1997
------------- ---------------
(in thousands, except per share data)
<S> <C> <C>
Revenues:
Gaming $516,622 $467,328
Racing 66,871 68,844
Other 82,846 74,659
-------- --------
666,339 610,831
-------- --------
Operating income (a) 74,752 55,569
Income before extraordinary item $7,678 $4,323
======== =======
Extraordinary item, redemption of the
Casino Magic 11.5% Notes $0 $11,039
======== ========
Net income (loss) $7,678 ($6,716)
======== ========
Dividend requirements on preferred stock $0 $1,520
Net income (loss) to common shareholders $7,678 ($8,236)
======== ========
Per common share:
Net income (loss) - basic $0.29 ($0.37)
Net income (loss) - diluted $0.29 ($0.37)
</TABLE>
____
(a) In 1998, the operating income is inclusive of costs of $6,243,000, related
to the Casino Magic Merger.
The unaudited pro forma combined results of operations are for comparative
purposes only and is not necessarily indicative of the operating results or
financial position that would have occurred if the Boomtown Merger and the
Casino Magic Merger had occurred as of January 1, 1997.
Note 3 - Supplemental Disclosure of Cash Flow Information
<TABLE>
<CAPTION>
For the years ended December 31,
----------------------------------------------------------------------
1998 1997 1996
-------------------- -------------------- --------------------
(in thousands)
<S> <C> <C> <C>
Cash paid during the year for:
Interest $22,024 $1,321 $299
Income taxes 8,195 827 40
</TABLE>
Note 4 - Short Term Investments
As of December 31, 1998, the Company has invested approximately $3,179,000
(inclusive of an unrealized gain of approximately $470,000) in equity
securities, which are presently being held as available-for-sale.
72
<PAGE>
Note 5 - Property, Plant and Equipment
Property, plant and equipment held as of December 31, 1998, and 1997 consisted
of the following:
<TABLE>
<CAPTION>
December 31,
----------------------------------------------
1998 (a) 1997
----------------- ----------------
(in thousands)
<S> <C> <C>
Land and land improvements $141,536 $50,945
Buildings 393,200 270,271
Equipment 174,270 77,337
Vessel 76,605 18,925
Construction in progress 46,297 21,896
-------- --------
831,908 439,374
Less accumulated depreciation 228,996 138,708
-------- --------
$602,912 $300,666
======== ========
</TABLE>
___
(a) Includes Casino Magic's assets.
Note 6 - Secured and Unsecured Notes Payable
Notes payable as of December 31, 1998, and 1997 consisted of the following:
<TABLE>
<CAPTION>
December 31,
------------------------------------------
1998 (a) 1997
----------------- -----------------
<S> <C> <C>
(in thousands)
Secured notes payable, Bank Credit Facility $270,000 $0
Secured notes payable, other 16,569 3,750
Hollywood Park 9.5% Notes 125,000 125,000
Casino Magic 13% Notes (b) 121,685 0
Boomtown 11.5% First Mortgage Notes 0 1,253
Capital lease obligations 641 1,527
Unsecured note payable 5,288 4,009
-------- --------
539,183 135,539
Less current maturities 11,564 3,437
-------- --------
$527,619 $132,102
======== ========
</TABLE>
_____
(a) Includes notes payable related to Casino Magic.
(b) Includes a write up to fair market values, as of the October 15, 1998,
acquisition of Casino Magic, of $8,810,000, as required under the purchase
accounting method of accounting for a business combination.
Hollywood Park Bank Credit Facility On October 14, 1998, the Company executed
--------------------
the Amended and Restated Reducing Revolving Loan Agreement with a bank syndicate
lead by Bank of America National Trust and Savings Association NT&SA ("Bank of
America") (the "Bank Credit Facility") for up to $300,000,000, with an option to
increase this amount to $375,000,000. The Bank Credit Facility also provides
for sub-facilities for letters of credit up to $30,000,000, and swing line loans
of up to $10,000,000. Prior to the execution of the Bank Credit Facility, the
Company was operating with a former Bank Credit Facility which was initially for
$225,000,000, and was reduced to $100,000,000 with the August 1997 issuance of
the 9.5% Hollywood Park Senior Subordinated Notes due 2007 (the "9.5% Notes").
The Bank Credit Facility extended the maturity of the former Bank Credit
Facility to December 31, 2003, reduced interest and commitment fee rates, and
amended certain covenants, as compared to the former Bank Credit Facility.
As of December 31, 1998, the Company had outstanding borrowings under the Bank
Credit Facility of $270,000,000 (inclusive of $225,000,000 borrowed on October
15, 1998, of which $80,904,000 was used to purchase Casino Magic's common stock,
$141,515,000 to redeem Casino Magic's 11.5% First Mortgage Notes, with the
balance used for general corporate needs) at a weighted average interest rate of
7.30%. Through
73
<PAGE>
February 8, 1999, the Company borrowed an additional $17,000,000, for total
outstanding borrowings under the Bank Credit Facility of $287,000,000, all of
which was paid in full on February 18, 1999, with a portion of the funds from
the Company's February 18, 1999 private placement of $350,000,000 aggregate
principal amount of 9.25% Senior Subordinated Notes due 2007 (the ("9.25%
Notes") (more fully discussed below).
Under the Bank Credit Facility, the Company is not required to make any
principal payments prior to March 31, 2001, but must make monthly interest
payments. Starting March 31, 2001, and on the last day of each subsequent
calendar quarter, through December 31, 2002, the then amount available under the
Bank Credit Facility will decrease by $15,000,000 and on the last day of each
calendar quarter for the period March 31, 2003, through September 30, 2003, it
will decrease by $25,000,000, with the balance of any principal outstanding due
on December 31, 2003. If the Company has borrowings in excess of the reduced
availability of the Bank Credit Facility, these amounts are due on the same day
as the scheduled reductions.
The annual interest rate under the Bank Credit Facility is determined, at the
Company's election, by reference to the "Eurodollar Rate" (for Eurodollar loans)
(for interest periods of one, two, three or six months) or the "Alternative Base
Rate", (for Base Rate loans) as these terms are defined in the Bank Credit
Facility, plus margins that vary upon the Company's ratio of funded debt to
earnings before interest, taxes, depreciation and amortization ("EBITDA"). With
a funded debt to EBITDA ratio of less than 2.00 to 1.00, the margin for
Eurodollar loans is 1.00% and nothing for Base Rate loans. The margin for each
type of loan will increase by 25 basis points (except the initial price increase
for Eurodollar loans, which increases by 12.5 basis points) for each 50 basis
point increase in the funded debt to EBITDA ratio. The maximum margin for
Eurodollar loans is 2.25%, and for Base Rate loans is 1.125%. The margin for
the period December 1, 1998 through February 28, 1999 for Eurodollar loans was
2.25% and 1.125% for Base Rate loans.
The Bank Credit Facility requires the payment of a quarterly commitment fee,
based on the Company's ratio of funded debt to EBITDA, applied to the average
amount of the unused portion of the Bank Credit Facility. The commitment fee
starts at 25 basis points when the ratio of funded debt to EBITDA is less than
2.00 to 1.00, and increases by 6.25 basis points for the first two increases in
the ratio of 50 basis points, then remains unchanged for the next 50 basis
points increase in the ratio, and thereafter increases by 6.25 basis points, to
a maximum of 50 basis points, for each 50 basis point increase in the ratio.
When the ratio of funded debt to EBITDA is greater than 3.00 to 1.00, but less
than 3.50 to 1.00, the commitment fee does not increase. The commitment fee for
the period December 1, 1998, through May 31, 1999, will be 50.00 basis points.
The Bank Credit Facility allows for interest rate swap agreements, or other
interest rate protection agreements, up to a maximum notional amount of
$300,000,000. Presently, the Company does not use such financial instruments.
9.5% Notes On August 6, 1997, Hollywood Park and Hollywood Park Operating
- ----------
Company co-issued $125,000,000 aggregate principal amount of 9.5% Notes. The
Company paid liquidated damages at an annual rate of 0.5% of the principal
amount of the 9.5% Notes for the period January 27, 1998 to March 20, 1998 (the
date of consummation of the required registered exchange offer for the 9.5%
Notes). The 9.5% Notes are redeemable, at the option of Hollywood Park and
Hollywood Park Operating Company, in whole or in part, on or after August 1,
2002, at a premium to face amount, plus accrued interest, as follows: (a) August
1, 2002 at 104.75%; (b) August 1, 2003 at 102.375%; (c) August 1, 2004 at
101.188%; and (d) August 1, 2005 and thereafter at 100%. The 9.5% Notes are
unsecured obligations of Hollywood Park and Hollywood Park Operating Company,
guaranteed by all other material restricted subsidiaries of either Hollywood
Park or Hollywood Park Operating Company. Certain Casino Magic subsidiaries,
including Casino Magic of Louisiana, Corp., which owns and operates Casino Magic
Bossier City, and the entities which conduct the Casino Magic Argentina
operations are unrestricted subsidiaries under the indenture governing the 9.5%
Notes and do not guarantee the 9.5% Notes.
On January 29, 1999, Hollywood Park received the required number of consents to
modify selected covenants associated with the 9.5% Notes. Among other things,
the modifications lowered the required minimum
74
<PAGE>
consolidated coverage ratio for debt assumption to 2.00:1.00 and increased the
size of Hollywood Park's allowed borrowings under the Bank Credit Facility from
$100,000,000 to $350,000,000. The Company paid a consent fee of $50.00 per
$1,000 principal amount of the 9.5% Notes, or a total cost of approximately
$6,781,000, inclusive of transaction related expenses.
The indenture governing the 9.5% Notes contains certain covenants that, among
other things, limit the ability of Hollywood Park, Hollywood Park Operating
Company and their restricted subsidiaries to incur additional indebtedness and
issue preferred stock, pay dividends or make other distributions, repurchase
equity interests (the previously discussed stock repurchase falls within the
parameters of the indenture) or subordinated indebtedness, create certain liens,
enter into certain transactions with affiliates, sell assets, issue or sell
equity interests in their respective subsidiaries or enter into certain mergers
and consolidations.
9.25% Notes On February 18, 1999, Hollywood Park issued $350,000,000 aggregate
- -----------
principal amount of 9.25% Notes, pursuant to a private offering. Hollywood Park
has filed a registration statement with the Securities and Exchange Commission
covering an exchange offer of a like principal amount of registered 9.25% Notes
with substantially identical terms as the outstanding 9.25% Notes. The 9.25%
Notes are redeemable, at the option of the Company, in whole or in part, on or
after February 15, 2003, at a premium to face amount, plus accrued interest, as
follows: (a) February 15, 2003 at 104.625%; (b) February 15, 2004 at 103.083%;
(c) February 15, 2005 at 101.542%; and (d) February 15, 2006 and thereafter at
100%. The 9.25% Notes are unsecured obligations of Hollywood Park, guaranteed
by all other material restricted subsidiaries of Hollywood Park excluding
certain Casino Magic subsidiaries, principally Casino Magic of Louisiana, Corp.
and the Casino Magic Argentina subsidiaries.
Hollywood Park received net proceeds of approximately $339,900,000 from the
9.25% Note offering. Of these proceeds, Hollywood Park used $287,000,000 to
repay all outstanding borrowings under the Bank Credit Facility. The remaining
proceeds of approximately $52,900,000 are currently invested in various short
term investments and are expected to be used to fund Hollywood Park's capital
expenditures. The repayment of all borrowings outstanding under the Bank Credit
Facility does not reduce the size of the bank's commitment to lend and, if
Hollywood Park meets the relevant conditions for borrowing, Hollywood Park could
borrow the full amount available under the Bank Credit Facility in the future,
including the amounts repaid with the proceeds from the 9.25% Note offering.
The indenture governing the 9.25% Notes contains 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 interest in its subsidiaries, or enter into certain mergers
and consolidations.
Boomtown 11.5% Notes In November 1993, Boomtown issued $103,500,000 of 11.5%
-----------
First Mortgage Notes (the "Boomtown 11.5% Notes"). On July 3, 1997, pursuant to
a tender offer made in connection with the Boomtown Merger, Boomtown repurchased
and retired approximately $102,142,000 in principal amount of the Boomtown 11.5%
Notes, at a purchase price of $1,085 per $1,000, along with accrued interest
thereon. An additional $105,000 of the remaining Boomtown 11.5% Notes were
tendered in the post Boomtown Merger change of control purchase offer, at a
price of $1,010 for each $1,000, completed August 12, 1997. As permitted in the
indenture governing the Boomtown Notes (the "Boomtown Indenture"), in June 1998,
Boomtown elected to satisfy and discharge its obligation regarding the remaining
$1,253,000 of Boomtown 11.5% Notes. As of June 9, 1998, Boomtown had satisfied
all conditions required to discharge its obligations under the Boomtown
Indenture. Total cost to retire the remaining Boomtown 11.5% Notes was
$1,378,000.
Casino Magic Casino Magic 11.5% Notes In October 1993, Casino Magic (through a
------------------------
wholly owned subsidiary) issued $135,000,000 in aggregate principal amount of
11.5% First Mortgage Notes (the "Casino Magic 11.5% Notes"). On October 15,
1998, concurrent with the completion of the Casino Magic Merger, Casino Magic
exercised its right to redeem the Casino Magic 11.5% Notes, at 103.833%, and as
of October 15, 1998, Casino Magic had satisfied all conditions required to
discharge its obligations at a total cost of
75
<PAGE>
$141,515,000. The funds used to redeem the Casino Magic 11.5% Notes were
borrowed under the Bank Credit Facility.
Casino Magic 13% Notes On August 22, 1996, Casino Magic of Louisiana, Corp.,
- ----------------------
(owner of Casino Magic Bossier City) a wholly owned subsidiary of Jefferson
Casino Corporation, which is a wholly owned subsidiary of Casino Magic, issued
$115,000,000 in aggregate principal amount of 13% First Mortgage Notes (the
"Casino Magic 13% Notes"), with contingent interest at 5% of Casino Magic
Bossier City's adjusted consolidated cash flow (as defined under the indenture
governing these notes). The Casino Magic 13% Notes are secured by a first
priority lien and security interest in substantially all of the assets of Casino
Magic Bossier City, and Jefferson Casino Corporation guarantees the Casino Magic
13% Notes, and the guarantee is secured by all of the assets of Jefferson Casino
Corporation including all of the capital stock of Casino Magic of Louisiana,
Corp. The Casino Magic 13% Notes are redeemable, in whole or in part, on or
after August 15, 2000, at a premium to face amount, plus accrued interest, as
follows: (a) August 15, 2000, at 106.5%; (b) August 15, 2001, at 104.332%; and
(c) August 15, 2002, and thereafter at 102.166%.
On December 23, 1998, the Company completed the post Casino Magic Merger change
of control purchase offer, whereby $2,125,000 in principal amount of the Casino
Magic 13% Notes were tendered, at a price of $1,010 for each $1,000 of principal
amount.
The indenture governing the Casino Magic 13% Notes contains certain covenants
limiting Casino Magic of Louisiana, Corp. and its subsidiaries to engage in any
line of business other than the current gaming operations of Casino Magic
Bossier City and incidental related activities, to borrow funds or otherwise
become liable for additional debt, to pay dividends, issue preferred stock, make
investments and certain types of payments, to grant liens on its property, enter
into mergers or consolidations, or to enter into certain specified transactions
with affiliates.
Other Information As of December 31, 1998, Casino Magic had various secured
- -----------------
notes payable totaling $14,069,000, primarily secured by various fixed assets at
Casino Magic Biloxi and Casino Magic Bossier City. As with the Boomtown Merger,
the Company is currently evaluating the various Casino Magic notes payable for
early retirement. Casino Magic also had unsecured notes payable totaling
$2,251,000 and capital leases of $641,000.
