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SCHEDULE 14A INFORMATION
PROXY STATEMENT PURSUANT TO SECTION 14(a) OF
THE SECURITIES EXCHANGE ACT OF 1934
Filed by the Registrant [X]
Filed by a Party other than the Registrant [_]
Check the appropriate box:
[_]Preliminary Proxy Statement
[_]Confidential, for Use of the Commission Only (as permitted by Rule 14a-
6(e)(2))
[X]Definitive Proxy Statement
[_]Definitive Additional Materials
[_]Soliciting Material Pursuant to Rule 14a-11(c) or Rule 14a-12
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HOLLYWOOD PARK, INC.
(NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
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Payment of Filing Fee (Check the appropriate box):
[_]No fee required.
[X]Fee computed on table below per Exchange Act Rules 14a-6(i)(1) and 0-11.
(1) Title of each class of securities to which transaction
applies: Hollywood Park Operating Company Common Stock, $.01 par
value
(2) Aggregate number of securities to which transaction
applies: 26,186,724
(3) Per unit price or other underlying value of transaction computed
pursuant to Exchange Act Rule 0-11 (set forth the amount on which
the filing fee is calculated and state how it was
determined): $4.40 per share (Estimated book value of securities to
be distributed in spin-off.)
(4) Proposed maximum aggregate value of transaction: $115,259,000
(5) Total fee paid: $23,052.00
[X]Fee paid previously with preliminary materials.
[_]Check box if any part of the fee is offset as provided by Exchange Act
Rule 0-11(a)(2) and identify the filing for which the offsetting fee was
paid previously. Identify the previous filing by registration statement
number, or the Form or Schedule and the date of its filing.
(1) Amount Previously Paid: ____________________________________________
(2) Form, Schedule or Registration Statement No.: ______________________
(3) Filing Party: ______________________________________________________
(4) Date Filed: ________________________________________________________
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[LOGO OF HOLLYWOOD PARK(R)]
HOLLYWOOD PARK, INC.
1050 SOUTH PRAIRIE AVENUE
INGLEWOOD, CALIFORNIA 90301
February 13, 1998
Dear Fellow Stockholder:
You are cordially invited to attend the Annual Meeting of Stockholders of
Hollywood Park, Inc. to be held at the New York Palace, 455 Madison Avenue,
New York, New York, on Monday, April 13, 1998 at 9:00 a.m. local time.
As you know, Hollywood Park has been evaluating the restoration of its
paired-share structure, with the company being reorganized into two parts, a
real estate investment trust and an operating company. Your Board has
concluded that this reorganization has significant potential benefits for our
stockholders, including increasing dividends paid to our stockholders,
possibly enhancing investor perception of the market value of Hollywood Park's
stock and affording Hollywood Park greater financing flexibility, as well as
the other potential benefits described in the attached Proxy Statement.
ACCORDINGLY, THE BOARD HAS APPROVED EACH OF THE PROPOSALS DESCRIBED IN THE
ATTACHED PROXY STATEMENT AND RECOMMENDS THAT YOU VOTE FOR THEIR APPROVAL.
At the Annual Meeting, you will be asked to vote upon the following matters:
First, the adoption of amendments to Hollywood Park's Certificate of
Incorporation necessary to effect the planned reorganization; Second, the
adoption of a stock option plan for the new operating company to be effective
following the reorganization; Third, the adoption of a deferred compensation
plan for directors of the operating company, also to be effective following
the reorganization; Fourth, the adoption of an amendment to Hollywood Park's
Certificate of Incorporation to eliminate the requirement that certain
transactions be approved by 70% of Hollywood Park's outstanding stock; Fifth,
the adoption of an amendment to Hollywood Park's Certificate of Incorporation,
which would expand the restrictions on stock ownership intended to protect
Hollywood Park's gaming licenses to cover the licenses of its subsidiaries;
and Sixth, the election of eleven directors to the Hollywood Park Board of
Directors.
The reorganization has important tax implications. As the accompanying Proxy
Statement explains, in voting on the matters relating to the reorganization,
the Board believes you should assume that the reorganization will result in
taxable events for Hollywood Park and its stockholders. We estimate that
Hollywood Park could incur a tax liability of approximately $54 million and
that stockholders could be treated as having received a taxable distribution
of approximately $4.95 per share. However, your Board believes that the
potential benefits of the reorganization may significantly outweigh its
potential tax costs. Hollywood Park requested advance rulings from the IRS as
to certain aspects of the reorganization and other tax matters, but withdrew
its ruling requests after being advised informally that the IRS had
tentatively concluded that it would not issue the requested rulings. Although
Hollywood Park expects to receive an opinion of counsel as to certain tax
matters, including certain of those issues which were the subject of the IRS
ruling requests, there can be no assurance that the IRS will not take a
contrary position on these issues. We urge you to read the accompanying Proxy
Statement carefully, including the "Risk Factors" and "Federal Income Tax
Matters" sections, which contain a discussion as to the nature of and
qualifications to the anticipated opinion of counsel.
Accompanying this letter is the formal Notice of Annual Meeting, Proxy
Statement and Proxy Card relating to the meeting, as well as Hollywood Park's
Annual Report to Stockholders for the year ended December 31, 1996. The Proxy
Statement contains important information about the reorganization and about
the two companies that would result if the reorganization is approved.
This Annual Meeting is of great significance given the importance of the
matters being voted upon. I hope you can attend the Annual Meeting in person.
However, whether or not you plan to attend the Annual Meeting, please
complete, sign, date and return your proxy in the enclosed envelope. If you
attend the Annual Meeting, you may vote in person if you wish, even though you
have previously returned your proxy.
Sincerely,
/s/ R. D. Hubbard
R. D. Hubbard
Chairman of the Board of Directors and
Chief Executive Officer
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HOLLYWOOD PARK, INC.
1050 SOUTH PRAIRIE AVENUE
INGLEWOOD, CALIFORNIA 90301
NOTICE OF ANNUAL MEETING OF STOCKHOLDERS
TO BE HELD ON APRIL 13, 1998
TO THE STOCKHOLDERS OF HOLLYWOOD PARK, INC.:
NOTICE IS HEREBY GIVEN that an Annual Meeting of Stockholders of Hollywood
Park, Inc., a Delaware corporation ("Hollywood Park"), will be held on Monday,
April 13, 1998, at 9:00 a.m., local time, at the New York Palace, 455 Madison
Avenue, New York, New York (the "Annual Meeting"). At the Annual Meeting,
Hollywood Park's stockholders will be asked to consider and vote upon:
1. Proposed amendments to Hollywood Park's Certificate of Incorporation (the
"Reorganization Amendments") necessary to effect the planned reorganization of
the Company into a real estate investment trust (a "REIT") and an operating
company, whose stock would be "paired" to trade publicly as units consisting
of one share of the REIT's stock and one share of the operating company's
stock (the "Reorganization"). The Reorganization would be effected through a
series of transactions, including a reclassification of Hollywood Park's
outstanding stock and a distribution to Hollywood Park's stockholders of all
of the outstanding stock of Hollywood Park's wholly-owned subsidiary Hollywood
Park Operating Company ("HP Operating Company"). After the Reorganization, HP
Operating Company would conduct substantially all of Hollywood Park's current
and future operating businesses and Hollywood Park (renamed Hollywood Park
Realty Enterprises, Inc. ("HP Realty")) would operate as a REIT which would
initially derive most of its income from leasing its real estate assets to HP
Operating Company. The pairing would commence upon completion of the
Reorganization and would be facilitated through various provisions in the By-
Laws of the companies and by a Pairing Agreement between the companies. The
Reorganization Amendments generally provide for:
. The change of Hollywood Park's name to Hollywood Park Realty
Enterprises, Inc.;
. The authorization of three new classes of stock that may be issued by
the REIT: (a) 100,000,000 shares of common stock, $.01 par value ("HP
Realty Common Stock"); (b) 25,000,000 shares of excess common stock,
$.01 par value ("Excess Stock"); and (c) 40,000,000 shares of preferred
stock, $.01 par value. The HP Realty Common Stock would be subject to
certain restrictions on transfer which are intended to protect HP
Realty's qualification as a REIT. (These restrictions are set forth in
Article IV of HP Realty's Restated Certificate of Incorporation, which
is attached to the Proxy Statement as Appendix A);
. The conversion of each outstanding share of Hollywood Park's Common
Stock, $.10 par value ("Hollywood Park Common Stock"), into one share of
HP Realty Common Stock; and
. The reduction in the number of authorized shares of Hollywood Park
Common Stock after the conversion from 40,000,000 to 1,000. Following
the Reorganization, the Pairing Agreement between HP Realty and HP
Operating Company will effectively prohibit the issuance of Hollywood
Park Common Stock.
The first two items listed above will be effected through one Reorganization
Amendment, and the last two items listed above will be effected through a
separate Reorganization Amendment to be filed with the Delaware Secretary of
State after the first Reorganization Amendment is effective.
2. The adoption of the Hollywood Park Operating Company 1998 Stock Option
Plan, providing for the grant of stock options following the Reorganization to
HP Operating Company officers, employees and directors
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that are exercisable for paired shares of HP Realty Common Stock and HP
Operating Company Common Stock (the "1998 Option Plan"), to be effective
following the Reorganization and which will replace Hollywood Park's existing
stock option plans.
3. The adoption of the Hollywood Park Operating Company 1998 Directors
Deferred Compensation Plan (the "HP Operating Company Directors Plan"), which
would permit directors of HP Operating Company to defer receipt of their
directors fees and to receive the deferred compensation in cash or in paired
shares, also to be effective following the Reorganization.
4. A proposed amendment to Hollywood Park's Certificate of Incorporation
(which will be the HP Realty Certificate of Incorporation if the
Reorganization is completed) to eliminate the requirement in the Certificate
of Incorporation that certain transactions be approved by 70% of Hollywood
Park's outstanding stock (the "Supermajority Elimination Amendment").
5. A proposed amendment to Article XIV of Hollywood Park's Certificate of
Incorporation, which would expand the restrictions on ownership of Hollywood
Park securities intended to protect Hollywood Park's California gaming
licenses to cover the gaming licenses of Hollywood Park and its subsidiaries
in all jurisdictions in which they operate now or in the future (the "Gaming
Amendment").
6. The election of eleven directors to serve on the Hollywood Park Board of
Directors for the coming year.
7. Such other business as may properly come before the Annual Meeting
(including any motion to adjourn to a later date to permit further
solicitation of proxies if necessary) or before any adjournments or
postponements thereof.
The effectiveness of the 1998 Option Plan and the HP Operating Company
Directors Plan is conditioned upon the approval of the Reorganization
Amendments and the completion of the Reorganization.
The Reorganization and the Reorganization Amendments, the other proposals
listed above and the director nominees are all more fully described in the
accompanying Proxy Statement. Only stockholders of record of Hollywood Park
Common Stock at the close of business on February 18, 1998 are entitled to
notice of and to vote at the Annual Meeting or any adjournments or
postponements thereof. A list of such stockholders entitled to vote will be
available for inspection at the Annual Meeting by any stockholder and, for 10
days prior to the Annual Meeting, at ChaseMellon Shareholder Services, L.L.C.,
450 West 33rd Street, 15th Floor, New York, N.Y., 10001.
TO ENSURE THAT YOUR SHARES ARE REPRESENTED AT THE ANNUAL MEETING, YOU ARE
URGED TO COMPLETE, DATE AND SIGN THE ENCLOSED PROXY AND MAIL IT PROMPTLY IN
THE POSTAGE PAID ENVELOPE PROVIDED, WHETHER OR NOT YOU PLAN TO ATTEND THE
ANNUAL MEETING IN PERSON. YOUR PROXY CAN BE WITHDRAWN BY YOU AT ANY TIME
BEFORE IT IS VOTED.
BY ORDER OF THE BOARD OF DIRECTORS
/s/ Donald M. Robbins
Donald M. Robbins
Secretary
Inglewood, California
February 13, 1998
2
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HOLLYWOOD PARK, INC.
1050 SOUTH PRAIRIE AVENUE
INGLEWOOD, CALIFORNIA 90301
PROXY STATEMENT RELATING TO
ANNUAL MEETING OF STOCKHOLDERS
TO BE HELD APRIL 13, 1998
This Proxy Statement is being furnished to the stockholders of Hollywood
Park, Inc., a Delaware corporation ("Hollywood Park"), in connection with the
solicitation of proxies by the Hollywood Park Board of Directors for use at
the Annual Meeting of Hollywood Park stockholders (the "Annual Meeting") to be
held at 9:00 a.m., local time, on Monday, April 13, 1998, at the New York
Palace, 455 Madison Avenue, New York, New York, and at any adjournments or
postponements thereof. At the Annual Meeting, holders of Hollywood Park's
common stock, $.10 par value ("Hollywood Park Common Stock"), will be asked to
vote upon the following matters:
1. The adoption of amendments to Hollywood Park's Certificate of Incorporation
(the "Reorganization Amendments") necessary to effect the planned
reorganization of Hollywood Park into a real estate investment trust (a
"REIT") and an operating company, whose stock would be "paired" to trade
publicly as units consisting of one share of the REIT's stock and one share
of the operating company's stock (the "Reorganization");
2. The adoption of a stock option plan for the new operating company (the
"1998 Option Plan");
3. The adoption of a deferred compensation plan for directors of the
operating company (the "HP Operating Company Directors Plan");
4. The adoption of an amendment to Hollywood Park's Certificate of
Incorporation to eliminate the requirement that certain transactions be
approved by 70% of Hollywood Park's outstanding stock (the "Supermajority
Elimination Amendment");
5. The adoption of an amendment to Hollywood Park's Certificate of
Incorporation, which would expand the restrictions on stock ownership
intended to protect Hollywood Park's gaming licenses to cover the
licenses of its subsidiaries (the "Gaming Amendment"); and
6. The election of eleven directors to the Hollywood Park Board of
Directors.
The effectiveness of the 1998 Option Plan and the HP Operating Company
Directors Plan is conditioned upon the approval of the Reorganization
Amendments and the completion of the Reorganization.
SEE "RISK FACTORS" ON PAGE 15 FOR A DISCUSSION OF CERTAIN FACTORS THAT
SHOULD BE CONSIDERED IN CONNECTION WITH THE REORGANIZATION AND THE
REORGANIZATION AMENDMENTS.
This Proxy Statement and the accompanying Proxy Cards are first being mailed
to stockholders of Hollywood Park on or about February 13, 1998.