Annual Maturities As of December 31, 1998, annual maturities of total notes and
loans payable are as follows:
<TABLE>
<CAPTION>
Year ending: (in thousands)
------------ --------------
<S> <C>
December 31, 1999 $2,064
December 31, 2000 1,993
December 31, 2001 30,743
December 31, 2002 60,743
December 31, 2003 180,050
Thereafter 263,590
</TABLE>
Note 7 - Accounting for Stock-Based Compensation
The Company estimated the fair market value of stock options using an option-
pricing model taking into account, as of the date of grant, the exercise price
and expected life of the option, the then current price of the underlying stock
and its expected volatility, expected dividend on the stock, and the risk-free
interest rate for the expected term of the options.
76
<PAGE>
In computing the stock-based compensation, the following assumptions were made:
<TABLE>
<CAPTION>
Risk-Free Expected Expected
Interest Rate Expected Life Volatility Dividends
--------------- ------------------- --------------- ----------------
<S> <C> <C> <C> <C>
Options granted in the following periods:
First quarter 1996 5.0% 3 years 36.1% None
Second quarter 1996 5.1% 3 years 46.4% None
Fourth quarter 1996 5.0% 10 years 47.4% None
Third quarter 1997 5.0% 3 years 47.8% None
Third quarter 1998 4.5% 10 years 40.1% None
Fourth quarter 1998 4.5% 3 to 10 years 40.1% None
</TABLE>
The following sets forth the pro forma financial results related to the
Company's employee stock-based compensation plans, with respect to the options
estimated fair value, based on the Company's stock price at the grant date:
<TABLE>
<CAPTION>
For the years ended December 31,
-----------------------------------------------------------------
1998 1997 1996
-------------------- -------------------- ---------------
(in thousands, except per share data)
<S> <C> <C> <C>
Net income (loss) before stock-based compensation expense $13,169 $8,670 ($4,249)
Stock-based compensation expense 1,905 629 81
------- ------- --------
Pro forma net income (loss) $11,264 $8,041 ($4,330)
======= ======= ========
Dividend requirements on convertible preferred stock $0 $1,520 $1,925
Pro forma net income (loss) to common shareholders $11,264 $6,521 ($6,255)
======= ======= ========
Per common share:
Pro forma net income (loss) - basic $0.43 $0.30 ($0.34)
Pro forma net income (loss) - diluted $0.43 $0.30 ($0.34)
Number of shares - basic 26,115 22,010 18,505
Number of shares - diluted 26,115 22,340 20,797
</TABLE>
Note 8 - Income Taxes
The Company accounts for income taxes under Statement of Financial Accounting
Standards No. 109 Accounting for Income Taxes, whereby deferred tax assets and
liabilities are recognized for the future tax consequences attributable to
differences between the financial statement carrying amounts of existing assets
and liabilities and their respective tax bases.
77
<PAGE>
The composition of the Company's income tax expense for the years ended December
31, 1998, 1997 and 1996 was as follows:
<TABLE>
<CAPTION>
Current Deferred Total
------------- ------------- -----------
(in thousands)
<S> <C> <C> <C>
Year ended December 31, 1998:
U.S. Federal $5,793 $97 $5,890
State 2,511 41 2,552
-------- -------- -------
$8,304 $138 $8,442
======== ======== =======
Year ended December 31, 1997:
U.S. Federal ($1,616) $6,972 $5,356
State (698) 1,192 494
-------- -------- -------
($2,314) $8,164 $5,850
======== ======== =======
Year ended December 31, 1996:
U.S. Federal $4,341 ($1,681) $2,660
State (3,293) 4,092 799
-------- -------- -------
$1,048 $2,411 $3,459
======== ======== =======
</TABLE>
The following table reconciles the Company's income tax expense (based on its
effective tax rate) to the federal statutory tax rate of 34%:
<TABLE>
<CAPTION>
For the years ended December 31,
------------------------------------------------------------------------
1998 1997 1996
-------------------- -------------------- --------------------
(in thousands)
<S> <C> <C> <C>
Income (loss) before income tax expense, at the
statutory rate $7,348 $4,935 ($269)
Employee meals 336 192 0
Goodwill amortization 691 317 195
Political and lobbying costs 339 246 291
State income taxes, net of federal tax benefits (808) 494 800
Other non-deductible expenses (2,651) (334) 105
Sunflower Racing, Inc., loss recapture 4,582 0 0
Depreciation and loss on assets (1,063) 0 0
Foreign income not subject to U.S. taxes (332) 0 0
Additional provisions 0 0 2,337
------- ------ ------
Income tax expense $ 8,442 $5,850 $3,459
======= ====== ======
</TABLE>
For the years ended December 31, 1998, and 1997, the tax effects of temporary
differences that gave rise to significant portions of the deferred tax assets
and deferred tax liabilities are presented below, along with a summary of
activity in the valuation allowance.
78
<PAGE>
<TABLE>
<CAPTION>
1998 1997
-------------------- ----------------------
Current deferred tax assets: (in thousands)
<S> <C> <C>
Workers' compensation insurance reserve $1,029 $790
General liability insurance reserve 1,430 1,012
Legal accrual 84 58
Write off of investment in Sunflower and excess loss
recapture 7,139 3,111
Lawsuit settlement 1,129 1,104
Vacation and sick pay accrual 1,709 872
Bad debt allowance 972 528
Casino Magic accruals 3,534 0
Other 6,157 1,999
--------------------- ---------------------
Current deferred tax assets 23,183 9,474
Less valuation allowance 0 (306)
--------------------- ---------------------
Current deferred tax assets 23,183 9,168
Current deferred tax liabilities:
State income taxes (1,572) 0
Sunflower book loss (831) 0
Other (2,355) (1,050)
--------------------- ---------------------
Net current deferred tax assets $18,425 $8,118
===================== ======================
Non-current deferred tax assets:
Net operating loss carryforwards $29,279 $5,489
General business investment tax credits 234 828
Excess tax basis over book value of acquired assets 11,736 0
Alternative minimum tax credits 7,207 3,946
Los Angeles revitalization zone tax credits 11,717 11,798
Merger costs 1,208 2,406
Capital loss divestiture of Boomtown Las Vegas 3,597 3,147
Casino Magic loss from subsidiaries 1,235 0
Casino Magic reserve for discontinued operations 1,156 0
Casino Magic other 1,576 0
Crystal Park LLC depreciation 1,300 0
Boomtown pre-opening and start up costs 1,272 0
Casino Magic amortization 1,489 0
Boomtown asset write down 2,166 0
Other 670 2,717
--------------------- ---------------------
Non-current deferred tax assets 75,842 30,331
Less valuation allowance (23,490) (13,524)
--------------------- ---------------------
Non-current deferred tax assets 52,352 16,807
Non-current deferred tax liabilities:
Loss on sale of Boomtown Las Vegas property (2,633) 0
Casino Magic interest (1,421) 0
Casino Magic pre-opening and start up costs (14,544) 0
Los Angeles revitalization zone accelerated write-off 0 (461)
Excess book value over tax basis of acquired assets (4,378) (4,048)
Depreciation and amortization (26,581) (17,382)
Other (3,195) (1,226)
--------------------- ---------------------
Net non-current deferred tax liabilities ($400) ($6,310)
===================== =====================
</TABLE>
The Company is located in the Los Angeles revitalization tax zone and is
entitled to special state of California income tax credits related to sales tax
paid on operating materials and supplies, on construction assets and on wages
paid to staff who reside within the zone. With the construction of the
Hollywood Park-Casino and the Crystal Park Casino, the Company earned
substantial tax credits related to sales tax paid on the assets acquired and on
wages paid to construction employees.
79
<PAGE>
<TABLE>
<CAPTION>
December 31,
----------------------------------------------
1998 1997
--------------------- ----------------------
(in thousands)
<S> <C> <C>
Valuation allowance at beginning of period $13,830 $5,632
Valuation allowance for Boomtown NOL carryforwards
and tax credits (5,632) 5,699
Valuation allowance for Casino Magic NOL
carryforwards and tax credits 15,292 0
Los Angeles revitalization zone tax credit 0 2,499
--------------------- ----------------------
Valuation allowance at end of period $23,490 $13,830
===================== ======================
</TABLE>
As of December 31, 1998, the Company had federal net operating loss ("NOL") and
capital loss ("CL") carryforwards of approximately $84,400,000, and $10,200,000,
respectively, comprised principally of NOL carryforwards acquired in the Casino
Magic and Boomtown Mergers, and CL carryforwards resulting from the disposition
of Boomtown's Las Vegas property. The NOL carryforwards expire on various dates
through 2018, and the CL carryforwards expire on various dates through 2002. In
addition, the Company has approximately $400,000 of foreign tax credits related
to Casino Magic Argentina operations, which expire in 2000, and approximately
$7,200,000 of alternative minimum tax credits which do not expire. The
alternative minimum tax credits can reduce future federal income taxes but
generally cannot reduce federal income taxes paid below the amount of
alternative minimum tax.
Under several provisions of the Internal Revenue Code (the "Code") and the
regulations promulgated thereunder, the utilization of NOL, CL and tax credit
carryforwards to reduce tax liability is restricted under certain circumstances.
Events which cause such a limitation include, but are not limited to, certain
changes in the ownership of a corporation. Both the Boomtown Merger and the
Casino Magic Merger caused such a change in ownership with respect to Boomtown
and Casino Magic. As a result, the Company's use of approximately $14,000,000
and $70,400,000 of Boomtown and Casino Magic's NOL carryforwards, respectively;
$1,400,000 of Boomtown's CL carryforwards; and $1,700,000 and $5,200,000 of
Boomtown and Casino Magic's tax credit carryforwards, respectively, is subject
to certain limitations imposed by Sections 382 and 383 of the Code and by the
separate return limitation year rules of the consolidated return regulations.
Section 382 of the Code generally provides that in each taxable year following
an ownership change with respect to a corporation, the corporation (or
consolidated group of which the corporation is a part) is subject to a
limitation on the amount of the corporation's pre-ownership change NOLs which
maybe be used equal to the value of the stock of the corporation (determined
immediately prior to the ownership change and subject to certain adjustments)
multiplied by the "long term tax exempt rate" which is in effect at the time of
the ownership change. For ownership changes occurring during June 1997
(Boomtown) and October 1998 (Casino Magic), the long term tax exempt rates were
5.64% and 5.02%, respectively. Section 383 of the Code imposes a comparable and
related set of rules for limiting the use of CL and tax credit carryforwards in
the event of an ownership change. In addition, the separate return limitation
year rules of the consolidated return regulations generally provide that
Boomtown and Casino Magic's pre-merger NOLs can be used in computing post-merger
taxable income of the Company only to the extent that Boomtown and Casino Magic,
respectively, contribute to the Company's consolidated income. The separate
return limitation year rules also impose similar limitations with respect to CL
and tax credit carryforwards of Boomtown and Casino Magic. Furthermore, the
utilization of the foreign tax credit is also subject to certain limitations
imposed by Section 904 of the Code which generally provides that foreign tax
credits cannot be used to reduce U.S. tax liability on income sources with the
U.S. These various limitations restrict the amount of NOL, CL and tax credit
carryforwards that may be used by the Company in any taxable year and,
consequently, are expected to defer the Company's use of a substantial portion
of such carryforwards and may ultimately prevent the Company's use of a portion
thereof. Therefore, a valuation allowance has been recorded related to the
Boomtown and Casino Magic carryforwards.
For California tax purposes, as of December 31, 1998, the Company also had
approximately $11,700,000 of Los Angeles Revitalization Zone ("LARZ") tax
credits. The LARZ tax credits can only be used to reduce certain California tax
liability and cannot be used to reduce federal tax liability. A valuation
allowance of $8,200,000
80
<PAGE>
has been recorded with respect to the LARZ tax credits because the Company may
not generate enough income subject to California tax to utilize the LARZ tax
credits before they expire.
Note 9 - Stockholders' Equity
On August 5, 1998, the Company announced its intention to repurchase and retire
up to 20% or approximately 5,256,000 shares of its then issued and outstanding
common stock on the open market or in negotiated transactions. As of December
31, 1998, the Company had repurchased and retired 500,000 shares at a total cost
of approximately $5,540,000 (with the last purchase being made on September 28,
1998).
On June 30, 1997, the Company acquired Boomtown and each share of Boomtown
common stock was converted into the right to receive 0.625 of a share of
Hollywood Park's common stock. Approximately 5,362,850 net shares of Hollywood
Park common stock were issued. In connection with the Boomtown Merger, the
Company purchased and retired 446,491 shares of Hollywood Park common stock
received by a former Boomtown shareholder.
During 1996, the Company announced its intention to repurchase and retire up to
2,000,000 shares of its common stock on the open market or in negotiated
transactions. As of December 31, 1996, the Company had repurchased and retired
(with the last purchase in 1996 made on November 13, 1996) 222,300 common shares
at a cost of approximately $1,962,000.
Note 10 - Lease Obligations
The Company leases certain equipment for use in gaming operations and general
office equipment. Minimum lease payments required under operating leases that
have initial terms in excess of one year as of December 31, 1998 are as follows:
<TABLE>
<CAPTION>
Period (in thousands)
------ ----------------
<S> <C>
1999 $5,481
2000 4,254
2001 3,822
2002 2,992
2003 2,907
Thereafter 2,781
</TABLE>
Total rent expense for these long term lease obligations for the years ended
December 31, 1998, 1997 and 1996 was $5,194,000, $2,453,000, and $1,378,000,
respectively.
Note 11 - Employee Benefit Plans
Hollywood Park offers a 401(k) Investment Plan (the "401(k) Plan") which is
subject to the provisions of the Employee Retirement Income Security Act of
1994. The 401(k) Plan is open to all employees of the Company (except those
covered by collective bargaining agreements) who have completed one year of
service. Employees may contribute up to 15% of pretax income (subject to legal
limitation of $10,000 for 1998). The Company offers a discretionary matching,
and for the years ended December 31, 1998 and 1997 contributed $987,000 and
$717, 000, respectively. The Company did not provide a matching contribution in
1996.
The Company merged the 401(k) plans of Boomtown and Casino Magic, into the
Hollywood Park 401(k) Plan, on July 1, 1998, and January 1, 1999, respectively.
As of January 31, 1997, Hollywood Park terminated its Pension Plan, and has no
intention to reinstate a pension plan in the foreseeable future, which was a
non-contributory defined benefit Pension Plan covering certain employees of
Hollywood Park, Inc. and Hollywood Park Operating Company. Pension Plan
participants' accrued Pension Plan benefits were frozen as of September 1, 1996,
except for certain retained
81
<PAGE>
participants (participants who, because of legal requirements, including the
provisions of the National Labor Relations Act, were represented by a collective
bargaining agent), whose accrued Pension Plan benefits were frozen as of
December 31, 1996. The funds accumulated under the Pension Plan were distributed
to the Pension Plan participants.
Effective January 31, 1997, in conjunction with the termination of the Pension
Plan, Hollywood Park elected to terminate its non-qualified Supplementary
Employment Retirement Plan ("SERP"). The SERP was an unfunded plan, established
primarily for the purpose of restoring the retirement benefits for highly
compensated employees that were eliminated by the Internal Revenue Service in
1994, when the maximum annual earnings allowed for qualified pension plans was
reduced to $150,000 from $235,850. Messers, Hubbard, Finnigan and Robbins
participated in the SERP prior to its termination.