<PAGE>
TABLE OF CONTENTS
<TABLE>
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<S> <C>
SUMMARY........................................... 5
The Annual Meeting.............................. 5
The Reorganization.............................. 6
The 1998 Option Plan............................ 10
The HP Operating Company Directors Plan......... 10
The Supermajority Elimination Amendment......... 11
The Gaming Amendment............................ 11
Election of Directors........................... 11
Recommendation of the Board of Directors........ 12
Summary Pro Forma Financial Data................ 13
RISK FACTORS...................................... 15
Absence of Rulings from the Internal Revenue
Service ....................................... 15
Potential Consequences of Proposed Legislation.. 17
Uncertain Amount of Corporate and
Stockholder Tax Liability...................... 17
Consequences of Failure to Qualify as a REIT.... 19
Dependence on Future Borrowings................. 20
Consequences of REIT Dividend Requirement....... 21
Constraints on Equity Financing................. 21
Constraints on Future Transactions.............. 22
Uncertain Level of Dividends.................... 22
Effect of Reorganization on Stockholder Rights.. 22
Factors Influencing Stock Market Price of
the Paired Shares.............................. 23
Separate and Increased Expenses................. 23
THE REORGANIZATION AMENDMENTS..................... 24
Background...................................... 24
The Proposed Reorganization Amendments.......... 24
Required Vote; Recommendation of the
Board of Directors............................. 25
THE REORGANIZATION................................ 26
Purpose of the Reorganization................... 26
Effect of the Reorganization.................... 28
Business Strategies of the Reorganized
Companies...................................... 29
Transactions in Connection with the
Reorganization................................. 30
Dividend Policy................................. 33
Directors, Officers and Employees of HP
Operating Company and HP Realty................ 33
Conditions to the Reorganization................ 33
Regulatory Approvals and Third-Party Consents... 35
Relationship Between the Companies After the
Reorganization................................. 35
Effect of the Reorganization on Rights of
Stockholders................................... 36
Trading......................................... 36
Employee Benefits and Compensation Matters...... 37
Allocation of Indebtedness...................... 37
Interest of Certain Persons in the
Reorganization................................. 38
Stock Certificates; Method of Exchange.......... 38
BUSINESS OF HP OPERATING COMPANY AFTER THE
REORGANIZATION................................... 40
General......................................... 40
Business Strategy............................... 40
Gaming Operations............................... 40
Racing Operations............................... 41
Regulation and Licensing........................ 42
BUSINESS OF HP REALTY AFTER THE REORGANIZATION.... 43
General......................................... 43
Business Strategy............................... 43
</TABLE>
2
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FEDERAL INCOME TAX MATTERS................................................. 44
Federal Income Tax Consequences of Contributions and Spin-Offs........... 44
Federal Income Taxation of HP Realty and Requirements for Qualification
as REIT................................................................. 50
Federal Income Taxation of HP Operating Company.......................... 59
Constraints on Future Transactions....................................... 60
Federal Income Taxation of Holders of Paired Shares...................... 60
Information Reporting Requirements and Backup Withholding................ 61
UNAUDITED PRO FORMA COMBINED CONSOLIDATED CONDENSED FINANCIAL STATEMENTS... 62
SELECTED HISTORICAL AND PRO FORMA FINANCIAL DATA........................... 79
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS................................................. 85
Overview................................................................. 85
Historical Results of Operations......................................... 87
Post-REIT Pro Forma Results of Operations................................ 96
Liquidity and Capital Resources.......................................... 98
DESCRIPTION OF CAPITAL STOCK OF THE COMPANIES.............................. 104
Common Stock............................................................. 104
Preferred Stock.......................................................... 104
Excess Stock............................................................. 105
Unpaired Common Stock.................................................... 105
The Pairing Agreement.................................................... 106
Certain Provisions of the Charters and By-Laws........................... 106
THE HOLLYWOOD PARK OPERATING COMPANY 1998 STOCK OPTION PLAN................ 110
Background............................................................... 110
Proposal................................................................. 110
Required Vote; Recommendation of the Board of Directors.................. 111
Summary of the 1998 Option Plan.......................................... 111
Federal Income Tax Matters............................................... 114
THE HOLLYWOOD PARK OPERATING COMPANY DIRECTORS PLAN........................ 117
Background............................................................... 117
Proposal................................................................. 117
Required Vote; Recommendation of the Board of Directors.................. 117
Summary of the HP Operating Company Directors Plan....................... 118
Federal Income Tax Matters............................................... 120
THE SUPERMAJORITY ELIMINATION AMENDMENT.................................... 121
Background............................................................... 121
Description of the Proposed Supermajority Elimination Amendment.......... 121
Required Vote; Recommendation of the Board of Directors.................. 122
THE GAMING AMENDMENT....................................................... 123
Background............................................................... 123
Description of the Proposed Gaming Amendment............................. 123
Required Vote; Recommendation of the Board of Directors.................. 124
ELECTION OF DIRECTORS...................................................... 125
General.................................................................. 125
Information Regarding the Directors of Hollywood Park.................... 125
Board Committees and Director Compensation............................... 126
Directors Deferred Compensation Plan..................................... 128
Compensation Committee Interlocks and Insider Participation.............. 129
Executive Officers....................................................... 130
</TABLE>
3
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<TABLE>
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<S> <C>
Executive Compensation................................................. 131
Compensation Committee Report on Executive Compensation................ 133
Performance Graph...................................................... 135
Certain Relationships and Related Transactions......................... 136
Section 16(a) Beneficial Ownership Reporting Compliance................ 137
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT........... 138
ADDITIONAL INFORMATION REGARDING THE ANNUAL MEETING...................... 140
General................................................................ 140
Record Date and Outstanding Shares..................................... 140
Voting of Proxies...................................................... 140
Abstentions; Broker Non-Votes.......................................... 140
Solicitation of Proxies and Expenses................................... 141
No Dissenters' Rights.................................................. 141
STOCKHOLDER PROPOSALS FOR THE NEXT ANNUAL MEETING........................ 141
INDEPENDENT PUBLIC ACCOUNTANTS........................................... 142
ADJOURNMENT OF MEETING................................................... 142
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE.......................... 142
AVAILABLE INFORMATION.................................................... 143
INDEX TO FINANCIAL STATEMENTS............................................ S-1
HOLLYWOOD PARK CONSOLIDATED FINANCIAL STATEMENTS......................... S-2
BOOMTOWN CONSOLIDATED FINANCIAL STATEMENTS............................... S-42
APPENDIX A--RESTATED CERTIFICATE OF INCORPORATION OF HP REALTY........... A-1
APPENDIX B--RESTATED CERTIFICATE OF INCORPORATION OF
HP OPERATING COMPANY.................................................... B-1
APPENDIX C--SECTIONS 7.2 AND 7.6 OF AMENDED BY-LAWS OF HP REALTY......... C-1
APPENDIX D--SECTIONS 7.2 AND 7.6 OF AMENDED BY-LAWS OF
HP OPERATING COMPANY.................................................... D-1
APPENDIX E--HOLLYWOOD PARK OPERATING COMPANY 1998 STOCK OPTION PLAN...... E-1
APPENDIX F--HOLLYWOOD PARK OPERATING COMPANY 1998 DIRECTORS DEFERRED
COMPENSATION PLAN....................................................... F-1
</TABLE>
4
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SUMMARY
The following is a brief summary of certain information contained elsewhere
in this Proxy Statement. The summary does not contain a complete description of
the Reorganization, the Reorganization Amendments, the 1998 Option Plan, the HP
Operating Company Directors Plan, the Supermajority Elimination Amendment or
the Gaming Amendment. The summary is qualified in its entirety by reference to
the full text of this Proxy Statement, the attached Appendices (which are
hereby incorporated herein by reference) and the other documents incorporated
by reference herein. Hollywood Park stockholders are urged to read carefully
this Proxy Statement and the attached Appendices in their entirety. Reference
to "Hollywood Park" or the "Company" generally refer to Hollywood Park, Inc.
and all of its subsidiaries (including Hollywood Park Operating Company) taken
as a whole before the Reorganization. References to "HP Realty" and "HP
Operating Company" generally refer to Hollywood Park Realty Enterprises, Inc.
and its subsidiaries taken as a whole, and Hollywood Park Operating Company and
its subsidiaries taken as a whole, respectively, after the Reorganization.
The proposed Reorganization structure discussed in this Proxy Statement
contemplates, among other things, that HP Realty will retain the real estate
assets of the Company's Turf Paradise, Inc. subsidiary and will lease the Turf
Paradise Race Track to HP Operating Company, which will operate the track. See
"The Reorganization--Effect of the Reorganization" and "--Transactions in
Connection with the Reorganization." Based on the facts and circumstances
existing immediately prior to the completion of the Reorganization
transactions, Hollywood Park may also decide to transfer the Turf Paradise real
estate to HP Operating Company in the Reorganization. In that event, the
discussion of the Reorganization and the respective businesses of HP Realty and
HP Operating Company contained in this Proxy Statement shall be deemed to be
modified accordingly. See "Federal Income Tax Matters."
THE ANNUAL MEETING
Date, Time and Place. The Annual Meeting will be held on Monday, April 13,
1998 at 9:00 a.m., local time, at the New York Palace, 455 Madison Avenue, New
York, New York.
Purposes of the Annual Meeting. At the Annual Meeting, stockholders of record
of Hollywood Park as of the close of business on the Record Date (as defined
below) will be asked (1) to consider and vote upon the Reorganization
Amendments, (2) to consider and vote upon the 1998 Option Plan, (3) to consider
and vote upon the HP Operating Company Directors Plan, (4) to consider and vote
upon the Supermajority Elimination Amendment, (5) to consider and vote upon the
Gaming Amendment, and (6) to elect eleven directors to serve on the Hollywood
Park Board of Directors (the "Board") for the coming year.
Record Date, Outstanding Shares and Quorum. Holders of record of Hollywood
Park Common Stock at the close of business on February 18, 1998 (the "Record
Date") are entitled to notice of and to vote at the Annual Meeting. At the
close of business on February 9, 1998, there were 26,284,138 shares of
Hollywood Park Common Stock outstanding, each of which will be entitled to one
vote on each matter to be acted upon. The required quorum for the transaction
of business at the Annual Meeting is a majority of the shares of Hollywood Park
Common Stock issued and outstanding on the Record Date.
Votes Required. The Reorganization Amendments and the Gaming Amendment must
be approved by a majority of the outstanding shares of Hollywood Park Common
Stock. The 1998 Option Plan and the HP Operating Company Directors Plan must be
approved by a majority of the shares represented in person or by proxy and
entitled to vote at the Annual Meeting. The Supermajority Elimination Amendment
must be approved by at least 70% of the outstanding shares of Hollywood Park
Common Stock. The affirmative vote of a plurality of shares of Hollywood Park
Common Stock represented at the Annual Meeting in person or by proxy and voting
is required to elect any nominee for director. For purposes of determining
whether the Reorganization
5
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Amendments, the Supermajority Elimination Amendment and the Gaming Amendment
have been approved, abstentions and broker non-votes will be treated as votes
against the proposal. For purposes of determining whether the 1998 Option Plan
and the HP Operating Company Directors Plan have been approved, abstentions
will be treated as votes against the proposal and broker non-votes will not be
counted as represented or voting at the meeting. With respect to the election
of directors, abstentions and broker non-votes will have no effect on the
outcome of the vote.
As of January 31, 1998, the directors, executive officers and other
affiliates of Hollywood Park owned an aggregate of 3,651,091 shares of
Hollywood Park Common Stock (approximately 13.9% of the shares entitled to vote
at the Annual Meeting). R.D. Hubbard, Chairman of the Board of Directors and
Chief Executive Officer of Hollywood Park, and Harry Ornest, a director of
Hollywood Park, have indicated that they intend to vote in favor of the
Reorganization Amendments, and the other proposals and the director nominees
described in this Proxy Statement. Although Hollywood Park's other directors
and executive officers have not indicated their voting intentions, Hollywood
Park believes that each of them will also vote in favor of such proposals and
director nominees.
THE REORGANIZATION
General
The Reorganization provides for the reinstatement of Hollywood Park's paired-
share structure, which was previously in effect from 1982 through 1991. In the
Reorganization, Hollywood Park would be divided into a REIT and an operating
company, whose stock would be "paired" to trade publicly as units consisting of
one share of the REIT's stock and one share of the operating company's stock.
The Reorganization will be effected through a series of transactions, including
a reclassification of Hollywood Park's outstanding stock and a distribution to
Hollywood Park's stockholders of all of the outstanding stock of Hollywood Park
Operating Company ("HP Operating Company"). See "The Reorganization--
Transactions in Connection with the Reorganization."
After the Reorganization, HP Operating Company would conduct substantially
all of Hollywood Park's current and future operating businesses and Hollywood
Park (renamed Hollywood Park Realty Enterprises, Inc. ("HP Realty")) would
operate as a REIT which would initially derive most of its income from leasing
its real estate assets to HP Operating Company. The pairing of the stock of HP
Realty and HP Operating Company will commence upon completion of the
Reorganization, and will be facilitated by various provisions in the By-Laws of
the companies and by a Pairing Agreement between the companies. Upon completion
of the Reorganization, HP Realty will elect to be taxed as a REIT commencing
with the 1999 calendar year.
The Reorganization Amendments
At the Annual Meeting, the stockholders of Hollywood Park will be asked to
consider and vote upon the Reorganization Amendments, which are necessary to
effect the planned Reorganization. The Reorganization Amendments provide for:
. The change of Hollywood Park's name to Hollywood Park Realty Enterprises,
Inc.;
. The authorization of three new classes of stock that may be issued by the
REIT: (i) 100,000,000 shares of common stock, $.01 par value ("HP Realty
Common Stock"); (ii) 25,000,000 shares of excess common stock, $.01 par
value ("Excess Stock"); and (iii) 40,000,000 shares of preferred stock,
$.01 par value ("Preferred Stock");
. The conversion of each share of Hollywood Park Common Stock that is
outstanding before the Reorganization into one share of HP Realty Common
Stock; and
. The reduction in the number of authorized shares of Hollywood Park Common
Stock after the conversion from 40,000,000 to 1,000. Following the
Reorganization, the Pairing Agreement between HP Realty and HP Operating
Company will effectively prohibit the issuance of Hollywood Park Common
Stock.
6
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HP Realty Common Stock will be subject to certain restrictions on transfer
and ownership intended to protect HP Realty's qualification as a REIT. See "The
Reorganization--The Reorganization Amendments" and "Description of Capital
Stock of the Companies." The first two items listed above will be effected
through one Reorganization Amendment and the last two items listed above will
be effected through a separate Reorganization Amendment to be filed with the
Delaware Secretary of State after the first Reorganization Amendment is
effective.
Purpose of the Reorganization
The Board believes that the reinstatement of Hollywood Park's paired REIT-
operating company structure has several significant potential benefits for
Hollywood Park's stockholders. These potential benefits include the following:
Realize Value Inherent in the Paired Share Structure. The Board believes that
the paired REIT-operating company structure will provide HP Realty and HP
Operating Company with certain advantages, including (i) advantages not
generally available to other REITs and operating companies by enabling holders
of the paired shares of the HP Realty Common Stock and HP Operating Company
Common Stock (the "Paired Shares") to retain the economic benefit of ownership
of the real estate assets of HP Realty and the full operating profits earned by
HP Operating Company without having to lease real estate properties to third-
party operators, and (ii) potentially enhancing investor perception of the
combined value of Hollywood Park's businesses (gaming/sports/entertainment and
real estate) once reorganized into the paired-share structure, due in part to
the dividends HP Realty will be required to pay as a REIT and the separate
reporting of HP Realty's and HP Operating Company's financial results. In any
acquisitions made by the companies after the Reorganization, the companies may
structure such transactions so that the real estate assets of the acquired
businesses would be held by HP Realty and the operating businesses would be
conducted by HP Operating Company. After the Reorganization, HP Realty and HP
Operating Company will be one of only five publicly-traded paired REIT-
operating companies in existence. Under the Internal Revenue Code, no new
paired REIT-operating companies may be established.
Greater Financing Flexibility. Each of HP Realty and HP Operating Company
intends to expand its existing properties and businesses and to pursue
acquisitions consistent with its strategic plans, which will require each of
the companies to obtain additional debt and/or equity financing. The Board
believes that, by separating Hollywood Park's assets generally along functional
lines (gaming/sports/entertainment and real estate) and by allowing separate
financial reporting with respect to each of gaming/sports/entertainment and
real estate, the Reorganization may provide HP Realty and HP Operating Company
with greater flexibility in structuring their credit facilities with lenders
and may enable each of them to borrow on better nonfinancial terms than would
be possible if HP Operating Company remained a subsidiary of Hollywood Park. In
particular, the Board believes that separating the gaming/sports/entertainment
business from the real estate business should enhance HP Realty's ability to
obtain project financing for potential real estate developments while
preserving HP Operating Company's ability to raise bank and bond financing to
support its operating businesses.
Increase Dividends Paid to Stockholders. Hollywood Park currently pays no
dividends on its common stock. After the Reorganization, HP Realty intends to
operate as a REIT. Generally, under the Internal Revenue Code of 1986, as
amended (the "Code"), HP Realty will be required to distribute as dividends to
its stockholders at least 95% of the taxable income (other than net capital
gains) that it earns from lease payments received from HP Operating Company on
the Hollywood Park Race Track, Hollywood Park-Casino and Turf Paradise Race
Track, as well as income earned from future real estate acquisition and
development activities, and the amounts distributed generally will not be
subject to federal income tax at the corporate level. Accordingly, the
Reorganization will result in HP Realty paying virtually all of its income in
the form of dividends to stockholders. Based on the proposed terms of the
leases for the Hollywood Park and Turf Paradise properties, on a pro forma
basis assuming the Reorganization became effective on January 1, 1996, HP
Realty would have been required to pay at least $7.5 million ($0.29 per Paired
Share) and $4.5 million ($0.17 per Paired Share) in dividends for the year
ended December 31, 1996 and the nine months ended September 30, 1997,
respectively.