The Company also contributed to several collectively-bargained multi-employer
pension and retirement plans which are administered by unions, and to a pension
plan covering non-union employees which is administered by an association of
race track owners. Amounts charged to pension cost and contributed to these
plans for the years ended December 31, 1998, 1997 and 1996 totaled $1,690,000,
$1,842,000, and $1,872,000, respectively. Contributions to the collectively-
bargained plans were determined in accordance with the provisions of negotiated
labor contracts and generally are based on the number of employee hours or days
worked. Contributions to the non-union plans are based on the covered
employees' compensation.
Information from the plans administrators was not available to permit the
Company to determine its share of unfunded vested benefits or prior service
liability. It is the opinion of management that no material liability exists.
Note 12 - Related Party Transactions
On June 2, 1998, Hollywood Park and R.D. Hubbard Enterprises, Inc. ("Hubbard
Enterprises"), which is wholly owned by Mr. Hubbard, entered into a new Aircraft
Time Sharing Agreement. The former agreement was entered into in November 1993.
The June 2, 1998 Aircraft Time Sharing Agreement is identical to the former
agreement, in all aspects, except for the type of aircraft covered by the
agreement. The Aircraft Time Sharing Agreement expires on December 31, 1999,
and then automatically renews each month unless written notice of termination is
given by either party at least two weeks before a renewal date. Hollywood Park
reimburses Hubbard Enterprises for expenses incurred as a result of Hollywood
Park's use of the aircraft, which totaled approximately $72,000 in 1998,
$106,000 in 1997, and $120,000 in 1996.
On August 31, 1998, the Company received a promissory note for up to $3,500,000
from Paul Alanis. As of December 31, 1998, the Company had loaned Mr. Alanis
$3,232,000, who used the funds to purchase 300,000 shares of the Company's
common stock. Interest on the promissory note is at least the prime interest
rate, but not more than 10%. The principal amount of the promissory note, along
with accrued interest is due, in full, no later than December 31, 1999. The
promissory note is secured by Mr. Alanis' interest in Horseshoe Gaming LLC, with
an approximate value well in excess of $3,500,000.
Timothy J. Parrott purchased 270,738 shares of Boomtown common stock in
connection with Boomtown's 1988 acquisition of Boomtown Hotel & Casino, Inc.
(which operates Boomtown Reno). Mr. Parrott paid an aggregate purchase price,
for the common stock, of $222,000, of which $1,000 was paid in cash and $221,000
was paid by a promissory note secured by pledge to Boomtown of all of the shares
owned by Mr. Parrott. As of October 31, 1998, Mr. Parrott resigned his position
as Chairman of Boomtown, and Hollywood Park retained him as a consultant to
provide services relating to gaming and other business issues. Mr. Parrott was
retained for a three year period, with an annual retainer of $350,000 with
health and disability benefits equivalent to those he received as Chairman of
Boomtown. Mr. Parrott's $221,000 note will be forgiven in three equal parts on
each anniversary of the consulting agreement.
Marlin Torguson, who beneficially owned approximately 21.5% of the outstanding
common shares of Casino Magic, agreed, in connection with the Casino Magic
acquisition, to vote his Casino Magic shares in favor of
82
<PAGE>
the acquisition by Hollywood Park. In addition, Mr. Torguson agreed to continue
to serve as an employee of Casino Magic for three years following the
acquisition, and during such three year period, not to compete with Hollywood
Park or Casino Magic in any jurisdiction in which either Hollywood Park or
Casino Magic operates. Hollywood Park appointed Mr. Torguson to its board of
directors. Hollywood Park has agreed to issue to Mr. Torguson 20,000 shares of
Hollywood Park common stock and pay him $300,000 for each year, during a three
year period. In addition, Hollywood Park issued Mr. Torguson 30,000 options to
acquire Hollywood Park common stock as of the October 15, 1998, acquisition of
Casino Magic, priced at the closing price of Hollywood Park's common stock on
that date. The foregoing payments will be made to Mr. Torguson whether or not
Hollywood Park or Casino Magic terminates Mr. Torguson's employment, except for
termination for cause.
Note 13 - Stock Option Plan
In 1996, the shareholders of the Company adopted the 1996 Stock Option Plan (the
"1996 Plan"), which provides for the issuance of up to 900,000 shares. Except
for the provisions governing the number of shares issuable under the 1996 Plan
and except for provisions which reflect changes in tax and securities laws, the
provisions of the 1996 Plan are substantially similar to the provision of the
prior plan adopted in 1993. The 1996 Plan is administered and terms of option
grants are established by the Board of Directors' Compensation Committee. Under
the terms of the 1996 Plan, options alone or coupled with stock appreciation
rights may be granted to selected key employees, directors, consultants and
advisors of the Company. Options become exercisable ratably over a vesting
period as determined by the Compensation Committee and expire over terms not
exceeding ten years from the date of grant, one month after termination of
employment, or six months after the death or permanent disability of the
optionee. The purchase price for all shares granted under the 1996 Plan shall
be determined by the Compensation Committee, but in the case of incentive stock
options, the price will not be less than the fair market value of the common
stock at the date of grant. On April 26, 1996, the Company amended the non-
qualified stock option agreements issued through this date, to lower the per
share price of the outstanding options to $10.00.
As of December 31, 1998, all of the 625,000 shares eligible for issuance under
the 1993 Stock Option Plan had either been issued or were subject to outstanding
options, and of the 900,000 shares eligible for issuance under the 1996 Stock
Option Plan, 274,688 were subject to outstanding options. In addition, 968,111
and 303,924 shares of Hollywood Park common stock are issuable upon exercise of
options granted under pre-merger plans of Boomtown and Casino Magic,
respectively, which Hollywood Park assumed in each Merger. Hollywood Park has
filed registration statements with the Securities and Exchange Commission
covering an aggregate of 2,883,215 shares of Hollywood Park common stock
issuable upon exercise of options granted under the Hollywood Park Stock Option
Plans, the Boomtown Stock Option Plans and the Casino Magic Stock Option Plans.
On September 10, 1998, the Company granted 817,500 options (625,000 at an
exercise price of $10.1875, and 192,500 at an exercise price of $18.00) outside
of the 1993 and 1996 Plans to the new executive gaming staff hired as of January
1, 1999. As of December 31, 1998, none of these options were exercised.
83
<PAGE>
The following table summarizes information related to shares under option and
shares available for grant under the Hollywood Park 1993 and 1996 Plans:
<TABLE>
<CAPTION>
1998 1997 1996
---------------- ----------------- --------------
<S> <C> <C> <C>
Options outstanding at beginning of year 857,499 622,500 249,000
Options granted during the year 219,188 261,000 413,500
Options exercised, expired or forfeited during the year (249,866) (26,001) (40,000)
---------------- --------------- --------------
Options outstanding at end of year 826,821 857,499 622,500
================ =============== ==============
Shares available for issuance under the 1993 Plan 625,000 625,000 625,000
Shares available for issuance under the 1996 Plan 900,000 900,000 900,000
---------------- --------------- --------------
Total shares available for issuance 1,525,000 1,525,000 1,525,000
================ =============== ==============
Per share price of outstanding options issued in prior year $14.75 $11.50 $10.00
Per share price of outstanding options issued in current year $8.625 to
$14.8125 -- --
Number of shares subject to exercisable options at end of year 584,846 696,813 188,332
</TABLE>
Note 14 - Commitments and Contingencies
9.5% Notes On August 6, 1997, Hollywood Park and Hollywood Park Operating
- ----------
Company, as co-obligors, issued $125,000,000 of 9.5% Notes (as previously
discussed). The 9.5% Notes are fully and unconditionally, jointly and
severally, guaranteed on a senior subordinated basis by all of Hollywood Park's
material subsidiaries.
Casino Magic 13% Notes On August 22, 1996, Casino Magic of Louisiana, Corp.
- ----------------------
(owner of Casino Magic Bossier City) a wholly owned subsidiary of Jefferson
Casino Corporation, which is a wholly owned subsidiary of Casino Magic, issued
$115,000,000 of 13% Notes (as previously discussed). The Casino Magic 13% Notes
are secured by all of the assets of Jefferson Casino Corporation including all
of the capital stock of Casino Magic of Louisiana, Corp.
Legal Poulos Lawsuit A class action lawsuit was filed on April 26, 1994, in the
- ------
United States District Court, Middle District of Florida (the "Poulos Lawsuit"),
naming as defendants 41 manufacturers, distributors and casino operators of
video poker and electronic slot machines, including Casino Magic. The lawsuit
alleges that the defendants have engaged in a course of fraudulent and
misleading conduct intended to induce people to play such games based on false
beliefs concerning the operation of the gaming machines and the extent to which
there is an opportunity to win. The suit alleges violations of the Racketeer
Influenced and Corrupt Organization Act, as well as claims of common law fraud,
unjust enrichment and negligent misrepresentation, and seeks damages in excess
of $6 billion. On May 10, 1994, a second class action lawsuit was filed in the
United States District Court, Middle District of Florida (the "Ahern Lawsuit"),
naming as defendants the same defendants who were named in the Poulos Lawsuit
and adding as defendants the owners of certain casino operations in Puerto Rico
and the Bahamas, who were not named as defendants in the Poulos Lawsuit. The
claims in the Ahern Lawsuit are identical to the claims in the Poulos Lawsuit.
Because of the similarity of parties and claims, the Poulos Lawsuit and Ahern
Lawsuit were consolidated into one case file in the United States District
Court, Middle District of Florida. On December 9, 1994 a motion by the
defendants for change of venue was granted, transferring the case to the United
States District Court for the District of Nevada, in Las Vegas. In an order
dated April 17, 1996, the court granted motions to dismiss filed by Casino Magic
and other defendants and dismissed the Complaint without prejudice. The
plaintiffs then filed an amended Complaint on May 31, 1996 seeking damages
against Casino Magic and other defendants in excess of $1 billion and punitive
damages for violations of the Racketeer Influenced and Corrupt Organizations Act
and for state common law claims for fraud, unjust enrichment and negligent
misrepresentation. Casino Magic and other defendants have moved to dismiss the
amended Complaint. Casino Magic believes that the claims are without merit and
does not expect that the lawsuit will have a materially adverse effect on the
financial condition or results of operations of Casino Magic.
84
<PAGE>
Casino America Litigation On or about September 6, 1996, Casino America, Inc.
commenced litigation in the Chancery Court of Harrison County, Mississippi,
Second Judicial District, against Casino Magic, and James Edward Ernst, its
Chief Executive Officer, seeking injunctive relief and unspecified compensatory
damages in an amount to be proven at trial as well as punitive damages. The
plaintiff claims, among other things, that the defendants (i) breached the terms
of an agreement they had with the plaintiff, (ii) tortiously interfered with
certain of the plaintiff's business relations; and (iii) breached covenants of
good faith and fair dealing they allegedly owed to the plaintiff. On or about
October 8, 1996, the defendants interposed an answer, denying the allegations
contained in the Complaint. The discovery phase of this litigation is
continuing and a trial date was initially set for August 1998, but was postponed
to mid-1999 after the plaintiff requested a continuance. While Casino Magic's
management cannot predict the outcome of this action, it believes plaintiff's
claims are without merit and intends to vigorously defend this action.
Astoria Entertainment, Inc. v. Edwin W. Edwards, et als., United States District
Court for the Eastern District of Louisiana, No. 98-3359. On February 2, 1999,
the plaintiff, Astoria Entertainment, Inc., voluntarily dismissed its complaint
(as presented below), without prejudice, as to the three Hollywood Park/Boomtown
defendants, and other defendants.
This civil action was filed on November 12, 1998 in federal district court in
New Orleans against 21 defendants, including Edwin W. Edwards, Stephen Edwards,
Edward J. Debartolo, Jr., Debartolo Entertainment Louisiana Gaming, Inc.,
Hollywood Casino Corporation, Boyd Kenner, Inc., Treasure Chest Casino, L.L.C.,
five members of the former Louisiana Riverboat Gaming Commission, Hollywood
Park, Inc., Louisiana Gaming Enterprises, Inc., and Robert List (an employee of
Boomtown, Inc.) (the latter three hereafter are referred to as the "Hollywood
Park/Boomtown defendants"). The complaint alleged violations of the Racketeer
Influenced and Corrupt Organizations ("RICO") Act in connection with the
awarding of riverboat gaming licenses in Louisiana. The plaintiff, Astoria
Entertainment, Inc. ("Astoria"), contends that it had sustained damages due to
alleged racketeering activities of the defendants, allegedly resulting in
corruption of the licensing process and Astoria's failure to receive a license
for riverboat gaming in, inter alia, the West Bank of Jefferson Parish (suburban
New Orleans). The Complaint sought damages of "not less than $340 million,"
plus treble damages, costs, and attorneys' fees. On January 15, 1998, the
Hollywood Park/Boomtown defendants filed a motion to dismiss Astoria's Complaint
for failure to state a claim against those defendants.
Astoria Entertainment, Inc. v. Edward J. DeBartolo, Jr., et als., Civil District
Court for the Parish of Orleans, State of Louisiana, No. 98-20315. On March 5,
1999, Astoria Entertainment, Inc. voluntarily dismissed, without prejudice all
claims asserted (as presented below) against the Hollywood Park/Boomtown
defendants.
This action was filed on or about December 1, 1998 in state district court in
New Orleans against twelve defendants, including Edward J. Debartolo, Jr.,
Debartolo Entertainment Louisiana Gaming, Inc., Hollywood Casino Corporation,
Robert Guidry, Boyd Gaming, Inc., Boyd Kenner, Inc., Treasure Chest Casino,
L.L.C., Hollywood Park, Inc., Robert List (an employee of Boomtown, Inc.),
Louisiana Gaming Enterprises, Inc., Boomtown, Inc., and Louisiana-I Gaming, L.P.
(the latter five hereafter are referred to as the "Hollywood Park/Boomtown
defendants"). The petition sought damages against the Hollywood Park/Boomtown
defendants and others "in excess of $300 million" for alleged "intentional
interference with economic advantage and/or prospective economic advantage" and
alleged "unjust enrichment" in connection with the licensing of riverboat gaming
in Louisiana. The plaintiff, Astoria Entertainment, Inc. ("Astoria"), alleged
that the defendants were obligated to refrain from intentional acts that would
interfere with Astoria's alleged ability to obtain a license for riverboat
gaming in the West Bank of Jefferson Parish (suburban New Orleans) and that the
Hollywood Park/Boomtown defendants breached the obligation by participating in
alleged unlawful practices designed to gain an improper advantage in obtaining a
certificate of preliminary approval and license for such riverboat gaming.
Hollywood Park 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.
85
<PAGE>
Note 15 - Unaudited Quarterly Information
The following is a summary of unaudited quarterly financial data for the years
ended December 31, 1998 and 1997:
<TABLE>
<CAPTION>
1998
-----------------------------------------------------------------------------
Dec. 31, Sept. 30, June 30, Mar. 31,
--------------- -------------- --------------- ---------------
(in thousands, except per share data)
<S> <C> <C> <C> <C>
Revenues $158,218 $87,467 $103,125 $78,157
=============== ============== =============== ===============
Net income (loss) $4,302 $1,972 $8,129 ($1,234)
=============== ============== =============== ===============
Per common share:
Net income (loss) - basic $0.17 $0.08 $0.31 ($0.05)
=============== ============== =============== ===============
Net income (loss) - diluted $0.17 $0.08 $0.31 ($0.05)
=============== ============== =============== ===============
Cash dividends $0.00 $0.00 $0.00 $0.00
=============== ============== =============== ===============
<CAPTION>
1997
-----------------------------------------------------------------------------
Dec. 31, Sept. 30, June 30, Mar. 31,
--------------- -------------- --------------- ---------------
(in thousands, except per share data)
<S> <C> <C> <C> <C>
Revenues $89,779 $85,210 $46,324 $26,815
=============== ============== =============== ===============
Net income (loss) $1,551 $2,411 $5,603 ($895)
=============== ============== =============== ===============
Net income (loss) available to
(allocated to) common shareholders $1,551 $1,853 $5,122 ($1,376)
=============== ============== =============== ===============
Per common share:
Net income (loss) - basic $0.06 $0.08 $0.28 ($0.07)
=============== ============== =============== ===============
Net income (loss) - diluted $0.06 $0.08 $0.27 ($0.07)
=============== ============== =============== ===============
Cash dividends $0.00 $0.00 $0.00 $0.00
=============== ============== =============== ===============
</TABLE>
The Company acquired Casino Magic and Boomtown on October 15, 1998, and June 30,
1997, respectively, and accounted for each acquisition under the purchase method
of accounting for a business combination, and therefore, Casino Magic's and
Boomtown's results of operations are not included prior to their respective
acquisition dates.