7
<PAGE>
Hollywood Park has retained Morgan Stanley & Co. Incorporated to advise it in
connection with matters relating to the Reorganization, including assisting the
Board in evaluating a proposed business combination with or investment by a
potential strategic partner (a "Strategic Transaction"). Although management
intends to pursue vigorously, and consummate as expeditiously as possible, a
Strategic Transaction, there can be no assurance such a transaction will occur
either prior to or after completion of the Reorganization. To date, Hollywood
Park has received inquiries from certain entities concerning a Strategic
Transaction, and has held discussions with several of the interested parties.
However, no agreement or understanding has been reached, and no serious
discussions are currently in progress, relating to such a transaction. See "The
Reorganization--Purpose of the Reorganization," "--Dividend Policy" and
"Management's Discussion and Analysis of Financial Condition and Results of
Operations--Post-REIT Pro Forma Results of Operations."
Effect of the Reorganization
As a result of the Reorganization, it is expected that (i) HP Realty will own
the land and facilities at the 378-acre Hollywood Park property in Inglewood,
California (the location of the Hollywood Park Race Track and the Hollywood
Park-Casino) and the 275-acre Turf Paradise property in Phoenix, Arizona, and
(ii) HP Operating Company will own substantially all of Hollywood Park's other
assets and conduct substantially all of Hollywood Park's current and future
operating businesses. The Company's Boomtown subsidiaries, including all
associated real estate, would be transferred to HP Operating Company. See "The
Reorganization--Effect of the Reorganization." The Reorganization will be
effected through the series of transactions discussed under "The
Reorganization--Transactions in Connection with the Reorganization."
Diagrams illustrating the corporate structures of Hollywood Park before, and
HP Realty and HP Operating Company after, the Reorganization may be found at
pages 31 and 32 of this Proxy Statement.
Business Strategies of the Reorganized Companies
After the Reorganization, HP Realty intends to operate as a REIT, and
initially will derive most of its income from HP Operating Company in the form
of lease payments on the Hollywood Park Race Track, the Hollywood Park-Casino,
and the Turf Paradise Race Track properties. HP Realty will also pursue
additional development at its existing properties, acquisitions and development
of new properties, and the raising of additional debt and/or equity capital as
necessary to finance these activities. In addition, HP Realty and HP Operating
Company may make joint acquisitions, principally in the gaming industry, in
which the real estate assets of the acquired businesses would be held by HP
Realty and the remaining assets would be held, and the operating businesses
would be conducted, by HP Operating Company. See "The Reorganization--Effect of
the Reorganization" and "Business of HP Realty After the Reorganization."
After the Reorganization, HP Operating Company intends to grow its gaming,
sports and entertainment businesses by (i) expanding and increasing the
utilization of its Boomtown Reno and Boomtown New Orleans properties, possibly
its Boomtown Biloxi property, and its other existing properties and (ii) making
selected acquisitions, principally in the gaming industry to diversify its
operations and to achieve economies of scale. See "Business of HP Operating
Company After the Reorganization."
Dividend Policy
Hollywood Park currently pays no dividends on its common stock. Generally,
after the Reorganization HP Realty would be required as a REIT to distribute as
dividends to its stockholders a minimum of 95% of its taxable income (other
than net capital gains), and such amounts distributed generally would not be
subject to federal income tax at the corporate level. Accordingly, HP Realty
would distribute at least 95% of the taxable income that it earns from lease
payments received from HP Operating Company and from any future real estate
acquisition and development activities. However, there can be no assurance that
significant taxable income, if any, will be earned and be available for
distribution by HP Realty after the Reorganization.
8
<PAGE>
HP Operating Company is not expected to pay dividends in the foreseeable
future. See "The Reorganization--Dividend Policy," and "Risk Factors--Uncertain
Level of Dividends."
Conditions to the Reorganization
The Reorganization is subject to (i) approval of the Reorganization
Amendments by Hollywood Park stockholders; (ii) all necessary regulatory
approvals (including the gaming and racing authorities of Arizona, California,
Louisiana, Mississippi and Nevada, and other governmental or regulatory bodies)
and consents of third parties having been obtained; (iii) effectiveness of the
Reorganization Amendments under Delaware law; and (iv) there not being in
effect any statute, rule, regulation or order of any court, governmental or
regulatory body which prohibits or makes illegal the transactions contemplated
by the Reorganization. The terms of the Reorganization may be modified or
conditions thereto may be waived by the Board. In addition, the Board has
retained discretion, even if stockholder approval of the Reorganization
Amendments is obtained and the other conditions to the Reorganization are
satisfied, to abandon, defer or modify the Reorganization. See "The
Reorganization--Conditions to the Reorganization," "--Regulatory Approvals and
Third-Party Consents" and "Federal Income Tax Matters."
Effect of Reorganization on Rights of Stockholders
The Reorganization will change the rights of Hollywood Park's stockholders in
several significant respects. First, the Amended and Restated By-Laws of HP
Realty and HP Operating Company (respectively, the "HP Realty By-Laws" and "HP
Operating Company By-Laws") will impose restrictions on the transferability of
shares of HP Realty Common Stock and HP Operating Company Common Stock designed
to implement the pairing of such shares. Second, the Amended and Restated
Certificates of Incorporation of HP Realty and HP Operating Company
(respectively, the "HP Realty Charter" and "HP Operating Company Charter") will
impose on stockholders additional transfer restrictions designed to protect HP
Realty's qualification as a REIT, including restrictions generally prohibiting
any stockholder from owning more than 9.8% of the outstanding Paired Shares.
See "The Reorganization--Effect of Reorganization on Rights of Stockholders"
and "Description of Capital Stock of the Companies."
Trading
The Paired Shares to be issued in the Reorganization will be publicly traded
as units under the name "Hollywood Park Enterprises." Hollywood Park intends to
file an application for the listing of the units on the New York Stock Exchange
(the "NYSE") under Hollywood Park's current symbol "HPK." See "The
Reorganization--Trading."
Federal Income Tax Consequences
The federal income tax consequences of the Reorganization are complex and
involve numerous factors. In addition, the federal income tax consequences
associated with a paired-share REIT structure are also complex. The Company
strongly urges stockholders to carefully read, in their entirety, the summary
of the material federal income tax consequences relating to the Reorganization
and the paired-share REIT structure under the heading "Federal Income Tax
Matters" and the other tax information contained elsewhere in this Proxy
Statement. See "Risk Factors--Absence of Rulings from the Internal Revenue
Service," "--Uncertain Amount of Corporate and Stockholder Tax Liability" and
"--Consequences of Failure to Qualify as a REIT."
Hollywood Park will proceed with the Reorganization without obtaining advance
rulings from the Internal Revenue Service (the "IRS") as to the tax
consequences of the Reorganization. Therefore, in considering and voting upon
the Reorganization Amendments and any other matters that are necessary to
effect the Reorganization, the stockholders of Hollywood Park should assume
that the Reorganization transactions
9
<PAGE>
(including the TPI Restructuring and the HPOC Spin-Off, as defined herein)
generally will be taxable to Hollywood Park and its stockholders and will have
the anticipated federal income tax consequences described in this Proxy
Statement under "Federal Income Tax Matters--Federal Income Tax Consequences of
Contributions and Spin-Offs." Based on estimates prepared by the Company,
Hollywood Park's tax liability associated with the Reorganization could be
approximately $54 million and the taxable distribution to Hollywood Park's
stockholders associated with the Reorganization could be approximately $130
million (or $4.95 per share of Hollywood Park Common Stock).
Stock Certificates; Method of Exchange
Promptly after completion of the Reorganization, ChaseMellon Shareholder
Services, L.L.C., as Exchange Agent, will send to each Hollywood Park
stockholder of record a Letter of Transmittal to be used in surrendering
certificates which, prior to the Reorganization, represented shares of
Hollywood Park Common Stock in exchange for new certificates representing
Paired Shares. Each Hollywood Park stockholder should promptly complete and
sign the Letter of Transmittal and forward it together with the old
certificates to the Exchange Agent, who will thereafter deliver to the
stockholder a new "back-to-back" certificate representing Paired Shares.
HOLLYWOOD PARK STOCKHOLDERS SHOULD NOT SEND IN THEIR OLD STOCK CERTIFICATES
UNTIL THEY HAVE RECEIVED A LETTER OF TRANSMITTAL. See "The Reorganization--
Stock Certificates; Method of Exchange."
Risk Factors
Hollywood Park stockholders are urged to read the section of this Proxy
Statement relating to the various factors to be considered in connection with
the Reorganization. See "Risk Factors."
THE 1998 OPTION PLAN
Hollywood Park stockholders will be asked to approve the adoption of the HP
Operating Company 1998 Stock Option Plan, to be effective upon completion of
the Reorganization. This plan would provide for the grant of stock options to
officers, employees, directors, and other persons who provide services to HP
Operating Company (including employees of HP Realty who also provide services
to HP Operating Company) that are exercisable for Paired Shares. After the
Reorganization, no new options will be granted under Hollywood Park's existing
stock option plans and Hollywood Park's outstanding stock options will be
adjusted so that option holders receive Paired Shares upon exercise. Because
the 1998 Stock Option Plan is intended to provide for the continuation of an
existing benefit, the number of Paired Shares that will be issuable under the
1998 Stock Option Plan will equal the same number of shares that will be
available for issuance and not subject to outstanding options immediately prior
to completion of the Reorganization under Hollywood Park's existing stock
option plans. Therefore, adoption of the 1998 Stock Option Plan will not
increase the number of shares that may be subject to option grants. See "The
Hollywood Park Operating Company 1998 Stock Option Plan."
THE HP OPERATING COMPANY DIRECTORS PLAN
Hollywood Park stockholders will also be asked to approve the adoption of the
Hollywood Park Operating Company 1998 Directors Deferred Compensation Plan (the
"HP Operating Company Directors Plan"), to be effective upon completion of the
Reorganization. The HP Operating Company Directors Plan would permit directors
of HP Operating Company to elect to defer all or a portion of the compensation
they receive in their capacity as directors and to receive the deferred
compensation in cash or in Paired Shares of HP Realty Common Stock and HP
Operating Company Common Stock. The terms of the HP Operating Company Directors
Plan are substantially similar to the terms of the Hollywood Park Directors
Deferred Compensation Plan which is currently in effect. The HP Operating
Company Directors Plan is intended to provide to directors of HP Operating
Company after the Reorganization a benefit that directors of Hollywood Park are
currently receiving. If the Hollywood Park stockholders do not approve the
adoption of the HP Operating Company Directors Plan,
10
<PAGE>
and the Reorganization is completed, the HP Operating Company Directors Plan
will still go into effect, but will only permit directors to defer their
compensation in cash. See "The Hollywood Park Operating Company Directors
Plan."
THE SUPERMAJORITY ELIMINATION AMENDMENT
Hollywood Park stockholders will be asked to vote on a proposal to remove
Article XII from Hollywood Park's Certificate of Incorporation. Article XII
requires that a merger, consolidation, sale of substantially all of Hollywood
Park's assets or dissolution of Hollywood Park be approved by 70% of Hollywood
Park's outstanding stock. If the Supermajority Elimination Amendment is
approved, stockholder approval of the foregoing actions would be required only
to the extent required by Delaware law which, in the cases where a vote is
required at all, would generally be the approval of a majority of Hollywood
Park's outstanding stock entitled to vote. In the case of certain mergers and
certain transfers of substantially all of Hollywood Park's assets (not
otherwise constituting a sale, lease or exchange), in the absence of Article
XII Delaware law would not require any stockholder approval. This amendment
would enhance management's ability to pursue beneficial corporate combinations
and other transactions and would prevent a minority of the shares (i.e., 30%)
from blocking a corporate opportunity that the Board and holders of a majority
of the shares might consider desirable. See "The Supermajority Elimination
Amendment."
THE GAMING AMENDMENT
Hollywood Park stockholders will be asked to vote on a proposal to amend and
restate Article XIV of Hollywood Park's Certificate of Incorporation. Article
XIV currently grants Hollywood Park the power to redeem its stock and other
securities from a holder who, because the holder lacks prescribed
qualifications, would cause Hollywood Park or its subsidiaries to lose, or
prevent the reinstatement of, any government-issued franchise or license
necessary for the operation of Hollywood Park's California card club casinos.
The Gaming Amendment would amend Article XIV to: (i) require Hollywood Park and
all holders of its and its affiliated companies' securities to comply with the
gaming laws of all jurisdictions in which Hollywood Park and its affiliated
companies conduct gaming activities, and to provide that all securities of
Hollywood Park will be subject to the requirements of those gaming laws; (ii)
grant Hollywood Park the power to redeem its securities from persons who are
deemed unsuitable by any gaming authority or who could jeopardize any of
Hollywood Park's required gaming licenses; and (iii) prohibit the exercise of
any voting rights by, or the payment of dividends, interest or remuneration for
services to, unsuitable persons. The Gaming Amendment is being submitted for
stockholder approval at the Annual Meeting because, as a result of Hollywood
Park's 1997 acquisition of Boomtown, Inc., Hollywood Park now conducts gaming
activities in Nevada, Louisiana and Mississippi, in addition to California. The
Board of Directors believes that the Gaming Amendment is necessary to enable
Hollywood Park and its subsidiaries to obtain or maintain required gaming
licenses in all jurisdictions in which they currently conduct gaming activities
and in which they may conduct gaming activities in the future, and to ensure
compliance with the gaming laws of such jurisdictions by Hollywood Park, its
subsidiaries and its stockholders. See "The Gaming Amendment."
ELECTION OF DIRECTORS
The stockholders of Hollywood Park will be asked to elect eleven directors of
Hollywood Park to serve for the coming year on the Board. Hollywood Park has
nominated as candidates R.D. Hubbard, Harry Ornest, J.R. Johnson, Timothy J.
Parrott, Richard Goeglein, Peter L. Harris, Robert T. Manfuso, Lynn P.
Reitnouer, Herman Sarkowsky, Warren B. Williamson and Delbert W. Yocam. Each of
the nominees is a current director of Hollywood Park. If the Reorganization is
completed, each individual elected as a director of Hollywood Park at the
Annual Meeting will become a director of HP Operating Company or HP Realty. See
"The Reorganization--Directors, Officers and Employees of HP Operating Company
and HP Realty" and "Election of Directors."
11
<PAGE>
RECOMMENDATION OF THE BOARD OF DIRECTORS
The Board has approved the Reorganization and the Reorganization Amendments
and has determined that the Reorganization is in the best interests of
Hollywood Park and its stockholders and therefore unanimously recommends
approval of the Reorganization Amendments. See "The Reorganization--Purpose of
the Reorganization." In conjunction with the Annual Meeting, the Board also
recommends approval of the 1998 Option Plan, the HP Operating Company Directors
Plan, the Supermajority Elimination Amendment and the Gaming Amendment, and a
vote in favor of election of each of the director nominees set forth herein.