Historically, the three months ended March 31, produce a loss, because the
Company does not operate live on-track racing at Hollywood Park Race Track.
Note 16 - Fair Value of Financial Instruments
Due to the short term maturity of financial instruments classified as current
assets and liabilities, the fair value approximates the carrying value. It is
not practical to estimate the fair value of long term receivables and long term
debt instruments, other than the 9.5% Notes and the Casino Magic 13% Notes,
because there are no quoted market prices for transactions of a similar nature.
86
<PAGE>
The book value and the fair value of the 9.5% Notes and the Casino Magic 13%
Notes, as of December 31, 1998, was as follows:
<TABLE>
<CAPTION>
Book Fair
Value Value
---------------- ----------------
(in thousands)
<S> <C> <C>
9.5% Notes $125,000 $125,000
Casino Magic 13% Notes (a) 121,685 130,238
____
(a) Includes a write up to fair market value, as of the October 15, 1998, acquisition of
Casino Magic, of $8,810,000, as required under the purchase method of accounting for a
business combination.
</TABLE>
Note 17 - Consolidating Condensed Financial Information
Hollywood Park's subsidiaries (excluding certain subsidiaries) have fully and
unconditionally guaranteed the payment of all obligations under the Hollywood
Park 9.5% Senior Subordinated Notes due 2007, and under the 9.25% Notes.
Hollywood Park Operating Company co-issued the 9.5% Notes and guarantees the
9.25% Notes. The following is the consolidating financial information for the
issuers of the 9.5% Notes and the 9.25% Notes and their respective subsidiaries:
87
<PAGE>
Hollywood Park, Inc.
Consolidating Condensed Financial Information
As of and for the years ended December 31, 1998, 1997 and 1996
<TABLE>
<CAPTION>
Hollywood
Park
Operating (b) (c)
Hollywood Co. (a) Wholly Non Wholly
Park, Inc. (Co-Obligor Wholly Owned Owned Consolidating
Guarantor 9.5% Notes/ Owned Non- Non- And Hollywood
(Parent Guarantor Guarantor Guarantor Guarantor Eliminating Park, Inc.
Obligor) 9.25% Notes) Subsidiaries Subsidiaries Subsidiaries Entries Consolidated
-------- ----------- ------------ ------------ ------------ ------- ------------
(in thousands)
<S> <C> <C> <C> <C> <C> <C> <C>
As of and for the year
ended Dec. 31, 1998
Balance Sheet
- --------------
Current assets $14,820 $2,574 $69,790 $17,726 $15,046 ($19,808) $100,148
Property, plant and
equipment, net 85,870 1,953 421,380 92,218 1,491 0 602,912
Other non-current assets 41,365 4,196 31,275 53,452 7,591 50,400 188,279
Investment in subsidiaries 279,442 17,839 174,141 0 0 (444,536) 0
Inter-company 252,556 144,569 303,855 0 5,012 (732,878) 0
-------- -------- ---------- -------- ------- ----------- -
$674,053 $171,131 $1,000,441 $163,396 $29,140 ($1,146,822) $891,339
======== ======== ========== ======== ======= ============ ========
Current liabilities $11,048 $12,547 $75,529 $29,266 $5,604 ($9,051) $124,943
Notes payable, long term 279,018 125,228 10,042 118,349 0 (5,018) 527,619
Other non-current
liabilities 5,889 0 13,396 2,727 7,532 (25,495) 4,049
Inter-company 147,122 23,323 564,207 0 21,549 (756,201) 0
Minority interest 0 0 4,366 0 0 (614) 3,752
Equity 230,976 10,033 332,901 13,054 (5,545) (350,443) 230,976
-------- -------- ---------- -------- ------- ------------ --------
$674,053 $171,131 $1,000,441 $163,396 $29,140 ($1,146,822) $891,339
======== ======== ========== ======== ======= ============ ========
Statement of Operations
- -----------------------
Revenues:
Gaming $46,255 $0 $221,029 $21,985 $3,788 $0 $293,057
Racing 0 39,618 27,253 0 0 0 66,871
Food and beverage 4,881 0 25,008 381 240 0 30,510
Equity in subsidiarie 20,812 0 3,390 0 0 (24,202) 0
Inter-company 0 0 22,856 0 0 (22,856) 0
Other 3,797 1,983 30,487 214 48 0 36,529
------- ------ ------- ------ ------ -------- --------
75,745 41,601 330,023 22,580 4,076 (47,058) 426,967
------- ------ ------- ------ ------ -------- --------
Expenses:
Gaming 27,167 0 118,813 14,602 967 0 161,549
Racing 0 17,198 12,118 0 0 0 29,316
Food and beverage 9,613 0 28,490 566 191 0 38,860
Administrative and other 18,616 14,254 80,451 3,394 1,263 0 117,978
REIT restructuring 419 0 0 0 0 0 419
Depreciation and
amortization 4,346 3,985 21,451 1,429 306 604 32,121
------ ------ ------- ------ ----- ------- -------
60,161 35,437 261,323 19,991 2,727 604 380,243
------ ------ ------- ------ ------ ------- -------
Operating income (loss) 15,584 6,164 68,700 2,589 1,349 (47,662) 46,724
Loss on write off of assets 1,586 0 635 0 0 0 2,221
Interest expense 6,871 12,565 (226) 3,308 0 0 22,518
Inter-company interest 0 0 22,856 0 0 (22,856) 0
------ ------ ------ ------ ----- -------- -------
Income (loss) before
minority interests and
taxes 7,127 (6,401) 45,435 (719) 1,349 (24,806) 21,985
Minority interests 0 0 0 0 0 374 374
Income tax expense
(benefit) (6,213) 0 14,164 0 491 0 8,442
------- -------- ------- ------ ----- --------- -------
Net income (loss) $13,340 ($6,401) $31,271 ($719) $858 ($25,180) $13,169
======= ======== ======= ====== ===== ========= =======
Statement of Cash Flows
- -----------------------
Net cash provided by
(used in) operating
activities ($153,372) $2,072 $203,874 $7,042 $1,055 ($22,452) $38,219
Net cash provided by
(used in) investing
activities (89,208) (2,132) (57,942) (5,844) (72) 18,666 (136,532)
Net cash provided by
(used in) financing
activities 261,682 (27) (140,773) 0 0 (2,384) 118,498
</TABLE>
88
<PAGE>
Hollywood Park, Inc.
Consolidating Condensed Financial Information
As of and for the years ended December 31, 1998, 1997 and 1996
<TABLE>
<CAPTION>
Hollywood
Park
Operating (b) (c)
Hollywood Co. (a) Wholly Non Wholly
Park, Inc. (Co-Obligor Wholly Owned Owned Consolidating
Guarantor 9.5% Notes/ Owned Non- Non- and Hollywood
(Parent Guarantor Guarantor Guarantor Guarantor Eliminating Park, Inc.
Obligor) 9.25% Notes) Subsidiaries Subsidiaries Subsidiaries Entries Consolidated
-------- ----------- ------------ ------------ ------------ ---------- ------------
(in thousands)
<S> <C> <C> <C> <C> <C> <C> <C>
As of and for the year
ended Dec. 31, 1997
Balance Sheet
- -------------
Current assets $19,844 $8,568 $25,074 $68,293 $0 $0 $60,206
Property, plant and
equipment, net 68,515 23,753 140,105 68,293 0 0 300,666
Other non-current assets 22,306 0 29,320 7,611 0 (1,080) 58,157
Investment in subsidiaries 126,121 15,132 116,020 0 0 (257,273) 0
Inter-company 125,210 148,380 122,035 0 0 (395,625) 0
-------- -------- -------- ------- -- ---------- --
$361,996 $195,833 $432,554 $82,624 $0 ($653,978) $419,029
======== ======== ======== ======= == ========== ========
Current liabilities $16,890 $14,232 $19,583 $6,612 $0 $0 $57,317
Notes payable, long term 2,406 125,256 1,936 2,504 0 0 132,102
Other non-current
liabilities 4,753 5,202 83 0 0 (3,728) 6,310
Inter-company 146,145 21,589 178,448 49,443 0 (395,625) 0
Minority interest 0 0 0 0 0 1,946 1,946
Equity 191,802 29,554 232,504 24,065 0 (256,571) 221,354
-------- -------- -------- ------- -- ---------- --------
$361,996 $195,833 $432,554 $82,624 $0 ($653,978) $419,029
======== ======== ======== ======= == ========== ========
Statement of Operations
- -----------------------
Revenues:
Gaming $50,820 $0 $58,622 $28,217 $0 $0 $137,659
Racing 0 39,930 28,914 0 0 0 68,844
Food and beverage 4,659 0 13,483 1,752 0 0 19,894
Equity in subsidiarie 13,963 3,735 (43) 0 0 (17,655) 0
Inter-company 0 0 4,823 0 0 (4,823) 0
Other 4,601 1,808 13,789 1,533 0 0 21,731
-------- -------- -------- ------- -- ---------- --------
74,043 45,473 119,588 31,502 0 (22,478) 248,128
-------- -------- -------- ------- -- ---------- --------
Expenses:
Gaming 28,353 0 32,370 14,010 0 0 74,733
Racing 0 17,822 12,482 0 0 0 30,304
Food and beverage 9,658 0 13,784 2,303 0 0 25,745
Administrative and other 18,282 14,536 33,277 8,792 0 0 74,887
REIT restructuring 2,483 0 0 0 0 0 2,483
Depreciation and
amortization 4,632 3,804 6,229 3,459 0 33 18,157
-------- -------- -------- ------- -- ---------- --------
63,408 36,162 98,142 28,564 0 33 226,309
-------- -------- -------- ------- -- ---------- --------
Operating income (loss) 10,635 9,311 21,446 2,938 0 (22,511) 21,819
Interest expense 1,789 5,368 (37) 182 0 0 7,302
Inter-company interest 0 0 2,244 2,579 0 (4,823) 0
-------- -------- -------- ------- -- ---------- --------
Income (loss) before
minority interests and
taxes 8,846 3,943 19,239 177 0 (17,688) 14,517
Minority interests 0 0 0 0 0 (3) (3)
Income tax expense 4,124 0 1,726 0 0 0 5,850
-------- -------- -------- ------- -- ---------- --------
Net income (loss) $4,722 $3,943 $17,513 $177 $0 ($17,685) $8,670
======== ======== ======== ======= == ========== ========
Statement of Cash Flows
- -----------------------
Net cash provided by
(used in) operating
activities $19,559 $117,960 $129,260 $5,250 $0 ($17,665) $18,444
Net cash provided by
(used in) investing
activities 14,747 (3,139) (23,516) (4,328) 0 (10) (16,226)
Net cash provided by
(used in) financing
activities 475 124,975 (114,345) (2,373) 0 877 9,609
</TABLE>
89
<PAGE>
Hollywood Park, Inc.
Consolidating Condensed Financial Information
As of and for the years ended December 31, 1998, 1997 and 1996
<TABLE>
<CAPTION>
Hollywood
Park
Operating (b) (c)
Hollywood Co. (a) Wholly Non Wholly
Park, Inc. (Co-Obligor Wholly Owned Owned Consolidating
Guarantor 9.5% Notes/ Owned Non- Non- and Hollywood
(Parent Guarantor Guarantor Guarantor Guarantor Eliminating Park, Inc.
Obligor) 9.25% Notes) Subsidiaries Subsidiaries Subsidiaries Entries Consolidated
-------- ----------- ------------ ------------ ------------ -------- ------------
(in thousands)
<S> <C> <C> <C> <C> <C> <C> <C>
As of and for the year
ended Dec. 31, 1996
Statement of Operations
- -----------------------
Revenues:
Gaming $19,844 $8,568 $25,074 $68,293 $0 $0 $60,206
Food and beverage 4,956 0 8,533 0 458 0 13,947
Equity in subsidiaries 1,751 3,408 0 0 0 (5,159) 0
Other 4,993 1,915 338 0 7 0 7,253
--------- -------- -------- ------ -------- --------- ----------
61,972 46,746 37,439 445 1,782 (5,159) 143,225
--------- -------- -------- ------ -------- --------- ----------
Expenses:
Gaming 27,249 0 0 0 0 0 27,249
Racing 0 17,999 11,903 0 265 0 30,167
Food and beverage 10,930 0 8,235 0 408 0 19,573
Administrative and other 18,316 15,059 9,556 1 1,030 0 43,962
Write off of investment in
Sunflower 11,412 0 0 0 0 0 11,412
Depreciation and
amortization 4,665 3,645 1,479 319 536 51 10,695
--------- -------- -------- ------ -------- --------- ----------
72,572 36,703 31,173 320 2,239 51 143,058
--------- -------- -------- ------ -------- --------- ----------
Operating income (loss) (10,600) 10,043 6,266 125 (457) (5,210) 167
Interest expense 134 27 0 0 781 0 942
--------- -------- -------- ------ -------- --------- ----------
Income (loss) before
minority interests and
taxes (10,734) 10,016 6,266 125 (1,238) (5,210) (775)
Minority interests 0 0 0 0 0 15 15
Income tax expense 3,421 0 38 0 0 0 3,459
--------- -------- -------- ------ -------- --------- ----------
Net income (loss) ($14,155) $10,016 $6,228 $125 ($1,238) ($5,225) ($4,249)
========= ======== ======== ====== ======== ========= ==========
Statement of Cash Flows
- -----------------------
Net cash provided by
(used in) operating
activities ($6,205) $4,956 $2,426 $200 ($3,588) $15,890 $13,679
Net cash used in investing
activities (963) (5,992) (354) 0 0 (12,586) (19,895)
Net cash used in financing
activities (4,245) (23) 0 0 0 0 (4,268)
</TABLE>
_____
(a) All of the subsidiaries mentioned in this footnote (a) became wholly owned
subsidiaries of the Company at different points in time, in some cases,
during the periods presented. All of such subsidiaries were guarantors on
both the 9.5% Notes and the 9.25% Notes. The following subsidiaries were
treated as guarantors for all periods presented: Turf Paradise, Inc.,
Hollywood Park Food Services, Inc., Hollywood Park Fall Operating Company
and, with respect to the 9.25% Notes, Hollywood Park Operating Company (it
is a co-obligor on the 9.5% Notes). The following subsidiaries were
treated as guarantors for periods beginning on June 30, 1997, when the
Boomtown Merger was consummated: Boomtown, Inc., Boomtown Hotel & Casino,
Inc., Bay View Yacht Club, Inc., Louisiana - I Gaming, Louisiana Gaming
Enterprises, Inc., and Boomtown Hoosier, Inc. The following subsidiaries
were treated as guarantors for periods beginning on October 15, 1998, when
the Casino Magic Merger was consummated: Casino Magic Corp., Mardi Gras
Casino Corp., Biloxi Casino Corp., Bay St. Louis Casino Corp., Casino Magic
Finance Corp., Casino Magic American Corp., and Casino One Corporation. HP
Casino, Inc., HP Yakama, Inc., and HP Consulting, Inc., were treated as
guarantors beginning in 1997 when these subsidiaries began operations.