12
<PAGE>
SUMMARY PRO FORMA FINANCIAL DATA
The following tables summarize certain unaudited pro forma combined
consolidated condensed financial data for (i) Hollywood Park, Inc., prior to
giving effect to the Reorganization (the "Pre-REIT Summary Financial Data"),
and (ii) each of HP Realty and HP Operating Company after giving effect to the
Reorganization (the "Post-REIT Summary Financial Data"), in each case for the
year ended December 31, 1996 and the nine months ended September 30, 1997. The
Pre-REIT Summary Financial Data gives effect to Hollywood Park's acquisition of
Boomtown, Inc. ("Boomtown") as a purchase, the divestiture of Boomtown's Las
Vegas property, the issuance by Hollywood Park, Inc. and HP Operating Company
of $125 million aggregate principal amount of 9 1/2% Senior Subordinated Notes
due 2007 (the "Notes") and the application of the proceeds therefrom. The Pre-
REIT Summary Financial Data was prepared by combining the consolidated
statement of operations of Hollywood Park with the unaudited consolidated
statement of operations of Boomtown, for the year ended December 31, 1996
(though historically Boomtown reported results on a September 30 fiscal year
end), and by combining the unaudited statement of operations of Hollywood Park
for the nine months ended September 30, 1997, which includes the results of
operations of Boomtown from and after July 1, 1997, with Boomtown's unaudited
results of operations for the six months ended June 30, 1997. The Post-REIT
Summary Financial Data includes pro forma adjustments to give effect to the
Reorganization, and assumes that the real property assets of Turf Paradise,
Inc. will be retained by a subsidiary of HP Realty. The information set forth
below should be read in conjunction with the information set forth under
"Unaudited Pro Forma Combined Consolidated Condensed Financial Statements,"
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" and Hollywood Park's and Boomtown's consolidated financial
statements and the notes thereto included in this Proxy Statement. The
following information is qualified in its entirety by the information and
financial statements appearing elsewhere in this Proxy Statement. This pro
forma information is presented for illustrative purposes only and is not
necessarily indicative of the operating results or financial position that
would have occurred if the Boomtown acquisition, the issuance of the Notes, and
the Reorganization had been consummated in an earlier period, nor is it
necessarily indicative of future operating results or financial position.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, 1996
---------------------------------
PRE-REIT POST-REIT
HOLLYWOOD POST-REIT HP OPERATING
PARK, INC. HP REALTY COMPANY
---------- --------- ------------
(IN THOUSANDS, EXCEPT PER SHARE
DATA)
<S> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Revenues.................................... $336,583 $15,777 $335,429
Operating expenses.......................... 354,666 7,746 361,543
Operating income (loss)..................... (18,083) 8,031 (26,114)
Interest expense............................ 15,468 134 15,334
Income (loss) before extraordinary item..... (37,523) 7,897 (41,168)
Dividends on convertible preferred
stock(a)................................... 1,925 1,925 0
Income (loss) before extraordinary item
available to (attributable to) common
shareholders............................... (39,448) 5,972 (41,168)
Per common share:
Income (loss) before extraordinary item:
Primary................................... $ (1.65) $ 0.25 $ (1.72)
Fully diluted............................. $ (1.65) $ 0.25 $ (1.72)
OTHER DATA:
Funds from operations(b)................... -- $14,031 --
</TABLE>
13
<PAGE>
<TABLE>
<CAPTION>
NINE MONTHS ENDED SEPTEMBER 30,
1997
---------------------------------
PRE-REIT POST-REIT
HOLLYWOOD POST-REIT HP OPERATING
PARK, INC. HP REALTY COMPANY
---------- --------- ------------
(IN THOUSANDS, EXCEPT PER SHARE
DATA)
<S> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Revenues................................... $259,305 $10,750 $258,365
Operating expenses......................... 234,627 5,829 238,608
Operating income........................... 24,678 4,921 19,757
Interest expense........................... 11,051 155 10,896
Income before extraordinary item........... 7,715 4,766 4,856
Dividends on convertible preferred
stock(a).................................. 1,520 1,520 0
Income before extraordinary item available
to common shareholders.................... 6,195 3,246 4,856
Per common share:
Income before extraordinary items--
primary................................... $ 0.26 $ 0.13 $ 0.20
OTHER DATA:
Funds from operations(b)................... -- $ 9,394 --
BALANCE SHEET DATA:
Cash and cash equivalents.................. $ 22,007 $ 3,567 $ 18,440
Long term obligations...................... 132,163 0 132,163
Stockholders' equity....................... 219,475 56,091 119,902
</TABLE>
- --------
(a) On August 28, 1997, Hollywood Park redeemed the outstanding convertible
preferred stock for shares of Hollywood Park Common Stock, and cash
dividends on the convertible preferred stock ceased to accrue as of that
date.
(b) Funds from operations is defined as income before minority interest
(computed in accordance with generally accepted accounting principles)
excluding gains (losses) from debt restructuring and sale of property,
provision for losses, and real estate related depreciation and amortization
(excluding amortization of financing costs). Funds from operations does not
necessarily represent cash generated from operating activities in
accordance with generally accepted accounting principles and is not
necessarily indicative of cash available to fund cash needs. Funds from
operations should not be considered an alternative to net income as an
indication of HP Realty's financial performance or as an alternative to
cash flows from operating activities as a measure of liquidity.
<TABLE>
<CAPTION>
NINE MONTHS
YEAR ENDED ENDED
DECEMBER 31, SEPTEMBER 30,
1996 1997
------------ -------------
<S> <C> <C>
Calculation of funds from operations:
Income before minority interest.................. $ 7,897 $4,766
Excluding gains (losses) from debt
restructuring................................... 0 0
Excluding gains (losses) from sale of property... 0 0
Excluding provision for losses................... 0 0
Add back real estate related depreciation and
amortization.................................... 6,134 4,628
------- ------
$14,031 $9,394
======= ======
</TABLE>
14
<PAGE>
RISK FACTORS
THIS PROXY STATEMENT CONTAINS CERTAIN STATEMENTS WITH RESPECT TO, AMONG
OTHER THINGS, THE FINANCIAL CONDITION, RESULTS OF OPERATIONS, BUSINESS AND
PROSPECTS OF HOLLYWOOD PARK (AND OF HP REALTY AND HP OPERATING COMPANY
FOLLOWING THE REORGANIZATION) THAT ARE FORWARD-LOOKING STATEMENTS WITHIN THE
MEANING OF SECTION 27A OF THE SECURITIES ACT OF 1933, AS AMENDED (THE
"SECURITIES ACT"), AND SECTION 21E OF THE SECURITIES EXCHANGE ACT OF 1934, AS
AMENDED (THE "EXCHANGE ACT"), INCLUDING STATEMENTS RELATING TO EXPANSION
OPPORTUNITIES, PRO FORMA COMBINED COMPANY FINANCIAL RESULTS OF HOLLYWOOD PARK,
INC. AND BOOMTOWN, INC., THE POTENTIAL BENEFITS OF THE PROPOSED REORGANIZATION
(INCLUDING THE POSSIBLE ENHANCEMENT OF INVESTOR PERCEPTION OF THE COMBINED
COMPANIES' VALUE), THE DECLARATION AND PAYMENT OF DISTRIBUTIONS BY HP REALTY,
THE AVAILABILITY OF DEBT FINANCING ON FAVORABLE TERMS AND TRENDS AFFECTING
FINANCIAL CONDITION AND RESULTS OF OPERATIONS, AND SUCH STATEMENTS ARE
INTENDED TO BE COVERED BY THE SAFE HARBOR CREATED THEREBY (SEE "SUMMARY--THE
REORGANIZATION," "--SUMMARY PRO FORMA FINANCIAL DATA," "THE REORGANIZATION--
PURPOSE OF THE REORGANIZATION," "--EFFECT OF THE REORGANIZATION," "BUSINESS OF
HP OPERATING COMPANY AFTER THE REORGANIZATION," "BUSINESS OF HP REALTY AFTER
THE REORGANIZATION," "FEDERAL INCOME TAX MATTERS," "UNAUDITED PRO FORMA
COMBINED CONSOLIDATED CONDENSED FINANCIAL STATEMENTS," "SELECTED HISTORICAL
AND PRO FORMA FINANCIAL DATA" AND "MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS"). THESE FORWARD-LOOKING
STATEMENTS CONCERN MATTERS WHICH INVOLVE CERTAIN RISKS AND UNCERTAINTIES.
FACTORS THAT MAY CAUSE ACTUAL PERFORMANCE OF HOLLYWOOD PARK (AND OF HP REALTY
AND HP OPERATING COMPANY) TO DIFFER MATERIALLY FROM THOSE CONTEMPLATED BY SUCH
FORWARD-LOOKING STATEMENTS INCLUDE, AMONG OTHERS, FAILURE OF THE PROPOSED REIT
TO QUALIFY AS SUCH UNDER THE CODE, FAILURE OF EITHER HP REALTY OR HP OPERATING
COMPANY TO COMPLETE OR SUCCESSFULLY OPERATE PLANNED EXPANSION PROJECTS,
FAILURE OF EITHER HP REALTY OR HP OPERATING COMPANY TO OBTAIN SUFFICIENT DEBT
OR EQUITY FINANCING ON ADVANTAGEOUS TERMS TO MEET ITS STRATEGIC GOALS, FAILURE
OF HP REALTY OR HP OPERATING COMPANY TO OBTAIN OR RETAIN GAMING LICENSES OR
REGULATORY APPROVALS, GENERAL ECONOMIC AND STOCK MARKET CONDITIONS, AND THE
FACTORS SET FORTH UNDER THIS HEADING.
In deciding whether to vote to approve the Reorganization Amendments,
stockholders should carefully consider, among others, the following factors:
ABSENCE OF RULINGS FROM THE INTERNAL REVENUE SERVICE
No rulings have been or will be issued by the IRS on any tax issue connected
with the Reorganization or on any other tax matter discussed in this Proxy
Statement. In August 1997, Hollywood Park submitted a request for advance
rulings (the "Ruling Request") to the IRS on certain aspects of the
Reorganization, including certain tax issues connected with (i) the TPI
Restructuring and the HPOC Spin-Off (as defined under "The Reorganization--
Transactions in Connection with the Reorganization"), and (ii) the
qualification of HP Realty as a REIT. In January 1998, the IRS informally
advised Hollywood Park's tax counsel and accounting firm that the IRS had
tentatively concluded that it would not issue the requested rulings. As a
result, Hollywood Park withdrew the Ruling Request and will proceed with the
Reorganization as described in this Proxy Statement without any advance
rulings from the IRS. Holders should note that without advance rulings from
the IRS there can be no assurance that the IRS will take a view similar to
Hollywood Park's with respect to the tax consequences described in this Proxy
Statement.
The Contributions and Spin-Offs. Because the Reorganization will be
consummated without IRS rulings, the stockholders of Hollywood Park should
assume, in considering and voting upon the Reorganization Amendments and any
other matters that are necessary to effect the Reorganization, that the TPI
Restructuring and the HPOC Spin-Off will both constitute taxable transactions
which will result in tax liabilities for both Hollywood Park and its
stockholders as discussed under "Federal Income Tax Matters--Federal Income
Tax Consequences of Contributions and Spin-Offs." Because the taxable
distribution to stockholders would be in the form of HP Operating Company
Common Stock and not in the form of cash, stockholders will be required to
fund their resulting tax liability out of other assets, including, if
necessary, through the sale of Paired Shares. Based on estimates prepared by
the Company, the tax liability associated with the Reorganization could be
approximately $54 million for Hollywood Park and the taxable distribution to
Hollywood Park's stockholders associated with the Reorganization could be
approximately $130 million (or $4.95 per share of Hollywood Park
15
<PAGE>
Common Stock). See "Federal Income Tax Matters--Federal Income Tax
Consequences of Contributions and Spin-Offs--Tax Consequences of TPI
Restructuring and HPOC Spin-Off: Assumption that Transactions Will Be
Taxable." In addition, there can be no assurance the amount of Hollywood
Park's tax liability or the taxable distribution to stockholders will not be
significantly greater than the foregoing estimates. See "Risk Factors--
Uncertain Amount of Corporate and Stockholder Tax Liability."
Hollywood Park, based on a review of the applicable facts and circumstances
at the time of the HPOC Spin-Off, may report the TPI Restructuring and the
HPOC Spin-Off generally as tax-free transactions. See "Federal Income Tax
Matters--Federal Income Tax Consequences of Contributions and Spin-Offs--
Possibility that Transactions May Be Reported as Tax-Free." However, there can
be no assurance that, if Hollywood Park were to take such reporting positions,
the IRS would not challenge them or not prevail in such challenge. In the
event the IRS prevailed in such challenge, then in addition to the tax
liabilities previously referred to, Hollywood Park would become liable for
interest (based on the applicable rates provided by the IRS from time to time)
on the tax owed by it and could also become liable for a 20% penalty on its
underpayment of income tax. The stockholders of Hollywood Park would also
become liable for interest on the tax owed by them, and depending on their
individual circumstances, could also become subject to understatement
penalties.
Section 269B. Section 269B of the Code generally prevents the use of a
paired REIT-operating company structure. However, pursuant to the terms of the
grandfathering rule set forth in Section 136(c)(3) of P.L. 98-369 (the
"Grandfathering Rule"), Section 269B does not apply if the shares of the REIT
and the non-REIT were paired as of June 30, 1983 and the REIT was taxable as a
REIT as of June 30, 1983. The shares of HP Realty and HP Operating Company
were paired as of June 30, 1983 through the end of 1991, and HP Realty filed
its tax return as a REIT for the taxable period including June 30, 1983 and
all subsequent periods through the end of the 1991 taxable year. Although HP
Realty and HP Operating Company ceased operating as a paired-share REIT in
1992, the Grandfathering Rule does not, by its terms, require that the shares
of HP Realty and HP Operating Company have been paired at all times after June
30, 1983, or that HP Realty have been taxed as a REIT at all times after June
30, 1983.
A bill that is currently pending in Congress, H.R. 2676 (the "Technical
Corrections Bill"), contains a provision (the "Grandfathering Rule Amendment")
that would clarify that the Grandfathering Rule applies to entities that were
paired-share REITs as of June 30, 1983 whether or not they were paired
entities for all periods after June 30, 1983. The bill was passed by the U.S.
House of Representatives on November 5, 1997 and is currently pending in the
U.S. Senate. However, there can be no assurance that the Technical Corrections
Bill will be passed by Congress and signed into law by the President, or if it
is, that the Grandfathering Rule Amendment will survive in the final bill. In
the absence of enactment of the Grandfathering Rule Amendment, Hollywood Park
still intends to proceed with the Reorganization based on an opinion of
counsel substantially to the effect that the termination of the paired-share
status of Hollywood Park and HP Operating Company and of Hollywood Park's REIT
election for the taxable years ended December 31, 1992 through 1998 should not
result in Section 269B becoming applicable to HP Realty. The opinion
formulation using the term "should" means that if the IRS were to assert a
contrary view and if all the facts and issues were completely and competently
presented to a court, it is more likely than not that the view stated in such
opinion would prevail. See "Federal Income Tax Matters--Federal Income
Taxation of HP Realty and Requirements for Qualification as REIT--Requirements
for Qualification as REIT--Opinion of Irell & Manella." Irell & Manella LLP
("Irell & Manella"), Hollywood Park's tax counsel, has indicated that it would
be willing to render such an opinion, unless there is a change in federal tax
law adversely impacting the availability of the Grandfathering Rule. See "--
Potential Consequences of Proposed Legislation." There are, however, no
judicial or administrative authorities interpreting the Grandfathering Rule,
and Irell & Manella's opinion would be based solely on the literal language of
the Grandfathering Rule and certain factual representations made by Hollywood
Park, including that Hollywood Park and HP Operating Company were stapled
entities as of June 30, 1983, and that as of such date, Hollywood Park was a
REIT. Therefore, in the absence of enactment of the Grandfathering Rule
Amendment and notwithstanding the issuance of such opinion of counsel, there
can be no assurance that the IRS would not take a contrary position as to the
availability of the Grandfathering Rule and the applicability of Section 269B
or that the IRS would not prevail in its position. Indeed, during the Ruling
Request process, when
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the IRS was presented with the same applicable facts and circumstances as
would be addressed in such opinion of counsel, the IRS informally advised
Hollywood Park's tax counsel and accounting firm that the IRS disagreed with
Hollywood Park's position on this matter.
If the IRS finds, after the Reorganization is completed, that HP Realty is
subject to Section 269B and the IRS prevails in its position, the paired-share
REIT structure would not be respected for federal income tax purposes and HP
Realty would not qualify as a REIT. In that event, HP Realty would be required
to pay corporate income taxes and would not be able to deduct from its taxable
income the amount of any dividends paid to its stockholders. It is possible
that, because of prior dividend distributions, HP Realty would not have the
funds to pay this tax liability, and HP Realty's corporate tax liability would
reduce the funds available for distribution as dividends to HP Realty's
stockholders. Accordingly, a finding by the IRS that HP Realty is subject to
Section 269B of the Code would have a material adverse effect on the business,
results of operations and financial condition of HP Realty, and would
significantly reduce the return on investment earned by holders of the Paired
Shares. See "--Consequences of Failure to Qualify as a REIT" and "Federal
Income Tax Matters--Federal Income Taxation of HP Realty and Requirements for
Qualification as REIT--Failure to Qualify."
POTENTIAL CONSEQUENCES OF PROPOSED LEGISLATION
There can be no assurance that the federal government will not enact
legislation in the future that limits or eliminates the ability of paired-
share REITs, including HP Realty and HP Operating Company, to avail themselves
of the Grandfathering Rule. In early February 1998, the Clinton administration
proposed legislation that would limit the tax-favored status enjoyed by
paired-share REITs. According to the Treasury Department's General
Explanations of the Administration's Revenue Proposals, under the proposed
legislation, for purposes of determining whether any grandfathered entity is a
REIT, the paired entities would be treated as one entity with respect to
properties acquired on or after the date of first Congressional committee
action regarding the proposed legislation and with respect to activities or
services relating to such properties (i.e., properties acquired on or after
the effective date) that are undertaken or performed by one of the paired
entities on or after such date. If the proposed legislation is enacted before
the Reorganization has been consummated, or in Hollywood Park's judgment is
likely to be enacted, Hollywood Park may abandon the Reorganization. If the
proposed legislation is enacted after the Reorganization has been consummated,
the legislation would substantially impair the ability of HP Realty and HP
Operating Company to avail themselves of the benefits of a paired-share REIT
structure. Hollywood Park believes that, at the present time, it cannot be
predicted whether such proposal will be enacted or, if enacted, in what form.
The proposed legislation could also deter third parties from pursuing
Strategic Transactions with Hollywood Park and thereby reduce the potential
benefits of the Reorganization. The staff of the Congressional Joint Committee
on Taxation also has indicated that it plans to look at the issue of paired-
share REITs at some point in the future. See "Federal Income Tax Matters--
Federal Income Taxation of HP Realty and Requirements for Qualification as
REIT--Paired Shares."
There also can be no assurance legislation will not be enacted that
adversely affects REITs in general. The Clinton administration has proposed
legislation that would eliminate the ability of REITs to defer, under IRS
Notice 88-19, taxable gain on appreciated assets at the time REIT status is
elected or a REIT makes an acquisition of assets of a regular corporation
subject to full corporate-level tax. Based on the Treasury Department's
explanations of this proposal, it is expected that the proposed legislation
would be effective for REIT elections that are first effective for a taxable
year beginning after January 1, 1999 and would also apply to acquisitions
after December 31, 1998. See "Federal Income Tax Matters--Federal Income
Taxation of HP Realty and Requirements for Qualification as REIT--General." If
the proposed legislation is enacted, it could substantially reduce the
benefits of the Reorganization because the cost of making certain acquisitions
would be increased on account of the inability to defer tax on appreciated
acquired assets. Hollywood Park believes that, at the present time, it cannot
be predicted whether such proposal will be enacted or, if enacted, in what
form.
UNCERTAIN AMOUNT OF CORPORATE AND STOCKHOLDER TAX LIABILITY
In considering and voting upon the Reorganization Amendments and any other
matters that are necessary to effect the planned Reorganization, the
stockholders of Hollywood Park should assume that the TPI Restructuring
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and the HPOC Spin-Off will both constitute taxable transactions. See "--
Absence of Rulings from the Internal Revenue Service." If the TPI
Restructuring is a taxable transaction, it would result in the recognition of
gain by the Company equal to either (i) the excess, if any, of the fair market
value of the assets contributed by Turf Paradise to Turf Paradise Operating
Company over Turf Paradise's tax basis in such assets, or (ii) the excess of
the fair market value of the assets retained by Turf Paradise over Turf
Paradise's tax basis in such assets. If the HPOC Spin-Off is a taxable
transaction, then (i) Hollywood Park would be required to recognize gain on
the HPOC Spin-Off to the extent that the fair market value of the shares of HP
Operating Company Common Stock distributed in the HPOC Spin-Off exceeded
Hollywood Park's tax basis in such shares; and (ii) each holder of Hollywood
Park Common Stock who receives shares of HP Operating Company Common Stock in
the HPOC Spin-Off would be treated as receiving a taxable distribution in an
amount equal to the fair market value of the shares of HP Operating Company
Common Stock distributed to such holder as part of the HPOC Spin-Off, taxed
first as a dividend to the extent of such holder's pro rata share of Hollywood
Park's current and accumulated earnings and profits and then as a nontaxable
return of capital to the extent of such holder's adjusted tax basis in the
Hollywood Park Common Stock, with any remaining amount being taxed as capital
gain (assuming such stock is held as a capital asset). Depending on the fair
market value of the shares of HP Operating Company Common Stock on the date of
the HPOC Spin-Off, the HPOC Spin-Off could result in significant tax
liabilities to stockholders without the companies having distributed to
stockholders any cash out of which to satisfy such liabilities.
Based on Hollywood Park's tax basis in its HP Operating Company shares, its
earnings and profits as of December 31, 1997 (which amounts may increase or
decrease prior to completion of the Reorganization on account of 1998 events),
and Hollywood Park's estimate that the aggregate fair market value of the
shares of HP Operating Company to be distributed in the HPOC Spin-Off would be
approximately $130 million (approximately six times estimated 1997 earnings
before interest, taxes, depreciation and amortization ("EBITDA"), less the
amount of certain liabilities), (i) the combined state and federal tax
liability to Hollywood Park would be approximately $29 million and (ii)
Hollywood Park stockholders would be treated as receiving a taxable dividend
of approximately $71 million (or $2.70 per share of Hollywood Park Common
Stock, based on the current number of outstanding shares). In addition,
stockholders who have a tax basis in shares of Hollywood Park Common Stock of
less than $2.25 per share would realize taxable capital gain equal to the
amount by which $2.25 exceeds such stockholders' tax basis in such a share of
Hollywood Park Common Stock (assuming such stock is held as a capital asset).
However, there can be no assurance that the fair market value of the HP
Operating Company shares would not be found to be significantly greater than
$130 million, resulting in increased tax liabilities for Hollywood Park and
its stockholders. Among other things, if it were determined that some portion
of the value attributable to HP Realty's exemption from Section 269B of the
Code, providing it with special rights to reinstate a paired REIT-operating
company structure, should be allocated to HP Operating Company, then the fair
market value of the HP Operating Company shares might be increased to reflect
such value. Hollywood Park has retained Morgan Stanley & Co. Incorporated to
advise it in connection with matters relating to the restoration of the
paired-share structure, including evaluation of a proposed business
combination with or investment by a potential strategic partner (a "Strategic
Transaction"). A Strategic Transaction could provide evidence of the value of
the paired share structure. See "Federal Income Tax Matters--Federal Income
Tax Consequences of Contributions and Spin-Offs--Tax Consequences of TPI
Restructuring and HPOC Spin-Off: Assumption that Transactions Will Be
Taxable." If the IRS were to assert that the valuation of the HP Operating
Company shares, as reported for tax purposes by Hollywood Park, was too low
and should therefore be increased for purposes of determining the foregoing
tax liabilities, and if the IRS were to prevail in its position, then
Hollywood Park would also become liable for interest (based on the applicable
rates provided by the IRS from time to time) on the additional tax owed by it
and could also become liable for a 20% penalty on its underpayment of income
tax, and the stockholders of Hollywood Park would also become liable for
interest on the additional tax owed by them and, depending on their individual
circumstances, could also become subject to understatement penalties.
Based on Turf Paradise's tax basis in its operating and real estate assets,
and the fair market value of such assets, as of December 31, 1997 (which
amounts may increase or decrease prior to completion of the Reorganization on
account of 1998 events), Hollywood Park estimates that the additional combined
state and federal tax liability to Hollywood Park from the TPI Restructuring
could be as much as $9 million, although
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there can be no assurance that such tax liability will not be significantly
higher. See "Federal Income Tax Matters--Federal Income Tax Consequences of
Contributions and Spin-Offs."
Whether or not the HPOC Spin-Off constitutes a taxable transaction, (i)
Hollywood Park will also be required to recognize income in the amount of any
excess loss accounts with respect to the stock of certain of its subsidiaries,
and (ii) Hollywood Park may be required to recognize gain as a result of the
transfer of certain real estate assets from HP Operating Company to Hollywood
Park. Hollywood Park estimates that the combined state and federal tax
liability associated with these income items could equal approximately $8
million for the excess loss accounts and approximately $8 million for the
transfer of the real estate assets, based on the estimated values of the
excess loss accounts and the fair market value of HP Operating Company's real
estate as of December 31, 1997 (which values could increase prior to
completion of the Reorganization due to 1998 events). However, there can be no
assurance that such tax liability will not be significantly higher. See
"Federal Income Tax Matters--Federal Income Tax Consequences of Contributions
and Spin-Offs."
CONSEQUENCES OF FAILURE TO QUALIFY AS A REIT
Subject to the limitations and qualifications referred to in this Proxy
Statement, Hollywood Park intends that, following implementation of the
Reorganization, HP Realty will be organized and operate in a manner so as to
satisfy the requirements for qualification and taxation as a REIT and HP
Realty's proposed method of operation will enable it to continue to meet the
requirements for qualification and taxation as a REIT. However, such
qualification and taxation as a REIT depends, as described in this Proxy
Statement, upon HP Realty's status under a federal tax law grandfathering
rule, upon the treatment of HP Realty's continuing relationships with HP
Operating Company, and upon HP Realty's ability to meet, through annual
operating results, certain requirements relating to its sources of income,
nature of assets, distributions to stockholders, diversity of stock ownership,
and various other tests imposed under the REIT provisions of the Code. See
"Federal Income Tax Matters--Federal Income Taxation of HP Realty and
Requirements for Qualification as REIT."
Paired Shares and the Grandfathering Rule. If the paired-share REIT
structure is not respected for federal income tax purposes, then HP Realty
would be unable to qualify as a REIT. There are several uncertainties as to
whether such a structure will be respected for federal income tax purposes,
including the following:
(i) Section 269B of the Code generally prevents the use of a paired REIT-
operating company structure. Hollywood Park will complete the
Reorganization in reliance on either the Grandfathering Rule Amendment, if
enacted, or based on an opinion of counsel substantially to the effect that
the termination of the paired-share status of Hollywood Park and HP
Operating Company and of Hollywood Park's REIT election for the taxable
years ended December 31, 1992 through 1998 should not result in Section
269B becoming applicable to HP Realty. There can be no assurance that the
Grandfathering Rule Amendment will be enacted. If Hollywood Park completes
the Reorganization based on an opinion of counsel, there can be no
assurance that the IRS would not take a contrary position as to the
applicability of Section 269B or that the IRS would not prevail in its
position. Indeed, during the Ruling Request process, the IRS informally
advised Hollywood Park's tax counsel and accounting firm that the IRS
disagreed with Hollywood Park's position on this matter. See "--Absence of
Rulings from the Internal Revenue Service." In addition, the federal
government may enact legislation in the future that limits or eliminates
the ability of paired-share REITs to avail themselves of the Grandfathering
Rule. In early February 1998, the Clinton administration proposed such
legislation. See "--Potential Consequences of Proposed Legislation."
(ii) The IRS has announced that it will not issue a ruling on whether a
corporation whose stock is "paired" with or "stapled" to stock of another
corporation will qualify as a REIT, if the activities of the corporations
are integrated. This issue has never been resolved by the courts and, thus,
there can be no assurance that the IRS would not challenge HP Realty's
qualification as a REIT on this basis, or that, if the IRS did so, it would
not prevail.
Gross Income Tests. In order to maintain qualification as a REIT, HP Realty
must annually satisfy certain gross income requirements under the REIT
provisions of the Code (the "Gross Income Tests"). There are
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several uncertainties as to whether the income HP Realty will derive from its
leases with HP Operating Company and Turf Paradise Operating Company will
qualify as "rents from real property" for purposes of the Gross Income Tests,
including whether such leases are true leases and not joint ventures or other
arrangements, the practical difficulties of monitoring the 10% stock ownership
limitations on a continuous basis, and whether the percentage rent under such
leases satisfies all the necessary conditions to qualify as "rents from real
property."
Prior to completion of the Reorganization, Irell & Manella will render an
opinion substantially to the effect that the leases should be treated as true
leases for federal income tax purposes. However, because there are no
authorities involving leases between paired companies, Irell & Manella's
opinion will be based upon an analysis of the facts and circumstances (and in
that regard, Irell & Manella will rely on factual representations made by
Hollywood Park) and upon rulings and judicial decisions involving analogous
situations. There can be no assurance that the leases will not be
recharacterized by the IRS as joint ventures or other arrangements rather than
as true leases. See "Federal Income Tax Matters--Federal Income Taxation of HP
Realty and Requirements for Qualification as REIT--Gross Income Tests."
In addition, although the income derived by HP Realty from the operation of
the Hollywood Park Golf and Sports Center and the Turf Paradise Travel Trailer
Park may not be considered to be qualifying income, Hollywood Park expects
that other qualifying income will be large enough in amount for HP Realty to
satisfy the Gross Income Tests. However, if Hollywood Park's expectation is
not met and HP Realty failed the Gross Income Tests, HP Realty would be unable
to satisfy the requirements to be taxed as a REIT (unless it were entitled to
relief under certain narrow provisions of the Code).
Consequences of Failure to Qualify
Tax Liability. If HP Realty fails for any reason to qualify for taxation as
a REIT in any taxable year and no relief provisions apply, then HP Realty will
be subject to tax (including any applicable alternative minimum tax) on its
taxable income at regular corporate rates. In addition, distributions to
stockholders in any year in which HP Realty fails to qualify will not be
deductible by HP Realty nor will they be required to be made. HP Realty's
failure to qualify as a REIT could result in significant tax liabilities to HP
Realty at a time when, due to prior distributions to stockholders, it may not
have sufficient cash or other liquid assets to pay the tax. To obtain the
funds necessary to pay such tax liabilities, HP Realty may be required to
arrange for short-term or possible long-term borrowings or to sell some of its
assets. There can be no assurance that such borrowings or asset sales would be
in the best interests of, or could be effected on terms favorable to, HP
Realty and its stockholders. As a result, the corporate tax liabilities
arising from such failure to qualify could have a material adverse effect on
the business, results of operations and financial condition of HP Realty.
Reduced Dividends. As stated above, if HP Realty failed to qualify as a
REIT, it will be required to pay corporate income taxes and would not be able
to deduct from its taxable income the amount of any dividends paid to its
stockholders. Accordingly, HP Realty's failure to qualify as a REIT would
significantly reduce the cash available for distribution by HP Realty to its
stockholders. Under such circumstances, the dividend income (and total return
on investment) earned by holders of the Paired Shares would be significantly
reduced. See "Federal Income Tax Matters--Federal Income Taxation of HP Realty
and Requirements for Qualification as REIT."
DEPENDENCE ON FUTURE BORROWINGS
The Board believes that, by separating Hollywood Park's assets along
functional lines (gaming/sports/entertainment and real estate) and by allowing
separate financial reporting with respect to each of
gaming/sports/entertainment and real estate, the Reorganization may provide HP
Realty and HP Operating Company with greater flexibility in structuring their
credit facilities with lenders and may enable each of them to borrow on better
nonfinancial terms than would be possible if HP Operating Company remained a
subsidiary of Hollywood Park. See "The Reorganization--Purpose of the
Reorganization." In order for HP Realty and HP Operating Company to realize
this benefit, they will have to negotiate and obtain financing arrangements on
more favorable terms than those under Hollywood Park's current $100 million
bank credit facility, either from the
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current lenders under that credit facility or from an alternative group of
lenders. There can be no assurance, however, that either HP Realty or HP
Operating Company will be successful in doing so, or that lenders will not
impose less favorable lending terms. Because HP Operating Company will be
required to make substantial lease payments to HP Realty and HP Realty will be
required, in order to maintain its qualifications as a REIT, to distribute
most of its income to its stockholders on an annual basis, lenders might be
reluctant to extend financing on improved or comparable terms. See "The
Reorganization--Relationship Between the Companies After the Reorganization"
and "Federal Income Tax Matters." In addition, each of HP Operating Company's
and HP Realty's access to third-party financing will depend upon a number of
factors beyond their control, including competitive forces in the banking
industry and the general availability of credit in the U.S. market. A failure
by HP Realty and/or HP Operating Company to obtain third-party financing on
improved terms would prevent Hollywood Park stockholders from realizing one of
the anticipated benefits of the Reorganization and could have a material
adverse effect on the business, results of operations and financial condition
of HP Realty and HP Operating Company. In addition, following the
Reorganization, holders of $125 million aggregate principal amount of Series A
and Series B 9 1/2% Senior Subordinated Notes due 2007 issued by Hollywood
Park and HP Operating Company (the "Notes") will have the right to cause
Hollywood Park and HP Operating Company to repurchase the Notes at 101% (or
102% in certain circumstances) of the aggregate principal amount of the Notes.