HP/Compton, Inc. was treated as a guarantor beginning in October 1996 when
this subsidiary began operations. Crystal Park Hotel and Casino
Development Company, LLC and Mississippi - I Gaming L.P. were treated as
wholly owned guarantors for periods beginning in January 1998 and October
1998, respectively, when the Company acquired the outstanding minority
interests therein and they became wholly owned subsidiaries.
(b) The following wholly owned subsidiaries were not guarantors on either the
9.5% Notes or the 9.25% Notes and became subsidiaries of the Company on
October 15, 1998, when the Casino Magic Merger was consummated: Jefferson
Casino Corporation Casino Magic of Louisiana, Corp., and Casino Magic
Management Services, Corp.
90
<PAGE>
(c) The following non-wholly owned subsidiaries were not guarantors on either
the 9.5% notes or the 9.25% Notes and became subsidiaries of the Company on
October 15, 1998, when the Casino Magic Merger was consummated: Casino
Magic Neuquen S.A. and its subsidiary, Casino Magic Support Services S.A.
(d) The following majority owned subsidiaries of the Company were guarantors on
both the 9.5% Notes and the 9.25% Notes and became subsidiaries on June 30,
1997, when the Boomtown Merger was consummated: Mississippi - I Gaming,
L.P. and Indiana Ventures LLC and its wholly owned subsidiaries,
Switzerland County Development Corp. and Pinnacle Gaming Development Corp.
Mississippi - I Gaming, L.P., a guarantor subsidiary, became a wholly owned
subsidiary in October 1998. In addition, Crystal Park Hotel and Casino
Development Company, LLC, a guarantor subsidiary, was a majority owned
subsidiary until January 1998, when it became a wholly owned subsidiary.
(e) Prior to the October 15, 1998 consummation of the Casino Magic Merger,
Sunflower Racing, Inc. and its wholly owned subsidiary, SR Food and
Beverage, Inc. were the Company's only wholly owned non-guarantor
subsidiaries with material financial activity. As of March 31, 1996, the
financial results of these two subsidiaries were no longer consolidated
with the Company's financial results, due to the Company's write off of its
investment in these subsidiaries.
91
<PAGE>
Schedule II - Valuation and Qualifying Accounts
<TABLE>
<CAPTION>
Allowance for bad debts:
(in thousands)
--------------
<S> <C>
Balance as of December 31, 1995 ($1,841)
Charges to expense (a) (783)
Write offs 1,535
--------------
Balance as of December 31, 1996 (1,089)
Add Boomtown balance as of June 30, 1997 (b) (225)
Charges to expense (189)
Write offs 754
--------------
Balance as of December 31, 1997 (749)
Add Casino Magic balance as of October 15, 1998 (c) (1,442)
Charges to expense (1,280)
Write offs 1,070
--------------
Balance as of December 31, 1998 ($2,401)
==============
</TABLE>
_____
(a) Hollywood Park assumed the bad debt allowance related to the Hollywood Park-
Casino gaming business in the November 17, 1995, acquisition of Pacific
Casino Management.
(b) Hollywood Park acquired Boomtown as of June 30, 1997.
(c) Hollywood Park acquired Casino Magic as of October 15, 1998.
92
<PAGE>
Hollywood Park, Inc.
Calculation of Earnings Per Share
<TABLE>
<CAPTION>
For the three months ended December 31,
-----------------------------------------------------------------------------
Basic Diluted
------------------------------------- -------------------------------------
1998 1997 1996 1998 1997 1996
----------- --------- ----------- ----------- --------- -----------
(in thousands, except per share data - unaudited)
<S> <C> <C> <C> <C> <C> <C>
Average number of common shares outstanding 25,800 26,209 18,365 25,800 26,705 18,365
Average common shares due to assumed conversion
of convertible preferred shares (b) 0 0 0 0 0 2,291
Average common shares due to assumed conversion
of stock options 0 0 0 0 0 0
----------- --------- ----------- ----------- --------- -----------
Total shares 25,800 26,209 18,365 25,800 26,705 20,656
========== ======== ========== ========== ======== ==========
Net income $4,302 $1,551 $3,277 $4,302 $1,551 $3,277
Less dividend requirements on convertible
preferred shares 0 0 482 0 0 0
----------- --------- ----------- ----------- --------- -----------
Net income available to common shareholders $4,302 $1,551 $2,795 $4,302 $1,551 $3,277
========== ======== ========== ========== ======== ==========
Net income per share $0.17 $0.06 $0.15 $0.17 $0.06 $0.16
========== ======== ========== ========== ======== ==========
<CAPTION>
For the year ended December 31,
-----------------------------------------------------------------------------
Basic Diluted (a)
------------------------------------- -------------------------------------
1998 1997 1996 1998 1997 1996
----------- --------- ----------- ----------- --------- -----------
(in thousands, except per share data)
<S> <C> <C> <C> <C> <C> <C>
Average number of common shares outstanding 26,115 22,010 18,505 26,115 22,340 18,505
Average common shares due to assumed conversion
of convertible preferred shares (b) 0 0 0 0 0 2,291
Average common shares due to assumed conversion
of stock options 0 0 0 0 0 0
----------- --------- ----------- ----------- --------- -----------
Total shares 26,115 22,010 18,505 26,115 22,340 20,796
========== ======== ========== ========== ======== ==========
Net income (loss) $13,169 $8,670 ($4,249) $13,169 $8,670 ($4,249)
Less dividend requirements on convertible
preferred shares 0 1,520 1,925 0 0 0
----------- --------- ----------- ----------- --------- -----------
Net income (loss) available to (allocated to)
common shareholders $13,169 $7,150 ($6,174) $13,169 $8,670 ($4,249)
========== ======== ========== ========== ======== ==========
Net income (loss) per share $0.50 $0.33 ($0.33) $0.50 $0.39 ($0.20)
========== ======== ========== ========== ======== ==========
</TABLE>
- -----------------------------
(a) When the computed diluted values are anti-dilutive, the basic per share
values are presented on the face of the consolidated statements of operations.
(b) As of August 28, 1997, the Company's 2,749,000 outstanding depositary shares
were converted into 2,291,492 shares of the Company's common stock.
93
<PAGE>
Hollywood Park, Inc.
Selected Financial Data by Property
<TABLE>
<CAPTION>
For the three months ended, For the year
------------------------------------------------- ended
December 31, September 30, June 30, March 31, December 31,
1998 1998 1998 1998 1998
---------- ---------- ---------- ---------- ----------
(unaudited) (audited)
-------------------------------------------------
(in thousands, except per share data)
<S> <C> <C> <C> <C> <C>
Revenues:
Hollywood Park, Inc. - Casino Division $13,818 $13,629 $13,784 $13,211 $54,442
Crystal Park and HP Yakama, Inc. 699 682 326 300 2,007
Boomtown Reno 15,442 20,747 17,912 13,436 67,537
Boomtown New Orleans 25,608 23,532 23,759 22,695 95,594
Boomtown Biloxi 17,441 15,479 16,354 15,873 65,147
Casino Magic Bay St. Louis 17,857 0 0 0 17,857
Casino Magic Biloxi 19,066 0 0 0 19,066
Casino Magic Bossier City 22,580 0 0 0 22,580
Casino Magic Argentina 4,076 0 0 0 4,076
Hollywood Park Race Track 15,648 11,683 27,500 5,478 60,309
Turf Paradise, Inc. 5,672 1,427 3,101 6,810 17,010
Hollywood Park, Inc. - Corporate 311 288 389 354 1,342
---------- ---------- ---------- ---------- ----------
158,218 87,467 103,125 78,157 426,967
---------- ---------- ---------- ---------- ----------
Expenses:
Hollywood Park, Inc. - Casino Division 12,148 12,515 11,753 11,707 48,123
Crystal Park and HP Yakama, Inc. 83 35 118 46 282
Boomtown Reno 13,487 15,907 16,006 14,299 59,699
Boomtown New Orleans 17,725 16,786 15,777 15,796 66,084
Boomtown Biloxi 13,781 13,334 13,200 13,354 53,669
Casino Magic Bay St. Louis 13,637 0 0 0 13,637
Casino Magic Biloxi 14,283 0 0 0 14,283
Casino Magic Bossier City 18,562 0 0 0 18,562
Casino Magic Argentina 2,421 0 0 0 2,421
Indiana Project 361 367 93 0 821
Hollywood Park Race Track 12,913 10,494 16,577 7,242 47,226
Turf Paradise, Inc. 3,750 1,871 2,584 4,374 12,579
Hollywood Park, Inc. - Corporate 3,329 1,410 2,921 2,657 10,317
---------- ---------- ---------- ---------- ----------
126,480 72,719 79,029 69,475 347,703
---------- ---------- ---------- ---------- ----------
Non-recurring expenses:
REIT restructuring (50) 0 0 469 419
Loss on write off of assets 635 1,586 0 0 2,221
Depreciation and amortization:
Hollywood Park, Inc. - Casino Division 652 650 648 698 2,648
Crystal Park and HP Yakama, Inc. 476 463 460 510 1,909
Boomtown Reno 1,792 1,457 1,461 1,469 6,179
Boomtown New Orleans 1,378 1,436 1,189 1,191 5,194
Boomtown Biloxi 940 945 900 882 3,667
Casino Magic Bay St. Louis 1,315 0 0 0 1,315
Casino Magic Biloxi 1,370 0 0 0 1,370
Casino Magic Bossier City 1,429 0 0 0 1,429
Casino Magic Argentina 306 0 0 0 306
Hollywood Park Race Track 1,064 1,053 1,048 1,065 4,230
Turf Paradise, Inc. 296 294 298 296 1,184
Hollywood Park, Inc. - Corporate 1,229 527 490 444 2,690
---------- ---------- ---------- ---------- ----------
12,247 6,825 6,494 6,555 32,121
---------- ---------- ---------- ---------- ----------
Operating income (loss):
Hollywood Park, Inc. - Casino Division 1,018 464 1,383 806 3,671
Crystal Park and HP Yakama, Inc. 140 184 (252) (256) (184)
Boomtown Reno 163 3,383 445 (2,332) 1,659
Boomtown New Orleans 6,505 5,310 6,793 5,708 24,316
Boomtown Biloxi 2,720 1,200 2,254 1,637 7,811
Casino Magic Bay St. Louis 2,905 0 0 0 2,905
Casino Magic Biloxi 3,413 0 0 0 3,413
Casino Magic Bossier City 2,589 0 0 0 2,589
Casino Magic Argentina 1,349 0 0 0 1,349
Indiana project (361) (367) (93) 0 (821)
Hollywood Park Race Track 1,671 136 9,875 (2,829) 8,853
Turf Paradise, Inc. 1,626 (738) 219 2,140 3,247
Hollywood Park, Inc. - Corporate (4,247) (1,649) (3,022) (2,747) (11,665)
REIT restructuring 50 0 0 (469) (419)
Loss on write off of assets (635) (1,586) 0 0 (2,221)
---------- ---------- ---------- ---------- ----------
18,906 6,337 17,602 1,658 44,503
---------- ---------- ---------- ---------- ----------
Interest expense 10,691 4,112 4,054 3,661 22,518
Minority interests - Casino Magic Argentina 374 0 0 0 374
---------- ---------- ---------- ---------- ----------
Income (loss) before income tax expense 7,841 2,225 13,548 (2,003) 21,611
Income tax expense (benefit) 3,539 253 5,419 (769) 8,442
---------- ---------- ---------- ---------- ----------
Net income (loss) $4,302 $1,972 $8,129 ($1,234) $13,169
========== ========== ========== ========== ==========
Per common share:
Net income (loss) - basic $0.17 $0.08 $0.31 ($0.05) $0.50
Net income (loss) - diluted $0.17 $0.08 $0.31 ($0.05) $0.50
Number of shares - basic 25,800 26,101 26,285 26,276 26,115
Number of shares - diluted 25,800 26,101 26,428 26,867 26,115
</TABLE>
94
<PAGE>
Report of Independent Public Accountants
To the Board of Directors of Casino Magic Corp.:
We have audited the accompanying consolidated balance sheets of Casino Magic
Corp. (a Minnesota corporation) and subsidiaries (the Company) as of October 15,
1998 and December 31, 1997, and the related consolidated statements of
operations, shareholders' equity and cash flows for the nine and one-half month
period ended October 15, 1998 and for each of the two years in the period ended
December 31, 1997. These consolidated financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these consolidated financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Casino Magic Corp. and
subsidiaries as of October 15, 1998 and December 31, 1997, and the results of
their operations and their cash flows for the nine and one-half month period
ended October 15, 1998 and for each of the two years in the period ended
December 31, 1997 in conformity with generally accepted accounting principles.
ARTHUR ANDERSEN LLP
New Orleans, Louisiana
February 23, 1999
95
<PAGE>
Casino Magic Corp.
Consolidated Balance Sheets
<TABLE>
<CAPTION>
As of
-------------------------------
October 15, December 31,
1998 1997
------------ ------------
(in thousands)
Assets
<S> <C> <C>
Current Assets:
Cash and cash equivalents, including restricted cash, of
$85,000 in 1998 and 1997 $14,682 $20,987
Restricted cash held by trustee, for Note redemption 141,511 0
Restricted marketable securities 1,599 10,629
Prepaid expenses 3,290 3,330
Notes and accounts receivable, net 3,525 3,782
Other assets 1,776 1,013
------------ ------------
Total current assets 166,383 39,741
Notes receivable 0 3,385
Property, plant and equipment, net 290,583 263,993
Investment in unconsolidated subsidiary 504 713
Concession agreement, net 7,789 8,540
Gaming license, net 36,780 38,048
Property held for development or sale 6,146 6,131
Debt issuance costs, net 4,133 8,958
Other assets 1,463 3,195
------------ ------------
$513,781 $372,704
=========== ===========
===============================================================================================
Liabilities and Stockholders' Equity
Current Liabilities:
Notes and contracts payable $2,308 $306
Current portion of notes payable 143,434 8,591
Accounts payable 10,737 9,324
Accrued liabilities 15,978 11,523
Accrued interest 4,539 9,784
Accrued Note redemption premium and interest 6,511 0
Accrued compensation 9,993 7,719
Gaming liabilities 1,794 1,445
Other liabilities 1,932 2,339
Note payable to Hollywood Park, Inc. 141,511 0
------------ ------------
338,737 51,031
Notes payable 124,999 253,471
Other liabilities, and minority interests 7,066 8,748
------------ ------------
Total liabilities 470,802 313,250
Commitments and contingencies
Stockholders' Equity:
Common stock, $0.01 par, 50,000,000 shares authorized;
35,722,124 issued and outstanding 357 357
Undesignated stock, 2,500,000 shares authorized; none
issued and outstanding 0 0
Capital in excess of par value 66,847 67,123
Accumulated deficit (24,225) (7,763)
Unearned compensation 0 (263)
------------ ------------
Totals stockholders' equity 42,979 59,454
------------ ------------
$513,781 $372,704
=========== ===========
</TABLE>
- ----____
See accompanying notes to the consolidated financial statements.
96
<PAGE>
Casino Magic Corp.