See "The Reorganization--Allocation of Indebtedness" and "Management's
Discussion and Analysis of Financial Condition and Results of Operations--
Liquidity and Capital Resources." There can be no assurance, in the event HP
Realty and HP Operating Company are required to repurchase a significant
portion of the Notes, that replacement financing will be available on
favorable terms. A failure to obtain replacement financing on favorable terms
for the redeemed Notes would have a material adverse effect on the business,
results of operations and financial condition of HP Realty and HP Operating
Company.
CONSEQUENCES OF REIT DIVIDEND REQUIREMENT
Management intends that, after the Reorganization, HP Realty will operate,
and elect to be taxed, as a REIT. In order to qualify as a REIT, HP Realty
must meet on a continuing basis certain requirements relating to its
organization, sources of income, nature of assets, and distribution of income
to stockholders. See "Federal Income Tax Matters--Federal Income Taxation of
HP Realty and Requirements for Qualification as REIT." Under the income
distribution requirement, HP Realty must generally distribute as dividends to
its stockholders a minimum of 95% of its taxable income (other than net
capital gains). As a result, it may be difficult for HP Realty to retain a
significant amount of cash from operations for use in acquiring and developing
real estate or otherwise growing its business. Because HP Realty's strategic
plan contemplates further real estate acquisition and development (see
"Business of HP Realty After the Reorganization"), HP Realty will need to seek
debt or equity financing from external sources to execute its strategic plan.
The Board believes that the Reorganization should enhance HP Realty's ability
to obtain project financing for potential real estate developments while
preserving HP Operating Company's ability to raise bank and bond financing to
support its operating businesses. See "The Reorganization--Purpose of the
Reorganization." However, there can be no assurance that the required debt
financing will be available in sufficient amounts or on sufficiently favorable
terms. See "--Dependence on Future Borrowings." In addition, the paired-share
structure imposes certain constraints that will make it more difficult for HP
Realty than other companies to finance growth through the issuance of equity
securities. See "--Constraints on Equity Financing."
CONSTRAINTS ON EQUITY FINANCING
As a result of the pairing of HP Realty Common Stock and HP Operating
Company Common Stock, after the Reorganization HP Realty and HP Operating
Company will face certain constraints in issuing equity securities that do not
exist with Hollywood Park owning HP Operating Company as a subsidiary. In
particular, under the Pairing Agreement, (i) neither HP Realty nor HP
Operating Company will be able to issue shares of capital stock (with the
exception of certain non-convertible preferred stock) except in combination
with shares of like securities of the other company; and (ii) a portion of the
consideration received from any paired issuance will have to be allocated and
paid to each company (based upon the relative value of the securities so
issued), even though one company may have a greater need for capital than the
other. See "Description of Capital Stock of the Companies--The Pairing
Agreement." Because HP Realty and HP Operating Company will have independent
business plans and
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financing needs after the Reorganization, the foregoing constraints will at
times impair, and possibly preclude, the issuance of equity securities (other
than certain non-convertible preferred stock) as a means for funding the
companies' respective operations. Under these circumstances, HP Realty and HP
Operating Company might be required to fund their operations through other
means (including by issuing debt or non-convertible preferred stock) which,
depending on market conditions, might carry a higher cost of capital than
common stock or convertible securities. In addition, the pairing will place
certain constraints on HP Realty's and HP Operating Company's ability to make
acquisitions with stock, which could have a material adverse effect on the
companies' ability to pursue their respective strategic plans. See "--
Constraints on Future Transactions."
CONSTRAINTS ON FUTURE TRANSACTIONS
In recent years, Hollywood Park has expanded its properties and businesses
primarily through corporate acquisitions. Both HP Realty and HP Operating
Company intend to continue to pursue selected acquisitions after the
Reorganization as a means of expanding their respective businesses. See
"Business of HP Operating Company After the Reorganization" and "Business of HP
Realty After the Reorganization." However the Reorganization will place several
constraints on the ability of HP Realty and HP Operating Company to acquire
other companies or to be acquired by other companies. Following the
Reorganization, in order to maintain the paired-share REIT structure, HP Realty
and HP Operating Company will be limited in the types of tax-free techniques
that they can use to effect an acquisition of another company and, as a result,
may be required (i) to use techniques that are taxable, in whole or in part, to
the acquired company and its stockholders, and (ii) to use cash or other non-
stock consideration to effect the acquisition. See "Federal Income Tax
Matters--Constraints on Future Transactions." The foregoing constraints may
make proposed acquisitions by HP Realty and HP Operating Company less
attractive to potential acquisition targets. Furthermore, because a REIT is
generally required to distribute as dividends to its stockholders a minimum of
95% of its taxable income (other than net capital gains), it may be difficult
for HP Realty to retain any significant amount of cash from operations for use
in making acquisitions or in taking other actions to grow its business. See "--
Consequences of REIT Dividend Requirement." The Board believes that the
Reorganization may provide both HP Realty and HP Operating Company with greater
flexibility in structuring debt financing to fund acquisitions, and in
particular may enhance HP Realty's ability to obtain project financing to fund
development. See "The Reorganization--Purpose of the Reorganization." However,
the above-mentioned constraints on acquisitions could offset some or all of the
beneficial effects that the Reorganization is expected to have on the
companies' debt financing capabilities and accordingly could have a material
adverse effect on the companies' ability to pursue their strategic plans.
UNCERTAIN LEVEL OF DIVIDENDS
Achievement of the anticipated benefits of the Reorganization (see "The
Reorganization--Purpose of the Reorganization") will depend, in part, on the
amount of HP Realty's rental income that will be available for distribution to
holders of the Paired Shares. Rents payable to HP Realty under its lease
agreements with HP Operating Company are generally based, subject to certain
minimum monthly payments, on fixed percentages of various sources of HP
Operating Company's revenues from the Hollywood Park Race Track, the Hollywood
Park-Casino and the Turf Paradise Race Track, including revenues from pari-
mutuel wagering, card club gaming revenues and race track concession sales. See
"The Reorganization--Relationship Between the Companies After the
Reorganization." These rental payments will be a substantial, if not the
exclusive, source of income for HP Realty for the foreseeable future, and
accordingly the amount of income available for distribution by HP Realty to
holders of the Paired Shares may be directly related to the level of HP
Operating Company's revenues from its Hollywood Park and Turf Paradise
operations. Any failure of such revenues to meet expectations will result in a
corresponding shortfall in dividends paid by HP Realty. The amount of dividends
that HP Realty can be expected to pay would also be reduced if the real estate
assets of Turf Paradise, Inc. are contributed to HP Operating Company in the
Reorganization.
EFFECT OF REORGANIZATION ON STOCKHOLDER RIGHTS
After the Reorganization, stockholders of Hollywood Park will become
stockholders of HP Realty and HP Operating Company. Particularly with respect
to the pairing requirement and the ownership limitations to protect
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HP Realty's REIT status, the rights of stockholders of HP Realty and HP
Operating Company under the provisions of the HP Realty and HP Operating
Company Charters and By-Laws will differ significantly from the existing
rights of Hollywood Park stockholders under Hollywood Park's Certificate of
Incorporation (the "Hollywood Park Charter") and By-Laws (the "Hollywood Park
By-Laws").
Certain new provisions of the HP Realty and HP Operating Company Charters
and the HP Realty and HP Operating Company By-Laws could have a potential
anti-takeover effect on HP Realty and HP Operating Company. The HP Realty and
HP Operating Company Charters will impose restrictions on the transfer of the
Paired Shares intended to protect HP Realty's qualification as a REIT (the
"REIT Restrictions"), and the HP Realty and HP Operating Company By-Laws will
impose transfer restrictions necessary to effect the pairing (the "Pairing
Restrictions," and collectively with the REIT Restrictions, the "Transfer
Restrictions"). Among other things, the REIT Restrictions prohibit any
stockholder from owning, directly or indirectly, more than 9.8% of the
outstanding Paired Shares, and will prevent direct or indirect ownership of
more than 50% of the outstanding Paired Shares by five or fewer individuals
(defined in the Code to include certain entities). Under the HP Realty and HP
Operating Company Charters, owners of more than 5% of the outstanding shares
of any class of HP Realty or HP Operating Company capital stock must provide
the companies with information regarding their holdings on an annual basis,
and HP Realty and HP Operating Company may demand that any owner of HP Realty
or HP Operating Company capital stock (regardless of the size of such owner's
holdings) provide the companies with such information in order to determine
compliance with the Code. The Pairing Restrictions will prohibit any transfer
or acquisition of shares of HP Realty Common Stock or HP Operating Company
Common Stock unless such shares are paired with an equivalent number of shares
of common stock of the other company. The Transfer Restrictions could have the
effect of making it more difficult for a third party to acquire control of HP
Realty and/or HP Operating Company, including certain acquisitions that
stockholders may deem to be in their best interests. See "Description of
Capital Stock of the Companies."
FACTORS INFLUENCING STOCK MARKET PRICE OF THE PAIRED SHARES
Several factors may influence the stock market price of the Paired Shares
after the Reorganization that did not influence, or had a lesser influence on,
the trading price of Hollywood Park Common Stock before the Reorganization,
including the market perception of paired REIT stocks and REIT stocks in
general, and legislative changes affecting REITs. In particular, the price of
the Paired Shares in public trading markets may be influenced by the annual
yield from distributions by HP Realty and HP Operating Company on the Paired
Shares as compared to yields on certain financial instruments. An increase in
market interest rates will result in higher yields on certain financial
instruments, which could adversely affect the market price of the Paired
Shares. In addition, the stock market price of the Paired Shares will be
influenced by the same factors as Hollywood Park Common Stock before the
Reorganization, including fluctuations in quarterly earnings, the
profitability and growth prospects of Hollywood Park's gaming and racing
businesses, the ability to make acquisitions yielding an attractive return on
investment, market perception of gaming and racing companies, as well as
general economic and stock market conditions. Although the Board believes that
the Reorganization may possibly enhance investor perception of the combined
value of Hollywood Park's businesses (gaming/sports/ entertainment and real
estate), there can be no assurance that this benefit will be realized due to
the foregoing factors. Furthermore, following the Reorganization, the Paired
Shares of Hollywood Park Common Stock and HP Realty Common Stock will be
subject to the REIT Restrictions, which do not apply to Hollywood Park Common
Stock. There can be no assurance that the market price of the Paired Shares
will be comparable to the market price of Hollywood Park Common Stock, or that
the market price of the Paired Shares will not be adversely affected by the
Transfer Restrictions.
SEPARATE AND INCREASED EXPENSES
HP Realty and HP Operating Company will incur higher expenses as a result of
their separate status, including increased director fees, stock transfer
costs, state franchise taxes, and expenses resulting from compliance with the
proxy solicitation and periodic reporting requirements of the federal
securities laws (and the auditing and legal fees associated with such
activities).
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THE REORGANIZATION AMENDMENTS
(ITEM NO. 1 ON PROXY CARD)
BACKGROUND
On September 16, 1997, the Board approved the Reorganization Amendments, and
directed the Reorganization Amendments to be submitted to the stockholders of
Hollywood Park for their approval at the Annual Meeting. The Reorganization
Amendments are a group of amendments to the Hollywood Park Charter that are
necessary to effect the proposed Reorganization and to protect HP Realty's
qualification as a REIT. Because all of the Reorganization Amendments are
necessary to effectuate the foregoing, they are being voted upon as a single
item.
THE PROPOSED REORGANIZATION AMENDMENTS
Approval of the Reorganization Amendments by Hollywood Park stockholders
will constitute approval of all of the amendments to the Hollywood Park
Charter discussed below:
Name Change. Article I of the Hollywood Park Charter would be amended to
change Hollywood Park's corporate name from "Hollywood Park, Inc." to
"Hollywood Park Realty Enterprises, Inc.," effective only if the
Reorganization is consummated. Because Hollywood Park intends to operate as a
REIT after the Reorganization, the name change is intended to better describe
the nature of Hollywood Park's business after the Reorganization relative to
that of HP Operating Company.
Authorization of New Classes of Stock. Article IV of the Hollywood Park
Charter would be amended to authorize the following new classes of HP Realty
capital stock:
. 100,000,000 shares of HP Realty Common Stock. If the Reorganization is
consummated, each share of Hollywood Park Common Stock outstanding before
the Reorganization will be converted into one share of HP Realty Common
Stock. HP Realty Common Stock will, by its terms, be subject to the "REIT
Restrictions" discussed below. In addition, under the terms of HP Realty's
By-Laws and a Pairing Agreement between HP Realty and HP Operating Company
(the "Pairing Agreement"), HP Realty Common Stock will be "paired" or
"stapled" to HP Operating Company Common Stock so that they will be
transferable and tradeable only in combination as units consisting of one
share of HP Realty Common Stock and one share of HP Operating Company
Common Stock.
. 25,000,000 shares of Excess Stock. Shares of Excess Stock may be issued
from time to time after the Reorganization upon the occurrence of certain
events specified in the REIT Restrictions, including in the event a
stockholder exceeds the 9.8% ownership limitation.
. 40,000,000 shares of Preferred Stock, $.01 par value. The Hollywood Park
Charter currently authorizes the issuance of 250,000 shares of preferred
stock, $1.00 par value, which shares will no longer be authorized following
effectiveness of the Reorganization Amendments.
Article IV of the Hollywood Park Charter, as amended, would contain certain
restrictions on the transfer of HP Realty Common Stock which are intended to
protect HP Realty's qualification as a REIT (the "REIT Restrictions"). The
REIT Restrictions prohibit any transfer or acquisition of HP Realty Common
Stock that would (i) result in any person owning, directly or indirectly, more
than 9.8% of the outstanding shares of HP Realty Common Stock, (ii) result in
the capital stock of HP Realty being beneficially owned by fewer than
100 persons, (iii) result in HP Realty being "closely held" or (iv) cause HP
Realty to own, actually or constructively, 10% or more of the ownership
interests in a tenant of the real property of HP Realty or a subsidiary of HP
Realty, all of the foregoing being determined under the attribution rules of
the Code. Any prohibited transfer or acquisition would be deemed to be void ab
initio, and the intended transferee or acquiror would acquire no right or
interest in the stock intended to be transferred or acquired. A prohibited
transfer or acquisition would also trigger the conversion of the stock
intended to be transferred or acquired into shares of Excess Stock and the
transfer of the Excess Stock to a charitable trust.
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In connection with the Reorganization, the HP Operating Company Charter will
be amended to authorize 100,000,000 shares of HP Operating Company Common
Stock (to be paired with HP Realty Common Stock), as well as 25,000,000 shares
of Excess Stock and 40,000,000 shares of Preferred Stock, and to contain
transfer restrictions substantially similar to the REIT Restrictions. In
addition, the HP Realty By-Laws and HP Operating Company By-Laws will be
amended to impose additional restrictions on transfer necessary to effect the
pairing of HP Realty Common Stock and HP Operating Company Common Stock (the
"Pairing Restrictions," and collectively with the REIT Restrictions, the
"Transfer Restrictions"). As is the case with the preferred stock that
Hollywood Park is currently authorized to issue, after the Reorganization the
Board of Directors of each of HP Realty and HP Operating Company would be
able, without stockholder approval, to issue Preferred Stock in one or more
series with such voting, dividend, conversion, redemption and other rights as
the HP Realty Board or the HP Operating Company Board determined in its
discretion. The Hollywood Park Board of Directors believes that authorizing
the issuance of 40,000,000 shares of the Preferred Stock by each of HP Realty
and HP Operating Company will provide the companies with the flexibility to
address potential future financing needs by enabling them to create a series
of Preferred Stock customized to the needs of any particular transaction
(including an acquisition) and to market conditions. However, the HP Realty
Board and the HP Operating Company Board would be able, without stockholder
approval, to issue Preferred Stock with voting and other rights that could
adversely affect the voting power of the holders of the Paired Shares of HP
Realty Common Stock and HP Operating Company Common Stock and could have
certain anti-takeover effects. The issuance of Preferred Stock could also
reduce the funds available for distribution to holders of the Paired Shares as
dividends or upon liquidation of the companies. See "Description of Capital
Stock of the Companies" for a more detailed discussion of the HP Realty Common
Stock, the Excess Stock, the Preferred Stock and the Transfer Restrictions.
Reclassification of Hollywood Park Common Stock into HP Realty Common
Stock. Article IV of the Hollywood Park Charter would be amended to provide
for the automatic conversion of each outstanding share of Hollywood Park
Common Stock into one share of HP Realty Common Stock (the
"Reclassification"). Following the Reclassification, all shares of Hollywood
Park Common Stock will be cancelled and cease to be outstanding. The
Reclassification is being effected to make the Transfer Restrictions binding
on all HP Realty stockholders. See "--Transactions in Connection with the
Reorganization."
Reduction in Authorized Shares of Hollywood Park Common Stock. Article IV of
the Hollywood Park Charter would be amended to reduce the number of authorized
shares of Hollywood Park Common Stock from 40,000,000 to 1,000 after
effectiveness of the Reclassification. Although no Hollywood Park Common Stock
will be outstanding and the Pairing Agreement will effectively prohibit HP
Realty from issuing Hollywood Park Common Stock after the Reorganization, a
nominal number of shares of Hollywood Park Common Stock will remain authorized
to evidence that the shares of HP Realty Common Stock were issued in a
reclassification under Delaware law.
The name change and the authorization of new classes of stock described
above will be effected through one Reorganization Amendment, and the
reclassification of Hollywood Park Common Stock into HP Realty Common Stock
and the reduction in authorized shares of Hollywood Park Common Stock will be
effected through a separate Reorganization Amendment to be filed with the
Delaware Secretary of State after the first Reorganization Amendment is
effective. The HP Realty Charter, as it will be amended and restated following
the Reorganization assuming the Supermajority Elimination Amendment and the
Gaming Amendment are also approved, is attached to this Proxy Statement as
Appendix A. The Reorganization Amendments are embodied in Articles I and IV of
such appendix.
REQUIRED VOTE; RECOMMENDATION OF THE BOARD OF DIRECTORS
Approval of the Reorganization Amendments requires the affirmative vote of a
majority of the outstanding shares of Hollywood Park Common Stock. For
purposes of calculating the votes for and against the proposal, abstentions
and broker non-votes will be treated as votes against the proposal.
THE BOARD OF DIRECTORS RECOMMENDS A VOTE "FOR" APPROVAL OF THE
REORGANIZATION AMENDMENTS.
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THE REORGANIZATION
PURPOSE OF THE REORGANIZATION
The Board believes that the reinstitution of Hollywood Park's paired REIT
and operating company structure has several significant potential benefits for
Hollywood Park's stockholders, including the following:
Realize Value Inherent in the Paired Share Structure. The paired REIT-
operating company structure will provide HP Realty and HP Operating Company
with advantages not generally available to other REITs and operating
companies. Under the Code, REITs are generally prohibited from conducting
operating businesses using their real estate assets and must lease their
properties to third-party operators. These leases must be structured so that
the third-party operator captures a portion of each property's current cash
flow and current growth. With the paired-share structure, HP Operating Company
will be able to lease from HP Realty and operate the Hollywood Park Race
Track, the Hollywood Park-Casino and the Turf Paradise Race Track, and may
also be the lessee of properties that HP Realty develops or acquires after the
Reorganization. As a result, stockholders will be able to retain the economic
benefit of ownership of the real estate assets of HP Realty and the full
operating profits of HP Operating Company. In addition, the Board believes
that the Reorganization may possibly enhance investor perception of the
combined value of Hollywood Park's businesses (gaming/sports/entertainment and
real estate) due to the foregoing economic benefit, the dividends HP Realty
will be required to pay as a REIT and the separation of Hollywood Park's
businesses for financial reporting purposes. In that regard, the Board has
taken note of the substantial premium other paired-share companies have
attracted in the last twelve months in relation to pure operating companies.
Therefore, the Board believes that the Reorganization may possibly enhance the
stock market value of the Hollywood Park companies, although stock prices are
inherently subject to fluctuations, including as a result of general economic
and market factors unrelated to the subject company. See "Risk Factors--
Factors Influencing Stock Market Price of the Paired Shares." The Board
believes that the pairing of HP Realty and HP Operating Company, as opposed to
the creation of separately-traded companies, is desirable because HP Realty
and HP Operating Company will continue to have a close business relationship
and questions of corporate opportunity and conflicts of interest inherent in
such a relationship will be minimized through common ownership. After the
Reorganization, HP Realty and HP Operating Company will be one of only five
publicly-traded paired REIT-operating companies in existence. Under the Code,
no new paired REIT-operating companies may be established.
Greater Financing Flexibility. Each of HP Realty and HP Operating Company
intends to expand its existing properties and businesses and to pursue
acquisitions consistent with its strategic plans. HP Operating Company's
strategic plan includes a $25 million enhancement of its Boomtown Reno
property and a $10 million enhancement of its Boomtown New Orleans property.
HP Operating Company also intends to make selected acquisitions, principally
in the gaming industry, to further diversify its operations and to achieve
certain economies of scale. In addition, HP Realty will explore the further
development of its Inglewood, California and Phoenix, Arizona properties.
These projects and acquisitions will require the companies to obtain
additional debt and/or equity financing.
The Board believes that, by separating Hollywood Park's businesses generally
along functional lines (gaming/sports/entertainment and real estate) and by
allowing separate financial reporting with respect to each of
gaming/sports/entertainment and real estate, the Reorganization may provide HP
Realty and HP Operating Company with greater flexibility in structuring their
credit facilities with lenders. The Company's bank lenders have historically
required that, as a condition to advancing loans to finance the Company's
casino and racing operations, the Company grant its lenders liens on its real
estate. Management's experience has been that the amount and cost of these
bank loans has been driven by the Company's operating cash flow, and that the
value of the real estate that has been subject to the banks' liens, although
significant, has not provided a basis for additional financing. Nonetheless,
these liens have inhibited Hollywood Park from pursuing project financing to
support its real estate development activities. Based on conversations with
the Company's bank lenders and other financial professionals, the Board
believes that the separation of HP Operating Company and HP Realty will permit
HP Operating Company to obtain necessary financing based on its cash flow
without the necessity of
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granting liens on HP Realty's real estate. Likewise, since HP Realty's real
estate would not be encumbered by HP Operating Company's cash flow financing,
the Reorganization would provide HP Realty with the opportunity to pursue
project financing in a manner that is precluded by the present structure and
its attendant financing arrangements. Conversely, the Board believes that the
Reorganization would allow HP Realty to pursue development opportunities and
raise additional financing to develop such projects without impairing HP
Operating Company's ability to raise bank and bond financing at levels
sufficient to support its proposed expansion plans. Accordingly, the
Reorganization will enable the companies to borrow on better non-financial
terms than would be possible if HP Operating Company remained a subsidiary of
Hollywood Park.
In order for HP Realty and HP Operating Company to realize this benefit,
they will have to negotiate and obtain financing arrangements on more
favorable terms than those under Hollywood Park's current $100 million bank
credit facility, either from the current lenders under that credit facility or
from an alternative group of lenders. Although the Board believes HP Realty
and HP Operating Company will be successful in obtaining beneficial financing
arrangements, their ability to do so will be affected by factors beyond their
control, including competitive forces in the banking industry and the general
availability of credit in the U.S. market. Accordingly, there can be no
assurance that HP Realty and HP Operating Company will be able to borrow money
on better terms after the Reorganization. In addition, following the
Reorganization, holders of the Notes (which have an aggregate principal of
$125 million) will have the right to cause Hollywood Park and HP Operating
Company to redeem the Notes at 101% (or, if there is a decline in the rating
of the Notes as a result of the Reorganization, at 102%) of the aggregate
principal amount of the Notes. See "Risk Factors--Dependence on Future
Borrowings" and "The Reorganization--Allocation of Indebtedness."
Increase Dividends Paid to Stockholders. After the Reorganization, HP Realty
intends to operate as a REIT. Generally, under the Code, a REIT is required to
distribute as dividends to its stockholders a minimum of 95% of its taxable
income (other than net capital gains), and the amounts distributed generally
are not subject to federal income tax at the corporate level. As a REIT, HP
Realty generally will be required to distribute at least 95% of the net
taxable income (undiminished by corporate level taxes) that it earns from
lease payments received from HP Operating Company on the Hollywood Park Race
Track, Hollywood Park-Casino and Turf Paradise Race Track properties, and from
any future real estate acquisition and development activities. Accordingly,
the Reorganization will result in HP Realty paying virtually all of its income
in the form of dividends to stockholders, whereas Hollywood Park currently
pays no dividends on its common stock. Based on the proposed terms of the
leases for the Hollywood Park and Turf Paradise properties, on a pro forma
basis assuming the Reorganization became effective on January 1, 1996, HP
Operating Company would have paid HP Realty approximately $14.6 million and
$9.8 million in lease payments, and HP Realty would have been required to pay
at least $7.5 million ($0.29 per Paired Share) and $4.5 million ($0.17 per
Paired Share) in dividends, for the year ended December 31, 1996 and the nine
months ended September 30, 1997, respectively. See "Unaudited Pro Forma
Combined Consolidated Condensed Financial Statements."
HP Realty intends to file an election with the Internal Revenue Service (the
"IRS") to qualify as a REIT beginning with the 1999 calendar year. If HP
Realty fails to qualify as a REIT, either in 1999 or any subsequent year, it
will be taxed at regular corporate income tax rates on all taxable income
during such periods. In addition, if HP Realty loses its REIT qualification,
HP Realty will also be disqualified from taxation as a REIT for the four
taxable years following the year during which qualification was lost (unless
the IRS has waived the applicability of such waiting period), after which HP
Realty could seek to qualify again. See "Federal Income Tax Matters." HP
Operating Company will continue to be taxed at regular corporate income tax
rates on its income.
The Company previously operated in a paired-share structure from 1982
through the end of 1991. The Company abandoned this structure and terminated
its REIT status in 1992 because, in light of the Company's then financial
condition and operating results and the market perception of paired share
companies at the time, the paired-share structure was determined to be a
hinderance to the Company in its efforts to reduce its debt (totalling
approximately $63 million at December 31, 1991) and grow its business. In the
several years prior to 1992, the Company had experienced losses and had
considerable debt. The mandatory requirement that REITs
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pay out 95% of their income as dividends effectively prevented the Company
from reinvesting whatever income it generated in its business and reducing its
outstanding debt. Moreover, because the Company's then existing asset base
produced virtually no income, the stockholders were not realizing meaningful
tax benefits from the Company's paired-share status. The Company also believed
that, in that time frame, the market was not valuing paired-share REITs highly
and, in fact, that the market discounted the value of paired-share entities.
Since that time circumstances have changed dramatically, both with respect
to the Company's asset base and financial condition as well as with respect to
the market's valuation of paired-share entities. As a result, the Company now
believes that the Company's financial position and market conditions will
allow shareholders to realize the full value of the paired-share structure.
Since 1992, the Company has raised substantial capital through equity
offerings of both common and preferred stock. This capital has allowed the
Company to engage in significant acquisitions and to repay its outstanding
debt. This process has transformed Hollywood Park into a company with
relatively low debt (other than the Notes, which were used principally to
refinance Boomtown's debt) and strong cash flow. Further, the Company's Board
has taken note of the substantial premiums the paired-share structure has
recently attracted in relation to pure operating companies. For the foregoing
reasons, the Company's Board, with the advice of its financial advisors, has
determined that the restoration of the paired-share structure may be an
appropriate way to seek to maximize shareholder value, and expects the
Reorganization will have the benefits discussed above. However, there can be
no assurance that any of the foregoing benefits will be achieved.
Hollywood Park has retained Morgan Stanley & Co. Incorporated to advise it
in connection with matters relating to the Reorganization, including assisting
the Board in evaluating a proposed business combination with or investment by
a potential strategic partner (a "Strategic Transaction"). Although management
intends to pursue vigorously, and consummate as expeditiously as possible, a
Strategic Transaction, there can be no assurance such a transaction will occur
either prior to or after completion of the Reorganization. Hollywood Park's
decision to proceed with the Reorganization without advance rulings from the
IRS could deter third parties from pursuing Strategic Transactions with
Hollywood Park and thereby reduce the potential benefits of the
Reorganization. To date, Hollywood Park has received inquiries from certain
entities concerning a Strategic Transaction, and has held discussions with
several of the interested parties. However, no agreement or understanding has
been reached, and no serious discussions are currently in progress, relating
to such a transaction.
EFFECT OF THE REORGANIZATION
In the Reorganization, Hollywood Park's current assets and operating
businesses will be divided between HP Realty and HP Operating Company as
follows:
HP Realty will be the:
. Owner of Hollywood Park Race Track real property and facilities (to be
leased to HP Operating Company);
. Owner of Hollywood Park-Casino real property and facilities (to be leased
to HP Operating Company);
. Owner of Turf Paradise Race Track real property and facilities (to be
leased by HP Realty's Turf Paradise, Inc. subsidiary ("Turf Paradise") to
Turf Paradise Operating Company, a subsidiary of HP Operating Company);
. Owner of 150 acres of undeveloped land at the Hollywood Park property in
Inglewood, California;
. Owner of 100 acres of undeveloped land at the Turf Paradise property in
Phoenix, Arizona;
. Owner and operator of Hollywood Park Golf and Sports Center, featuring
miniature golf, putting course, pro shop, driving ranges, and batting
cages; and
. Owner and operator of Turf Paradise Travel Trailer Park.
HP Operating Company will be the:
. Operator of Hollywood Park Race Track, including thoroughbred horse racing
and simulcast wagering (under real property lease from HP Realty);
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. Operator of gaming and other operations at Hollywood Park-Casino (under
real property lease from HP Realty);
. Operator (through Turf Paradise Operating Company) of Turf Paradise Race
Track, including thoroughbred, quarter horse and arabian horse racing and
simulcast wagering (under real property lease from HP Realty);
. Owner and operator (through Boomtown, Inc.) of gaming and other operations
at Boomtown Reno, Boomtown New Orleans and Boomtown Biloxi (including the
ownership of all real estate currently owned by Boomtown);
. Owner (through Crystal Park Hotel and Casino Development Company LLC
("Crystal Park LLC")) of a 93.2% interest in the Crystal Park Hotel and
Casino (the "Crystal Park Casino");
. Owner (through Sunflower Racing, Inc. ("Sunflower")) of The Woodlands,
including greyhound and thoroughbred racing; and
. Owner (through HP Yakama, Inc. ("HP Yakama") and HP Yakama Consulting, Inc.
("HPY Consulting")) of an interest in an Indian gaming facility in
Washington State (the "Yakama Project"), subject to regulatory approval.
In the Reorganization, the real estate assets of Hollywood Park's Boomtown,
Crystal Park LLC and Sunflower subsidiaries will not be retained by HP Realty
and will instead be transferred to HP Operating Company together with the
related operating businesses. Hollywood Park believes that the tax liability
that would result from dividing Boomtown's real estate and operating
businesses would outweigh the advantages of HP Realty retaining the Boomtown
real estate. Hollywood Park also believes that Boomtown's real estate has a
less significant development potential than the Hollywood Park property in
Inglewood, California and the Turf Paradise property in Phoenix, Arizona. In
addition, it is not practical to divide Crystal Park LLC into real estate and
operating businesses because Hollywood Park intends to seek one or more
suitable minority investors for this subsidiary, and dividing Crystal Park LLC
could limit Hollywood Park's flexibility in negotiating such a transaction.
Likewise, it is not practical to divide the Sunflower real estate and
operating businesses because Sunflower is currently the subject of a
reorganization proceeding under Chapter 11 of the Bankruptcy Code.