Consolidated Statements of Operations
<TABLE>
<CAPTION>
For the period
January 1, 1998 Years ended December 31,
through ---------------------------
October 15, 1998 1997 1996
---------------- ------------ ------------
(in thousands, except per share data)
<S> <C> <C> <C>
Revenues:
Casino $223,565 $246,320 $167,154
Food, beverage and rooms 11,495 10,785 8,080
Royalty and management fees 0 0 3,099
Other income 4,001 4,369 1,945
-------- -------- --------
239,061 261,474 180,278
-------- -------- --------
Expenses:
Casino 104,746 118,467 74,943
Food and beverage 9,530 10,757 7,352
Rooms 1,583 640 1,039
Other 3,113 4,292 2,807
Advertising and marketing 28,245 36,427 20,901
General and administative 27,776 26,426 24,217
Property maintenance and energy 9,566 11,210 7,433
Rents, property taxes and insurance 7,296 7,891 5,991
Casino Magic Merger, with Hollywood Park, Inc. 6,243 0 0
Depreciation and amortization 16,972 20,247 18,346
Pre-opening 682 0 6,555
Development 454 562 1,850
-------- -------- --------
216,206 236,919 171,434
-------- -------- --------
Operating income 22,855 24,555 8,844
Interest expense 27,980 34,724 25,072
Capitalized interest expense (2,746) (1,964) (5,717)
Interest income (311) (1,375) (1,436)
Loss from unconsolidated subsidiary 370 505 26,501
Other 287 (1,555) 689
Loss before income taxes, minority interest and
extraordinary item (2,725) (5,780) (36,265)
Income tax expense (benefit) 1,539 (1,935) (4,676)
Minority interest 1,160 1,404 0
Loss before extraordinary item (5,424) (5,249) (31,589)
Extraordinary item, costs associated with the
redemption of the Casino Magic 11.5% Notes 11,039 0 0
-------- -------- --------
Net loss ($16,463) ($5,249) ($31,589)
======== ======= ========
==================================================================================================
Per common share:
Net loss - basic ($0.46) ($0.15) ($0.89)
Net loss - diluted ($0.46) ($0.15) ($0.89)
Number of shares - basic 35,722 35,663 35,448
Number of shares - diluted 35,722 35,663 35,448
</TABLE>
____
See accompanying notes to the consolidated financial statements.
97
<PAGE>
Casino Magic Corp.
Consolidated Statements of Changes in Stockholders' Equity
For the period January 1, 1998 through October 15, 1998, and for the years ended
December 31, 1997 and 1996
<TABLE>
<CAPTION>
Retained
Capital in Earnings Total
Common Excess of Unearned Comprehensive (Accumulated Stockholders'
Stock Par Value Compensation Income (Loss) Deficit) Equity
------------ ------------ ------------ ------------ ------------ ------------
(in thousands)
<S> <C> <C> <C> <C> <C> <C>
Balance as of December 31, 1995 $353 $66,087 ($113) ($224) $29,076 $95,179
Net loss 0 0 0 0 (31,589) (31,589)
Foreign currency translation adjustment 0 0 0 224 0 224
Unrealized holding loss on securities 0 0 0 (850) 0 (850)
Amortization of unearned compensation 0 0 188 0 0 188
Stock option grants 0 567 (567) 0 0 0
Net proceeds from exercise of warrants 0 1 0 0 0 1
Net proceeds from exercise of options 3 454 0 0 0 457
Acquisition of Casino One Corp. 0 15 0 0 0 15
----------- ----------- ----------- ----------- ----------- -----------
Balance as of December 31, 1996 356 67,124 (492) (850) (2,513) 63,625
Net loss 0 0 0 0 (5,249) (5,249)
Loss on securities available for sale 0 0 0 850 0 850
Amortization of unearned compensation 0 0 228 0 0 228
Vested stock grants 1 (1) 0 0 0 0
----------- ----------- ----------- ----------- ----------- -----------
Balance as of December 31, 1997 357 67,123 (264) 0 (7,762) 59,454
Net loss 0 0 0 0 (16,463) (16,463)
Amortization of unearned compensation 0 0 264 0 0 264
Stock grants canceled and redeemed 0 (276) 0 0 0 (276)
----------- ----------- ----------- ----------- ----------- -----------
Balance as of October 15, 1998 $357 $66,847 $0 $0 ($24,225) $42,979
=========== =========== =========== =========== =========== ===========
</TABLE>
____
See accompanying notes to the consolidated financial statements.
98
<PAGE>
Casino Magic Corp.
Consolidated Statements of Cash Flows
<TABLE>
<CAPTION>
For the period
January 1, 1998 Years ended December 31,
through --------------------------------
October 15, 1998 1997 1996
---------------- ------------- -------------
(in thousands)
<S> <C> <C> <C>
Cash flows from operating activities:
Net loss ($16,463) ($5,249) ($31,589)
Adjustments to reconcile net loss to net cash provided
by operating activities:
Depreciation and amortization 16,972 20,247 18,346
Loss (gain) on disposal of property, plant and equipment 44 (2,633) 339
Amortization of original issue discount and deferred
debt issuance costs 1,647 1,969 1,496
Amortization of unearned stock compensation, net 264 228 189
Extraordinary item, costs associated with the redemption
of the Casino Magic 11.5% Notes 11,039 0 0
Write off of pre-opening and development costs 0 0 7,054
Net loss on investment in unconsolidated subsidiary 370 505 22,436
Minority interests 1,160 1,404 0
(Increase) decrease in income tax receivable 0 0 4,225
(Increase) decrease in prepaid expenses 518 (507) 89
(Increase) decrease in notes and accounts receivable, net (1,671) 2,328 (148)
Decrease in current deferred income taxes 0 3,158 2,923
Increase in other assets (762) (140) (278)
Decrease in noncurrent net deferred income tax liability 0 (267) (4,173)
Increase (decrease) in accounts payable 263 (2,251) 2,925
Increase (decrease) in accrued liabilities 4,516 3,595 (4,278)
Increase (decrease) in accrued interest (5,719) 889 3,488
Increase (decrease) in accrued compensation 2,273 (622) 1,255
Increase in gaming liabilities 349 323 55
Increase (decrease) in other current liabilities 598 805 (228)
------------- ------------- -------------
Net cash provided by operating activities 15,398 23,782 24,126
------------- ------------- -------------
Cash flows from investing activities:
Proceeds from sale of property, plant and equipment 95 19,896 1,437
Additions to property, plant and equipment (28,898) (37,177) (67,850)
Purchase of gaming license 0 0 (15,250)
Purchase of land held for sale (14) (127) 40
Investments in unconsolidated subsidiary (161) (260) (651)
Purchase of land options and associated deposits 0 0 (480)
Pre-opening and development 6 0 (6,555)
(Increase) decrease in other long term assets 3,785 (2,921) 2,531
(Increase) decrease in marketable securities 9,030 (10,630) 0
------------- ------------- -------------
Net cash used in investing activities (16,157) (31,219) (86,778)
------------- ------------- -------------
Cash flows from financing activities:
Proceeds from debt or notes payable 144,488 6,350 121,044
Payment of debt issuance costs (53) (350) (5,420)
Principal payments on notes payable (2,089) (4,606) (1,010)
Principal payments on long term debt (6,105) (7,516) (48,644)
Net proceeds from sale of common stock 0 0 15
Net proceeds from common stock options exercised 0 0 457
Net payment for buyout of employee stock grants (276) 0 0
------------- ------------- -------------
Net cash provided by (used in) financing activities 135,965 (6,122) 66,442
------------- ------------- -------------
(Decrease) increase in cash and cash equivalents 135,206 (13,559) 3,790
Cash and cash equivalents, including restricted cash
at the beginning of the period 20,987 34,546 30,756
------------- ------------- -------------
Cash and cash equivalents, including restricted cash
at the end of the period $156,193 $20,987 $34,546
============ ============ ============
====================================================================================================================
Interest paid, net of amount capitalized $29,414 $29,552 $12,379
Income taxes paid, net of refunds 0 (6,382) (7,604)
Supplemental schedule of non-cash operating, investing, and
financing activities:
Other current assets (478) 22 0
Other current liabilities 1,563 303 0
Property, plant and equipment and other asset acquisitions,
included in accounts and construction payable and
accrued expenses (6,349) (2,358) 5,455
Gaming license acquisition financed with long term debt 0 0 21,618
Property, plant and equipment under capital leases 0 376 81
Property, plant and equipment financed with long term debt 7,294 0 0
Property, plant and equipment held for sale financed with
long term debt 0 0 30,729
Common stock granted to officers 0 0 567
____
See accompanying notes to the consolidated financial statements.
</TABLE>
99
<PAGE>
CASINO MAGIC CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 1 - Summary of Significant Accounting Policies
General On October 15, 1998, Casino Magic Corp. ("Casino Magic") was acquired
by Hollywood Park, Inc. ("Hollywood Park"), pursuant to the February 19, 1998
Agreement of Merger among Casino Magic Corp., Hollywood Park, Inc., and HP
Acquisition II, Inc. (a wholly owned subsidiary of Hollywood Park) (the "Casino
Magic Merger"). Hollywood Park paid cash of approximately $80,904,000 for
Casino Magic's common stock.
In connection with the Casino Magic Merger, Casino Magic recorded approximately
$6,200,000 of merger related costs, primarily related to investment advisory,
consulting and legal fees.
Casino Magic is a gaming company with dockside gaming in Bay Saint Louis,
Mississippi ("Casino Magic Bay St. Louis"), and Biloxi, Mississippi ("Casino
Magic Biloxi"), riverboat gaming in Bossier City, Louisiana ("Casino Magic
Bossier City"), and is a 51% partner in two land-based casinos in Argentina
("Casino Magic Argentina").
Consolidation The consolidated financial statements for the period January 1,
1998 through October 15, 1998, included the accounts of Casino Magic and its
eleven active subsidiaries: (1) Mardi Gras Casino Corp.; (2) Biloxi Casino
Corp.; (3) Casino Magic Finance Corp.; (4) Jefferson Casino Corporation; (5)
Casino Magic of Louisiana Corp.; (6) Casino Magic Neuquen S.A.; (7) Casino Magic
Support Services S.A.; (8) Casino Magic American Corp.; (9) Casino Magic
Management Services Corp.; (10) Casino One Corp.; and (11) Casino Magic
Advertising, Inc.
Restricted Cash Held By Trustee In October 1993, Casino Magic (through a wholly
owned subsidiary) issued $135,000,000 in aggregate principal amount of 11.5%
First Mortgage Notes (the "Casino Magic 11.5% Notes"). On October 15, 1998,
Casino Magic exercised its right to redeem the Casino Magic 11.5% Notes, at
103.833%, and as of October 15, 1998, Casino Magic had satisfied all conditions
required to discharge its obligations at a total cost of approximately
$141,515,000.
For the period January 1, 1998 through October 15, 1998, Casino Magic recorded
an extraordinary item of $11,039,000, or $0.31 per common share, consisting
primarily of the write off of unamortized debt issuance costs and the redemption
premium.
Restricted Marketable Securities Restricted marketable securities as of October
15, 1998, and December 31, 1997, were for amounts for capital improvements at
Casino Magic Bossier City, as required by the indenture associated with the
$115,000,000 aggregate principal amount of 13% Notes (the "Casino Magic 13%
Notes"), issued by a wholly owned subsidiary of Casino Magic, related
specifically to Casino Magic Bossier City.
Gaming Revenue and Promotional Allowances Gaming revenues consisted of the
difference between gaming wins and losses, or net win from gaming activities.
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 during the period January 1, 1998 through October 15, 1998, and the
years ended December 31, 1997 and 1996, was $19,797,000, $21,846,000 and
$13,838,000, respectively.
Cash Flows Cash and cash equivalents consisted of short term investments with
original maturities of 90 days or less.
Casino Magic holds U.S. agency securities as held to maturity investments and as
such, the investments are recorded at amortized costs, which, based on the short
term nature of the investments approximates fair value.
100
<PAGE>
Property, Plant and Equipment Property, plant and equipment are stated at cost
and depreciated on the straight line method over estimated useful lives of 15 to
31.5 years for barges and buildings, lives of the leases for leasehold
improvements, and five to seven years for furniture and equipment.
Normal repairs and maintenance were charged to expense as incurred.
Expenditures which materially extended the useful lives of capital assets were
capitalized.
In June 1997, Casino Magic changed the depreciable lives on the asset
categories, land improvements, buildings and improvements, and barges and
improvements from originally estimated useful lives of 10 or 15 years to 31
years. The useful lives for these assets originally reflected their tax lives
and have been changed to anticipated useful lives. These changes reduced the
December 31, 1997, net loss by $859,796 and the loss per share by $0.02.
Excluding the change in depreciable lives, net loss and net loss per share would
have been $6,109,000 and $0.17, respectively.
Investment in Unconsolidated Subsidiary Investments in unconsolidated
subsidiaries where Casino Magic exercises significant influence are accounted
for under the equity method.
Concession Agreement In December 1994, Casino Magic acquired a twelve year
concession agreement to operate the two Casino Magic Argentina casinos, and
capitalized the costs related to obtaining the concession agreement. The costs
are being amortized on a straight line basis over the twelve-year life of the
concession agreement. Accumulated amortization as of October 15, 1998 and
December 31, 1997, was $3,598,000 and $2,847,000, respectively.
Gaming License In May 1996, Casino Magic acquired Crescent City Capital
Development Corp., which included the Louisiana state gaming license to conduct
the gaming operations of Casino Magic Bossier City. Casino Magic allocated a
portion of the purchase price to the Louisiana gaming license, which is being
amortized on a straight line basis over twenty-five years. Accumulated
amortization as of October 15, 1998 and December 31, 1997, was $3,282,000 and
$2,014,000, respectively.
Development and Pre-opening Costs Prior to January 1998, pre-opening costs were
capitalized, and then expensed lump-sum when the associated business began
operations. All development related internal and salary related costs were
expensed as incurred.
Segment Information Statement of Financial Accounting Standards Statement No.
131 "Disclosures about Segments of an Enterprise and Related Information" is
effective for years after December 31, 1997, and has been adopted by Casino
Magic for all periods presented in these consolidated financial statements. It
establishes revised guidelines for public companies in determining operating
segments based on those used for internal reporting to management. Based on
these guidelines, Casino Magic reports information under a single gaming
segment.
Income Taxes Casino Magic accounts for income taxes under Statement of
Financial Accounting Standards ("SFAS") 109, "Accounting for Income Taxes",
whereby deferred tax assets and liabilities are recognized for the future tax
consequences attributable to differences between the financial statement
carrying amounts of existing assets and liabilities and their respective tax
bases. Deferred tax assets and liabilities are measured using enacted tax rates
expected to apply to taxable income in the years in which those temporary
differences are expected to be recovered or settled. Under SFAS 109, the effect
on deferred tax assets and liabilities of a change in tax rate is recognized in
income in the period that included the enactment date.
Earnings Per Share Basic earnings per share were computed by dividing income
(loss) by the weighted average number of common shares outstanding during the
period. Diluted per share amounts were similarly computed, but include the
effect, when dilutive, of the exercise of stock options and warrants.
Estimates Financial statements prepared in accordance with generally accepted
accounting principles require the use of management estimates, including
estimates used to evaluate the recoverability of
101
<PAGE>
property, plant and equipment, to determine the fair value of financial
instruments, to account for the valuation allowance for deferred tax assets and
to determine litigation related obligations.
Note 2 - Notes and Accounts Receivable
Notes and accounts receivable as of October 15, 1998 and December 31, 1997
consisted of the following:
<TABLE>
<CAPTION>
October December
15, 1998 31, 1997
------------ ----------
(in thousands)
<S> <C> <C>
Current:
Notes receivable $0 $886
Accounts receivable-air charter 0 157
Accounts receivable-trade 3,757 3,602
Other 1,210 581
----- -----
4,967 5,226
Less allowance for doubtful accounts 1,442 1,444
----- -----
3,525 3,782
Non-current:
Notes receivable 0 3,385
----- -----
$3,525 $7,167
======= =======
</TABLE>
During 1998, a $5,000,000 note receivable, which was originally scheduled to be
repaid over sixty months, starting as of February 1997, was paid in full.
Note 3 - Property, Plant and Equipment
Property, plant and equipment held as of October 15, 1998 and December 31, 1997
consisted of the following:
<TABLE>
<CAPTION>
October December
15, 1998 31, 1997
------------ ------------
(in thousands)
<S> <C> <C>
Land and improvements $85,064 $85,021
Buildings and improvements 114,524 69,193
Barges and improvements 58,660 57,568
Leasehold improvements 503 301
Furniture and equipment 85,106 75,877
Construction in progress 18,690 33,843
--------- ---------
362,547 321,803
Less accumulated depreciation and amortization 71,964 57,810
--------- ---------
$290,583 $263,993
========= =========
</TABLE>
In September 1997, Casino Magic sold a riverboat to Hollywood Park for
$11,700,000, and recorded a gain of $1,400,000 on the sale. The proceeds from
the sale of the riverboat were restricted under the indenture governing the
Casino Magic 13% Notes, and were used to construct the hotel at Casino Magic
Bossier City.
102
<PAGE>
Note 4 - Notes and Contracts Payable
Notes and contracts payable as of October 15, 1998 and December 31, 1997
consisted of the following:
<TABLE>
<CAPTION>
October December
15, 1998 31, 1997
---------- ----------
(in thousands)
<S> <C> <C>
Construction contracts - Casino
Magic Bossier City, related $ 2,031 $ 0
Other 277 306
------- -----
$ 2,308 $ 306
======= =====
</TABLE>
Note 5 - Dispositions
In September 1997, Casino Magic sold a riverboat to Hollywood Park for
$11,700,000 million, and recorded a gain on the sale of $1,400,000. Under the
terms of the indenture covering the Casino Magic 13% Notes, the proceeds were
used to construct the Casino Magic Bossier City hotel; or else the proceeds
would have had to have been remitted to the indenture trustee.
In June 1997, Casino Magic sold a 49% interest in Casino Magic Argentina for
$7,000,000. In addition to a 51% share of Casino Magic Argentina's financial
results, Casino Magic also receives a management fee of 2% of Casino Magic
Argentina's gross monthly revenues (as defined in the relative agreements).
Casino Magic recorded a gain on the sale of $1,300,000.
Note 6 - Long Term Debt
Long term debt as of October 15, 1998 and December 31, 1997 consisted of the
following:
<TABLE>
<CAPTION>
October December
15, 1998 31, 1997
------------ ------------
(in thousands)
<S> <C> <C>
Notes payable, bank (a) $5,100 $8,170
Equipment contracts (a) 1,833 2,099
Notes payable, land 3,410 2,053
Other notes payable 714 920
Other, furniture and equipment notes payable (a) 6,812 0
Capital lease obligations 564 726
Casino Magic 13% Notes 115,000 115,000
Casino Magic 11.5% Notes 135,000 135,000
Unamortized original issue discount 0 (1,906)
--------- ---------
268,433 262,062
Less current maturities 143,434 8,591
--------- ---------
$124,999 $253,471
========= =========
</TABLE>
Notes payable, bank consisted of four notes (with some of the notes
collateralized by certain assets of Casino Magic), coming due between May 1998
and February 2000. As of October 15, 1998, interest rates on the notes ranged
between 8.75% and 9.5%.
Notes payable equipment contracts as of March 1998, consisted of a single note,
collateralized by certain assets, and is due, in full, by March 2000, at an
interest rate of 10.5%.
Notes payable, land consisted of three notes, coming due between April 1999 and
March 2003. As of October 15, 1998, interest on the notes ranged between 8% and
10.5%.
103
<PAGE>
Other notes payable consisted of various notes primarily for furniture and
equipment for Casino Magic Biloxi, which come due in 2004, with interest rates
between 9.5% and 13.25%.
Other, furniture and equipment notes payable related to collateralized notes for
the purchase of furniture and fixtures for Casino Magic Biloxi's hotel
expansion, interest on the notes is between 9.54% and 10.12%.
Casino Magic 13% Notes On August 22, 1996, Casino Magic of Louisiana, Corp.
- ----------------------
(owner of Casino Magic Bossier City) a wholly owned subsidiary of Jefferson
Casino Corporation, which is a wholly owned subsidiary of Casino Magic, issued
$115,000,000 in aggregate principal amount of 13% First Mortgage Notes, with
contingent interest at 5% of Casino Magic Bossier City's adjusted consolidated
cash flow (as defined under the indenture governing these notes). The Casino
Magic 13% Notes are secured by a first priority lien and security interest in
substantially all of the assets of Casino Magic Bossier City, and Jefferson
Casino Corporation, guarantees the Casino Magic 13% Notes, and the guarantee is
secured by all of the assets of Jefferson Casino Corporation including all of
the capital stock of Casino Magic Louisiana, Corp. The Casino Magic 13% Notes
are redeemable, in whole or in part, on or after August 15, 2000, at a premium
to face amount, plus accrued interest, as follows: (a) August 15, 2000, at
106.5%; (b) August 15, 2001, at 104.332%; and (c) August 15, 2002, and
thereafter at 102.166%.
In December 1998, Hollywood Park completed the post Casino Magic Merger change
of control purchase offer, whereby, $2,125,000 in principal amount of the Casino
Magic 13% Notes were tendered, at a price of $1,010 for each $1,000 of principal
amount. Redemption costs of $192,000 were recorded subsequent to October 15,
1998.
The indenture governing the Casino Magic 13% Notes contains certain covenants
limiting Casino Magic of Louisiana, Corp., and its subsidiaries to engage in any
line of business other than the current gaming operations of Casino Magic
Bossier City and incidental related activities, to borrow funds or otherwise
become liable for additional debt, to pay dividends, issue preferred stock, make
investments and certain types of payments, to grant liens on its property, enter
into mergers or consolidations, or to enter into certain specified transactions
with affiliates.
Casino Magic 11.5% Notes In October 1993, Casino Magic (through a wholly owned
- ------------------------
subsidiary) issued $135,000,000 in aggregate principal amount of 11.5% First
Mortgage Notes. On October 15, 1998, concurrent with the completion of the
Casino Magic Merger, Casino Magic exercised its right to redeem the Casino Magic
11.5% Notes, at 103.833%, and as of October 15, 1998, Casino Magic had satisfied
all conditions required to discharge its obligations at a total cost of
$141,515,000. The funds to redeem the Casino Magic 11.5% Notes came from
Hollywood Park.
For the period January 1, 1998 through October 15, 1998, Casino Magic recorded
an extraordinary item of $11,039,000, or $0.31 per common share, consisting
primarily of the write off of unamortized debt issuance costs and the redemption
premium.
Annual Maturities As of October 15, 1998, annual maturities of long term debt,
- -----------------
including capital lease obligations are as follows:
<TABLE>
<CAPTION>
Year ended: (in thousands)
----------- --------------
<S> <C>
December 31, 1999 $143,434
December 31, 2000 4,061
December 31, 2001 2,900
December 31, 2002 2,277
December 31, 2003 115,599
Thereafter 162
---------
$268,433
=========
</TABLE>
104
<PAGE>
The carrying amounts and fair values of notes payable and current maturities of
long term debt as of October 15, 1998 and December 31, 1997 are as follows:
<TABLE>
<CAPTION>
October December
15, 1998 31, 1997
---------- ----------
(in thousands)
<S> <C> <C>
Carrying amount $268 $262
Fair value 284 248
</TABLE>
Note 7 - Lease Commitments
Casino Magic Biloxi Casino Magic leases approximately 11.5 acres, inclusive of
- -------------------
approximately 6.4 acres of submerged tidelands leased from the state of
Mississippi. The land lease was entered into in June 1993, for an initial five
year term, with seventeen five year renewal options. Rent due under the land
lease for years one through five is $550,000, $250,000, $450,000, $450,000 and
$200,000, respectively. The lease for the submerged tidelands is for ten years
with a five year option to renew. Annual rent for the submerged tidelands
started at $595,000 and increases by $45,000 for the first five years.
The following is a schedule of future minimum lease payments for capital and
operating leases (with initial or remaining terms in excess of one year) as of
October 15, 1998:
<TABLE>
<CAPTION>
Capital Operating
Leases Leases
--------- -----------
(in thousands)
<S> <C> <C>
1999 $325 $2,522
2000 160 2,080
2001 148 1,913
2002 20 1,882
2003 20 1,916
Thereafter 0 0
----- --------
Total minimum lease payments 673 10,313
Less amount representing
Interest (9% to 13%) 75 0
----- --------
Present value of net minimum capital
lease payments $598 $10,313
===== ========
</TABLE>
Rent expense for the period January 1, 1998 through October 15, 1998, and for
the years ended December 31, 1997 and 1996, was $2,264,000, $3,644,000 and
$1,800,000, respectively.
Note 8 - Commitments and Contingencies
Casino Magic 13% Notes On August 22, 1996, Casino Magic of Louisiana, Corp.
- ----------------------
(owner of Casino Magic Bossier City) a wholly owned subsidiary of Jefferson
Casino Corporation, which is a wholly owned subsidiary of Casino Magic, issued
$115,000,000 of 13% Notes (as previously discussed). The Casino Magic 13% Notes
are secured by all of the assets of Jefferson Casino Corporation including all
of the capital stock of Casino Magic of Louisiana, Corp.
Legal Poulos Lawsuit A class action lawsuit was filed on April 26, 1994, in
- -----
the United States District Court, Middle District of Florida (the "Poulos
Lawsuit"), naming as defendants 41 manufacturers, distributors and casino
operators of video poker and electronic slot machines, including Casino Magic.
The lawsuit alleges that the defendants have engaged in a course of fraudulent
and misleading conduct intended to induce people to play such games based on
false beliefs concerning the operation of the gaming machines and the extent to
which there is an opportunity to win. The suit alleges violations of the
Racketeer Influenced and Corrupt Organization Act, as well as claims of common
law fraud, unjust enrichment and negligent
105
<PAGE>
misrepresentation, and seeks damages in excess of $6 billion. On May 10, 1994, a
second class action lawsuit was filed in the United States District Court,
Middle District of Florida (the "Ahern Lawsuit"), naming as defendants the same
defendants who were named in the Poulos Lawsuit and adding as defendants the
owners of certain casino operations in Puerto Rico and the Bahamas, who were not
named as defendants in the Poulos Lawsuit. The claims in the Ahern Lawsuit are
identical to the claims in the Poulos Lawsuit. Because of the similarity of
parties and claims, the Poulos Lawsuit and Ahern Lawsuit were consolidated into
one case file in the United States District Court, Middle District of Florida.
On December 9, 1994 a motion by the defendants for change of venue was granted,
transferring the case to the United States District Court for the District of
Nevada, in Las Vegas. In an order dated April 17, 1996, the court granted
motions to dismiss filed by Casino Magic and other defendants and dismissed the
Complaint without prejudice. The plaintiffs then filed an amended Complaint on
May 31, 1996 seeking damages against Casino Magic and other defendants in excess
of $1 billion and punitive damages for violations of the Racketeer Influenced
and Corrupt Organizations Act and for state common law claims for fraud, unjust
enrichment and negligent misrepresentation. Casino Magic and other defendants
have moved to dismiss the amended Complaint. Casino Magic believes that the
claims are without merit and does not expect that the lawsuit will have a
materially adverse effect on the financial condition or results of operations of
Casino Magic.
Casino America Litigation On or about September 6, 1996, Casino America, Inc.
commenced litigation in the Chancery Court of Harrison County, Mississippi,
Second Judicial District, against Casino Magic, and James Edward Ernst, its then
Chief Executive Officer, seeking injunctive relief and unspecified compensatory
damages in an amount to be proven at trial as well as punitive damages. The
plaintiff claims, among other things, that the defendants (i) breached the terms
of an agreement they had with the plaintiff, (ii) tortiously interfered with
certain of the plaintiff's business relations; and (iii) breached covenants of
good faith and fair dealing they allegedly owed to the plaintiff. On or about
October 8, 1996, the defendants interposed an answer, denying the allegations
contained in the Complaint. The discovery phase of this litigation is
continuing and a trial date was initially set for August 1998, but was postponed
to mid-1999 after the plaintiff requested a continuance. While Casino Magic's
management cannot predict the outcome of this action, it believes plaintiff's
claims are without merit and intends to vigorously defend this action.
Astoria Entertainment, Inc. v. Edwin W. Edwards, et als., United States District
Court for the Eastern District of Louisiana, No. 98-3359. On February 2, 1999,
the plaintiff, Astoria Entertainment, Inc., voluntarily dismissed its complaint
(as presented below), without prejudice, as to the three Hollywood Park/Boomtown
defendants, and other defendants.
This civil action was filed on November 12, 1998 in federal district court in
New Orleans against 21 defendants, including Edwin W. Edwards, Stephen Edwards,
Edward J. Debartolo, Jr., Debartolo Entertainment Louisiana Gaming, Inc.,
Hollywood Casino Corporation, Boyd Kenner, Inc., Treasure Chest Casino, L.L.C.,
five members of the former Louisiana Riverboat Gaming Commission, Hollywood
Park, Inc., Louisiana Gaming Enterprises, Inc., and Robert List (an employee of
Boomtown, Inc.) (the latter three hereafter are referred to as the "Hollywood
Park/Boomtown defendants"). The complaint alleged violations of the Racketeer
Influenced and Corrupt Organizations ("RICO") Act in connection with the
awarding of riverboat gaming licenses in Louisiana. The plaintiff, Astoria
Entertainment, Inc. ("Astoria"), contends that it had sustained damages due to
alleged racketeering activities of the defendants, allegedly resulting in
corruption of the licensing process and Astoria's failure to receive a license
for riverboat gaming in, inter alia, the West Bank of Jefferson Parish (suburban
New Orleans). The Complaint sought damages of "not less than $340 million,"
plus treble damages, costs, and attorneys' fees. On January 15, 1998, the
Hollywood Park/Boomtown defendants filed a motion to dismiss Astoria's Complaint
for failure to state a claim against those defendants.
Astoria Entertainment, Inc. v. Edward J. DeBartolo, Jr., et als., Civil District
Court for the Parish of Orleans, State of Louisiana, No. 98-20315. On March 5,
1999, Astoria Entertainment, Inc. voluntarily dismissed, without prejudice all
claims asserted (as presented below) against the Hollywood Park/Boomtown
defendants.
This action was filed on or about December 1, 1998 in state district court in
New Orleans against twelve defendants, including Edward J. Debartolo, Jr.,
Debartolo Entertainment Louisiana Gaming, Inc., Hollywood
106
<PAGE>
Casino Corporation, Robert Guidry, Boyd Gaming, Inc., Boyd Kenner, Inc.,
Treasure Chest Casino, L.L.C., Hollywood Park, Inc., Robert List (an employee of
Boomtown, Inc.), Louisiana Gaming Enterprises, Inc., Boomtown, Inc., and
Louisiana-I Gaming, L.P. (the latter five hereafter are referred to as the
"Hollywood Park/Boomtown defendants"). The petition sought damages against the
Hollywood Park/Boomtown defendants and others "in excess of $300 million" for
alleged "intentional interference with economic advantage and/or prospective
economic advantage" and alleged "unjust enrichment" in connection with the
licensing of riverboat gaming in Louisiana. The plaintiff, Astoria
Entertainment, Inc. ("Astoria"), alleged that the defendants were obligated to
refrain from intentional acts that would interfere with Astoria's alleged
ability to obtain a license for riverboat gaming in the West Bank of Jefferson
Parish (suburban New Orleans) and that the Hollywood Park/Boomtown defendants
breached the obligation by participating in alleged unlawful practices designed
to gain an improper advantage in obtaining a certificate of preliminary approval
and license for such riverboat gaming.
Casino Magic 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 Casino Magic's
financial results.
Note 9 - Stock Option Plan and Other Employee Benefits
In 1992, Casino Magic adopted an incentive stock option plan (the "Casino Magic
Plan") in which directors, officers, and key employees of Casino Magic
participate. Casino Magic registered 3,700,000 shares of Casino Magic's common
stock for issuance under the Casino Magic Plan.
On October 15, 1998, Hollywood Park assumed responsibility for the Casino Magic
Plan, and filed a registration statement with the Securities and Exchange
Commission covering an aggregate of 303,924 shares of Hollywood Park common
stock issuable upon exercise of stock options granted under the Casino Magic
Plan.
The following table summarizes information related to shares under option and
under the Casino Magic Plan:
<TABLE>
<CAPTION>
Years ended December 31,
January 1, 1998 through ----------------------------------------------------------
October 15, 1998 1997 1996
---------------------------- ----------------------------- ------------------------
Weighted Exercise Weighted Exercise Weighted Exercise
Average Price Average Price Average Price
Shares Shares Shares
-------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Outstanding at beginning of year 3,446 $3.97 4,200 $0.67 5,108 $ 7.60
Granted 8 $2.00 400 $1.69 1,998 $ 3.56
Exercised (106) $0.00 (239) $1.59 (424) $ 1.72
Canceled (196) $3.54 (915) $2.23 (2,482) $12.00
Outstanding at end of year 3,152 $4.13 3,446 $3.96 4,200 $ 3.67
Options exercisable at end of year 2,009 $4.04 1,985 $3.96 2,655 $ 3.11
Options available for future grants 2,771 2,582 2,068
Weighted average fair value of
options granted during the year $2.00 $1.69 $ 1.11
</TABLE>
107
<PAGE>
The following table summarizes information about stock options and warrants
outstanding at October 15, 1998:
<TABLE>
<CAPTION>
Options Outstanding Options Exercisable
-------------------------------- -----------------------------------------------
Wgtd. Avg. Wgtd. Avg Wgtd. Avg.
Exercise Number Remaining Exercise Number Exercise
Price Outstanding Contr. Life Price Exercisable Price
---------- ------------- ------------- ----------- ------------- -----------
<S> <C> <C> <C> <C> <C>
$1.69 393,500 3.98 $1.73 60,000 $1.69
2.00 7,500 4.66 2.00 0 0.00
2.75 980,000 0.02 2.75 980,000 2.75
3.50 105,000 3.77 3.50 60,000 3.50
3.63 1,143,500 3.28 3.63 509,125 3.63
3.81 3,000 3.87 3.81 1,200 3.81
5.81 200,000 3.70 5.81 200,000 5.81
7.20 69,100 0.51 7.20 69,100 7.20
7.35 50,000 1.10 7.35 50,000 7.35
15.30 200,000 5.51 15.30 80,000 15.30
--------- -------- ------- --------- ------
Total 3,151,600 2.45 $4.13 2,009,425 $4.04
========= ======== ======= ========= ======
</TABLE>
Accounting for Stock-Based Compensation Casino Magic estimated the fair market
- ---------------------------------------
value of stock options using an option-pricing model taking into account, as of
the date of grant, the exercise price and expected life of the option, the then
current price of the underlying stock and its expected volatility, expected
dividend on the stock, and the risk-free interest rate for the expected term of
the options.
In computing the stock-based compensation, the following assumptions were made:
<TABLE>
<CAPTION>
Risk-Free
Interest Expected Expected Expected
Rate Life Volatility Dividend
----------- --------- ------------ ----------
<S> <C> <C> <C> <C>
Options granted in the following periods:
Jan. 1, 1998 through Oct. 15, 1998 5.20% 2.25 years 20% None
Year ended December 31, 1997 5.26% 4.5 years 20% None
Year ended December 31, 1996 5.47% 6.75 years 20% None
</TABLE>
<TABLE>
<CAPTION>
For the For the years ended
period Jan. 1, December 31,
1998 through -----------------------------
Oct. 15, 1998 1997 1996
--------------- -------- -------
(in thousands, except per share data)
<S> <C> <C> <C>
Net loss before stock-based compensation expense ($16,463) ($5,249) ($31,589)
Stock-based compensation expense 384 709 974
Pro forma net loss ($16,847) ($5,958) ($32,563)
======== ======= ========
Per common share:
Pro forma net loss - basic ($0.47) ($0.17) ($0.92)
Pro forma net loss - diluted ($0.47) ($0.17) ($0.92)
</TABLE>
Pensions and Other Employee Benefits In July 1993, Casino Magic adopted a
- ------------------------------------
401(k) Plan (the "401(k) Plan"), a defined contribution plan covering all
eligible employees of Casino Magic who have one year of service and are age
twenty-one or older. The 401(k) Plan is subject to the provisions of the
Employee Retirement Income Security Act of 1974 (ERISA). Each year,
participants may contribute up to 15% of pretax annual compensation, as defined
in the 401(k) Plan. Casino Magic's matching and/or additional contributions may
be contributed at the discretion of Casino Magic's Board of Directors. Casino
Magic's contributions to the 401(k) Plan are allocated to employed participants'
accounts as of the last day of the plan year. Total employer contributions
108
<PAGE>
to the 401(k) Plan at December 31, 1997 and 1996 were approximately $201,000 and
$176,000, respectively. No contribution were been made for the 1998 401(k) Plan
year as of October 15, 1998.
As of January 1, 1999, the 401(k) Plan was merged into the Hollywood Park 401(k)
Plan resulting in all plan assets transferring from Fidelity to Massachusetts
Financial Services. Casino Magic's annual matching contribution for 1998
totaled $254,000.
Note 10 - Advertising Expense
Advertising costs related to production and communication were expensed as
incurred. Advertising expenses for the period January 1, 1998 through October
15, 1998, and for the years ended December 31, 1997, and 1996, was approximately
$5,574,000, $7,815,000 and $5,470,000, respectively.
Note 11 - Related Party Transactions
During the years ended December 31, 1997 and 1996, Casino Magic incurred
approximately $7,000 and $1,347,000, respectively, for architectural and design
services provided by an architectural firm which was wholly owned by an outside
director and shareholder of Casino Magic. The director resigned in October
1996.
During the period January 1, 1998 through October 15, 1998 and for the years
ended December 31, 1997 and 1996, the Company incurred approximately $232,000,
$146,000 and $154,000, respectively, for legal services provided by a law firm
in which one of Casino Magic's outside directors was a shareholder.
During the year ended December 31, 1996, Casino Magic incurred approximately
$220,000 for charter plane rentals provided by a company that is wholly owned by
the Chairman of Casino Magic.
In February 1996, Casino Magic purchased a jet for $1,700,000 from the Chairman
of Casino Magic.
In connection with the redemption of the Casino Magic 11.5% Notes Hollywood Park
transferred approximately $141,511,000 to Casino Magic, representing the
principal, premium and accrued interest.
Note 12 - Income Taxes
Pretax financial loss generated from domestic and foreign sources was as
follows:
<TABLE>
<CAPTION>
For the period
Jan. 1, 1998 Years ended December 31,
through ---------------------------------
Oct. 15, 1998 1997 1996
---------------- -------- --------
(in thousands)
<S> <C> <C> <C>
Domestic ($17,109) ($10,729) ($15,323)
Foreign 3,346 4,949 (20,943)
-------- -------- --------
Total pretax loss ($13,764) ($5,780) ($36,265)
======== ======= ========
</TABLE>
109
<PAGE>
Provision (benefit) for income taxes for the period January 1, 1998 through
October 15, 1998 and years ended December 31, 1997 and 1996 are as follows:
<TABLE>
<CAPTION>
For the period
Jan. 1, 1998 Years ended December 31,
through -----------------------------------------
Oct. 15, 1998 1997 1996
---------------- --------------- ----------------
(in thousands)
<S> <C> <C> <C>
Federal and state current $0 ($2,733) ($4,254)
Foreign current 1,539 1,065 828
Federal deferred 0 (267) (1,250)
Foreign deferred 0 0 0
------- -------- --------
Total $1,539 ($1,935) ($4,676)
======= ======== ========
</TABLE>
Components of deferred tax liabilities (assets) are as follows:
<TABLE>
<CAPTION>
For the period
Jan. 1, 1998 Year ended
through December
October 15, 1998 31, 1997
------------------ ------------
(in thousands)
<S> <C> <C>
Depreciation and amortization $13,052 $12,155
Foreign source income 258 258
--------- ----------
Total deferred tax liabilities 13,310 12,413
--------- ----------
Write-off of pre-opening costs (2,296) (1,782)
Tax benefits related to non-statutory stock options (504) (504)
Accrued employee benefits and liabilities (2,702) (1,428)
Abandoned development projects (1,516) (1,516)
Net operating loss carry-forward (28,887) (21,300)
Accrued merger costs (3,183) 0
Other (1,588) (903)
--------- ----------
Total deferred tax assets (40,676) (27,433)
Less valuation allowance 27,366 15,020
--------- ----------
Net deferred tax liabilities $0 $0
========= ==========
</TABLE>
The provision for income taxes differs from the amount of income tax determined
by applying the applicable U.S. statutory federal income tax rate to pre-tax
income from continuing operations as a result of the following differences:
<TABLE>
<CAPTION>
For the period
Jan. 1, 1998 Years ended December 31,
through ---------------------------------------
Oct. 15, 1998 1997 1996
---------------- ----------------- ----------------
(in thousands)
<S> <C> <C> <C>
Statutory U.S. tax rate at 35% ($4,817) ($2,023) ($12,693)
Increase (decrease) in rates resulting from:
Expenses which were non-deductible
for tax purposes 1,102 1,299 358
Expenses which were deductible
for tax purposes and not book (461) (6,988) 0
Foreign taxes 1,539 1,065 828
Valuation allowance 5,538 6,818 8,201
State tax benefit 0 0 (802)
Other (1,362) (2,106) (568)
-------- -------- ---------
Effective tax rate (11%), 27%
and 13%, respectively $1,539 ($1,935) ($4,676)
======== ======== =========
</TABLE>
110
<PAGE>
The valuation allowance against net deferred tax assets was recorded in
recognition of the significant operating losses Casino Magic incurred over the
last three years.
Mississippi state taxes were offset by a tax credit for state gaming taxes based
on gross revenues realized by Casino Magic Bay St. Louis and Casino Magic
Biloxi. The tax credit is the lesser of the annual total gaming taxes paid or
the state income tax. Tax credit carryforwards are not permitted.
Louisiana state tax laws do not allow for a similar offset.
Note 13 - Unaudited Quarterly Information
The following is a summary of unaudited quarterly financial data for the period
January 1, 1998 through October 15, 1998, and for the year ended December 31,
1997:
<TABLE>
<CAPTION>
1998
----------------------------------------------------------------------------
Oct. 15, Sept. 30, June 30, Mar. 31,
--------- -------- -------- ---------
(in thousands, except per share data)
<S> <C> <C> <C> <C>
Revenues $13,672 $77,891 $75,312 $72,186
Net income (loss) before
Extraordinary item ($7,276) ($2,615) $1,989 $2,478
========= ======== ======== ========
Net income (loss) ($18,315) ($2,615) $1,989 $2,478
========= ======== ========= ========
Per common share:
Net income (loss) - basic ($0.51) ($0.07) $0.06 $0.07
========= ======== ========= ========
Net income (loss) - diluted ($0.51) ($0.07) $0.06 $0.07
========= ======== ========= ========
<CAPTION>
1997
----------------------------------------------------------------------------
Dec. 31, Sept. 30, June 30, Mar. 31,
--------- -------- -------- ---------
(in thousands, except per share data)
<S> <C> <C> <C> <C>
Revenues $63,240 $66,495 $65,958 $65,781
Net income (loss) ($3,030) $2,675 ($1,222) ($3,672)
========= ======== ======== =========
Per common share:
Net income (loss) - basic ($0.08) $ 0.08 ($0.03) ($0.10)
Net income (loss) - diluted ($0.08) $ 0.08 ($0.03) ($0.10)
========= ======== ======== =========
</TABLE>
111
<PAGE>
Hollywood Park, Inc.
Exhibit Index
<TABLE>
<CAPTION>
Exhibit Description Page
- -------- ----------- ----
<S> <C> <C>
23.1 Consent of Arthur Andersen LLP
27.1 Financial Data Schedule 1
</TABLE>
<PAGE>
Consent of Independent Public Accountants
We consent to the incorporation by reference in the registration statements on
Form S-8 with respect to (A) the registration of shares issued (i) upon exercise
of options granted pursuant to the 1996 Stock Option Plan of Hollywood Park,
Inc., and (ii) upon exercise of options to purchase an aggregate of 20,000
shares of Common Stock granted to certain directors of Hollywood Park, Inc.; (B)
the registration of shares issued upon exercise of options granted pursuant to
the 1990 Stock Option Plan and the 1992 Director Option Plan of Boomtown, Inc.;
(C) the registration of shares issued (i) upon exercise of options granted
pursuant to the 1992 Incentive Stock Option Plan of Casino Magic Corp. and (ii)
upon exercise of options granted to certain employees and directors of Casino
Magic Corp.; and (D) the registration of (i) options and stock appreciation
rights granted under the 1993 Stock Option Plan of Hollywood Park, Inc. and (ii)
shares issued upon exercise of such options and/or stock appreciation rights, of
our reports dated February 23, 1999 on the financial statements of Hollywood
Park, Inc. and Casino Magic Corp., which reports appear in the Annual Report on
From 10-K of Hollywood Park, Inc., for the fiscal year ended December 31, 1998.
We further consent to the incorporation by reference in the registration
statement on Form S-4 (Registration No. 333-73235) of Hollywood Park, Inc. with
respect to the registration of $350,000,000 aggregate principal amount of 9.25%
Series B Senior Subordinated Notes due 2007 of our reports dated February 23,
1999 on the financial statements of Hollywood Park, Inc. and Casino Magic Corp.,
which reports appear in the Annual Report on Form 10-K of Hollywood Park, Inc.
for the fiscal year ended December 31, 1998.
Arthur Andersen LLP
Los Angeles, California
March 30, 1999
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<CIK> 0000356213
<NAME> HOLLYWOOD PARK, INC.
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> DEC-31-1998
<CASH> 43,934,000
<SECURITIES> 3,179,000
<RECEIVABLES> 36,955,000
<ALLOWANCES> 2,401,000
<INVENTORY> 0
<CURRENT-ASSETS> 100,148,000
<PP&E> 831,908,000
<DEPRECIATION> (228,996,000)
<TOTAL-ASSETS> 891,339,000
<CURRENT-LIABILITIES> 124,943,000
<BONDS> 539,183,000
0
0
<COMMON> 2,580,000
<OTHER-SE> 228,396,000
<TOTAL-LIABILITY-AND-EQUITY> 891,339,000
<SALES> 45,009,000
<TOTAL-REVENUES> 426,967,000
<CGS> 52,139,000
<TOTAL-COSTS> 380,243,000
<OTHER-EXPENSES> 2,595,000
<LOSS-PROVISION> 1,280,000
<INTEREST-EXPENSE> 22,518,000
<INCOME-PRETAX> 21,985,000
<INCOME-TAX> 8,442,000
<INCOME-CONTINUING> 13,169,000
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 13,169,000
<EPS-PRIMARY> 0.50
<EPS-DILUTED> 0.50
</TABLE>