Under certain circumstances, all of the assets of Hollywood Park's Turf
Paradise subsidiary (including all real estate and the operations of the Turf
Paradise Travel Trailer Park) may be transferred to HP Operating Company in
the Reorganization. As discussed below under "Federal Income Tax Matters,"
Hollywood Park may decide, based on the facts and circumstances existing
immediately prior to the completion of the Reorganization transactions, to
report the distribution of the stock of HP Operating Company in the
Reorganization as a tax-free spin-off with the IRS. In such an event,
transferring Turf Paradise in its entirety to HP Operating could potentially
reduce Hollywood Park's corporate tax liability from the Reorganization
transactions. This structural change would reduce the lease payments made by
HP Operating Company to HP Realty and the amount of income that HP Realty
would be able to distribute as dividends to holders of the Paired Shares. See
"Federal Income Tax Matters" and "Notes to Post-REIT Unaudited Pro Forma
Consolidated Statements of Operations."
BUSINESS STRATEGIES OF THE REORGANIZED COMPANIES
After the Reorganization, HP Realty intends to operate as a REIT and make an
election with the Internal Revenue Service to be taxed as such as of the
beginning of the following calendar year. Under the Code, REITs are strictly
limited in their ability to engage, either directly or through a subsidiary,
in the active conduct of a business. Accordingly, HP Realty will initially
derive most of its income from HP Operating Company in the form of lease
payments on the real property and facilities used to conduct operations at the
Hollywood Park Race Track, the Hollywood Park-Casino, and the Turf Paradise
Race Track. See "--Relationship Between the Companies After the
Reorganization." HP Realty will also consider raising additional debt and/or
equity capital as necessary to finance additional development at its existing
properties and to acquire and develop new properties. In addition, HP Realty
and HP Operating Company may make joint acquisitions, principally in the
gaming industry, in which the real estate assets of the acquired businesses
would be held by HP Realty and the
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remaining assets would be held, and the operating businesses would be
conducted, by HP Operating Company. See "Federal Income Tax Matters" and
"Business of HP Realty After the Reorganization."
After the Reorganization, HP Operating Company intends to grow its gaming,
sports and entertainment businesses by (i) expanding and increasing the
utilization of its Boomtown properties and its other existing properties and
(ii) making selected acquisitions, principally in the gaming industry to
diversify its operations and to achieve economies of scale. Some of these
acquisitions could be made jointly with HP Realty, with HP Realty holding the
real estate assets, and HP Operating Company holding the other assets and
conducting the operations, of the acquired businesses. See "Business of HP
Operating Company After the Reorganization."
TRANSACTIONS IN CONNECTION WITH THE REORGANIZATION
The Reorganization will be effected through the following series of
transactions:
Spin-off of Turf Paradise Operating Company. Turf Paradise, a wholly-owned
subsidiary of Hollywood Park, will transfer all of its non-real estate assets
to Turf Paradise Operating Company, a newly created subsidiary (the "TPOC
Contribution"). Turf Paradise will then distribute all of the stock of Turf
Paradise Operating Company to Hollywood Park (the "TPOC Spin-Off," and
collectively with the TPOC Contribution and the contribution of the stock of
Turf Paradise Operating Company to HP Operating Company as described in the
following paragraph, the "TPI Restructuring").
Contribution of Assets to HP Operating Company. Except for the Hollywood
Park real property, the Turf Paradise real property, the Hollywood Park Golf
and Sports Center and the Turf Paradise Travel Trailer Park, Hollywood Park
will transfer all of its assets and operating businesses to HP Operating
Company, including all of the stock of Turf Paradise Operating Company,
Sunflower, Boomtown, HP/Compton, Inc., HP Casino, Inc., HP Yakama and HPY
Consulting and the non-real estate assets of the Hollywood Park-Casino (the
"HPOC Contribution"). In connection with this transfer, HP Operating Company
will effect a stock split so that prior to the HPOC Spin-Off (as defined
below), HP Operating Company and Hollywood Park will have an equal number of
shares outstanding.
During 1998, and in any event prior to completion of the Reorganization, HP
Operating Company will transfer to Hollywood Park all of HP Operating
Company's real estate assets (consisting primarily of leasehold improvements
at the Hollywood Park Race Track) in partial satisfaction of HP Operating
Company's rent payment obligations to Hollywood Park for periods prior to the
completion of the Reorganization.
The Reclassification. Subject to approval of the Reorganization Amendments
by Hollywood Park's stockholders, Hollywood Park will file with the Delaware
Secretary of State an amendment to the Hollywood Park Charter that will (i)
change Hollywood Park's name to HP Realty Enterprises, Inc., (ii) authorize
100,000,000 shares of HP Realty Common Stock, (iii) authorize 25,000,000
shares of Excess Stock, and (iv) authorize 40,000,000 shares of Preferred
Stock. By a subsequent filing with the Delaware Secretary of State, the
Hollywood Park Charter will be further amended (iv) to effect the
Reclassification, so that each outstanding share of Hollywood Park Common
Stock will be converted into one share of HP Realty Common Stock and (v) to
reduce the number of authorized shares of Hollywood Park Common Stock from
40,000,000 to 1,000. The Board will also amend Hollywood Park's By-Laws to add
the Pairing Restrictions, which are necessary to implement the pairing of HP
Realty Common Stock and HP Operating Company Common Stock. In addition, prior
to the HPOC Spin-Off, the HP Operating Company Charter and the HP Operating
Company By-Laws will be amended to be substantially the same as the Hollywood
Park Charter and the Hollywood Park By-Laws (including similar REIT
Restrictions and Pairing Restrictions but excluding, regardless of whether the
Supermajority Elimination Amendment is approved, the supermajority provisions
of Article XII of the current Hollywood Park Charter), and HP Realty and HP
Operating Company will enter into a Pairing Agreement (the "Pairing
Agreement") to coordinate the pairing of their stock.
The HPOC Spin-Off. Finally, all of the outstanding HP Operating Company
Common Stock will be distributed to HP Realty stockholders on the basis of one
share of HP Operating Company Common Stock for
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each share of HP Realty Common Stock held (the "HPOC Spin-Off"). The Board
intends to declare the distribution of the HP Operating Company Common Stock
immediately after the time the Reclassification becomes effective (the
"Effective Time"). The distribution will be payable and effective for all
purposes at the Effective Time to holders of record of HP Realty Common Stock.
Immediately after the HPOC Spin-Off, each Hollywood Park stockholder will
hold one share of HP Realty Common Stock and one share of HP Operating Company
Common Stock, which will be paired and will trade together as one unit, in
replacement of each share of Hollywood Park Common Stock held before the
Effective Time. HP Realty will elect to be taxed as a REIT commencing with the
1999 calendar year.
The Transfer Restrictions are intended to protect HP Realty's qualification
as a REIT and to effect the pairing of HP Realty Common Stock and HP Operating
Company Common Stock. Under Section 202 of the Delaware General Corporation Law
(the "DGCL"), a restriction on the transfer or registration of transfer of
securities of a corporation may be imposed either by the certificate of
incorporation or the by-laws or by an agreement among any number of security
holders or among such holders and the corporation. However, no such restriction
is binding with respect to securities issued prior to the adoption of the
restriction unless the holders of the securities are parties to an agreement or
voted in favor of the restriction. In determining the most effective method for
imposing the Transfer Restrictions, Hollywood Park, with the advice of its
Delaware counsel, Morris, Nichols, Arsht & Tunnell, reviewed these provisions
of the DGCL, relevant cases decided thereunder, and other instances where
public companies had imposed transfer restrictions on their shares in order to
protect their tax benefits. Hollywood Park concluded that, while there was no
structure under which the enforceability of the Transfer Restrictions with
respect to shares held by stockholders not voting in favor of the transactions
contemplated by the Reorganization was certain, the structure contemplated by
the Reorganization Amendments and the By-Law amendments described in this Proxy
Statement is most likely to result in such enforceability under Section 202 of
the DGCL.
The following diagrams (including the footnote explanations on the following
page) illustrate the corporate structure of Hollywood Park and its subsidiaries
before the Reorganization, and HP Realty and HP Operating Company and their
respective subsidiaries after the Reorganization:
HOLLYWOOD PARK PRIOR TO THE REORGANIZATION
[CHART SHOWING HOLLYWOOD PARK AND ITS PRINCIPAL DIRECT AND INDIRECT
SUBSIDIARIES APPEARS HERE]
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HP REALTY AND HP OPERATING COMPANY AFTER THE REORGANIZATION
[CHART SHOWING HP OPERATING COMPANY, HP REALTY AND THEIR RESPECTIVE
PRINCIPAL DIRECT AND INDIRECT SUBSIDIARIES APPEARS HERE]
- --------
(1) Owns the Hollywood Park Race Track and the Hollywood Park-Casino
properties and leases the Hollywood Park Race Track property to its
subsidiary HP Operating Company.
(2) HP/Compton, Inc. and HP Casino, Inc. own 89.8% and 3.4%, respectively, of
the membership interests of Crystal Park LLC.
(3) Filed for reorganization under Ch. 11 of the Bankruptcy Code. Sunflower
has presented to the Bankruptcy Court a plan of reorganization that would
provide for, subject to regulatory and other required approvals, the sale
of The Woodlands to the Wyandotte Tribe of Oklahoma and the construction
of a casino on the property. A Hollywood Park subsidiary and a non-
affiliated partner would make loans to fund the acquisition and
development of, provide consulting services to, and receive a share of the
revenues of the casino.
(4) Hollywood Park has delivered a notice exercising its option to purchase
the minority interest.
(5) Proposed Joint Venture with Hilton Gaming (Switzerland County)
Corporation.
(6) Includes HP Yakama, Inc. and HP Yakama Consulting, Inc., which, subject to
regulatory approval, will fund the construction and development of,
provide development services to, and receive a share of the net revenues
of, an Indian casino in Yakima County, Washington.
(7) Will own the Hollywood Park Race Track and the Hollywood Park-Casino
properties and will lease the properties to HP Operating Company.
(8) Will own the Turf Paradise Race Track property and will lease the property
to Turf Paradise Operating Company.
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As a result of the Reclassification and the HPOC Spin-Off, each record owner
of shares of Hollywood Park Common Stock immediately before the Effective Time
will, immediately after the Effective Time, own of record an identical number
of Paired Shares. As of the Effective Time, each Hollywood Park stock
certificate issued and not canceled prior to that time will be deemed to
evidence for all corporate purposes, except with respect to the payment of
dividends and delivery of stock certificates, an equal number of Paired
Shares. At the same time, each holder of record of Hollywood Park Common Stock
will be registered on the stock records of HP Realty and HP Operating Company,
respectively, as owning the number of shares of HP Realty Common Stock into
which such stockholder's shares of Hollywood Park Common Stock were converted
in the Reclassification and the number of shares of HP Operating Company
Common Stock which were received in the HPOC Spin-Off. See "--Stock
Certificates; Method of Exchange" for important information pertaining to the
exchange of Hollywood Park stock certificates for new "back-to-back"
certificates of HP Realty and HP Operating Company.
As of the Effective Time, Hollywood Park's outstanding stock options will be
adjusted so that the option holders will be entitled to receive Paired Shares
upon exercise.
DIVIDEND POLICY
Hollywood Park has not paid any dividends on Hollywood Park Common Stock
since March 1992. To qualify as a REIT, HP Realty will be generally required
to distribute at least 95% of its taxable income (other than net capital
gains) to its stockholders during each calendar year. HP Realty presently
intends to pay approximately equal quarterly dividends based upon its board of
directors' estimate of earnings for the entire year. If the quarterly
dividends result in less than 95% of HP Realty's income being paid out for any
year, it intends to pay an additional special dividend after the close of the
year. Based on the proposed terms of the leases for the Hollywood Park and
Turf Paradise properties, on a pro forma basis assuming the Reorganization
became effective on January 1, 1996, HP Operating Company would have paid
Hollywood Park approximately $14.6 million and $9.8 million in lease payments,
and HP Realty would have been required to pay at least $7.5 million ($0.29 per
Paired Share) and $4.5 million ($0.17 per Paired Share) in dividends, for the
year ended December 31, 1996 and the nine months ended September 30, 1997,
respectively. See "Unaudited Pro Forma Combined Consolidated Condensed
Financial Statements" and "Management's Discussion and Analysis of Financial
Condition and Results of Operations -- Post-REIT Pro Forma Results of
Operations."
It is anticipated that HP Operating Company will not pay dividends for the
foreseeable future and will retain earnings, if any, to finance the growth of
its business.
DIRECTORS, OFFICERS AND EMPLOYEES OF HP OPERATING COMPANY AND HP REALTY
It is anticipated that, upon completion of the Reorganization, (i) each of
the 11 individuals elected to the Hollywood Park Board of Directors at the
Annual Meeting will become a director of HP Operating Company or HP Realty,
and (ii) each of Hollywood Park's current executive officers will become an
executive officer of HP Operating Company or HP Realty. Additional individuals
may also be appointed as directors and executive officers of the companies
upon completion of the Reorganization. The composition of the respective
Boards of Directors and management teams of HP Operating Company and HP Realty
will be determined by Hollywood Park prior to completion of the Reorganization
based upon, among other things, federal tax law requirements applicable to
REITs.
It is also anticipated that, upon completion of the Reorganization, HP
Realty will retain approximately 10 to 20 employees. All of Hollywood Park's
other employees will become employees of HP Operating Company.
CONDITIONS TO THE REORGANIZATION
The Reorganization is subject to (i) approval of the Reorganization
Amendments by Hollywood Park stockholders; (ii) all necessary regulatory
approvals (including the gaming and racing authorities of Arizona, California,
Louisiana, Mississippi and Nevada, and other governmental or regulatory
bodies) and consents of third parties having been obtained;
(iii) effectiveness of the Reorganization Amendments under Delaware law;
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and (iv) there not being in effect any statute, rule, regulation or order of
any court, governmental or regulatory body which prohibits or makes illegal
the transactions contemplated by the Reorganization. The terms of the
Reorganization may be modified or the conditions thereto may be waived by the
Board. In addition, the Board has retained discretion, even if stockholder
approval of the Reorganization Amendments is obtained and the other conditions
to the Reorganization are satisfied, to abandon, defer or modify the
Reorganization. See "--Regulatory Approvals and Third-Party Consents" and "--
Effect of the Reorganization."
Under the Code, HP Realty will not be able to qualify as a REIT until the
beginning of the calendar year following the year in which the Reorganization
is completed. Therefore, the Reorganization must be completed by December 31,
1998 for HP Realty to qualify as a REIT for the 1999 calendar year.
REGULATORY APPROVALS AND THIRD-PARTY CONSENTS
To complete the Reorganization, Hollywood Park and its subsidiaries will
need to obtain the consent or approval of a number of governmental authorities
which administer gaming and racing laws applicable to their operations. In
particular, since the Reorganization will result in a change in control of
Hollywood Park's Boomtown, Inc. subsidiary (as defined under applicable gaming
laws), it may not occur without the prior approval of the Nevada Gaming
Commission, the Mississippi Gaming Commission and the Louisiana Gaming Control
Board. Such approvals will require, among other things, (i) registration of HP
Operating Company as a publicly traded corporation, (ii) approval of HP
Operating Company's acquisition of control of Boomtown, including a finding of
suitability of HP Operating Company, and (iii) licensing or a finding of
suitability of the officers and directors of HP Operating Company. Because the
operations of the Hollywood Park-Casino will be transferred to HP Operating
Company in the Reorganization, the prior approval of the California State
Attorney General and the City of Inglewood, California may be required.
Furthermore, the prior approval of the Arizona Racing Commission could be
required under certain circumstances if the racing operations, but not the
real estate, of Turf Paradise are transferred to HP Operating Company. In
addition, if Hollywood Park is successful in obtaining necessary licenses for
its proposed riverboat casino operations in Switzerland County, Indiana, and
its participation in the Yakama Project, approval of the Reorganization by the
Indiana Gaming Commission, federal gaming authorities, and the state and
tribal gaming commissions of Washington may also be necessary.
Hollywood Park and its subsidiaries are in the process of filing initial
applications for these gaming and racing approvals. It is anticipated that the
required approvals will be obtained on a timely basis to permit the
Reorganization to be completed in 1998.
Hollywood Park does not believe that any other material federal, state or
local regulatory approvals or other material third-party consents will be
necessary in connection with the Reorganization.
RELATIONSHIP BETWEEN THE COMPANIES AFTER THE REORGANIZATION
Prior to the completion of the Reorganization, Hollywood Park and HP
Operating Company will enter into certain agreements, described below,
governing their relationship subsequent to the Reorganization (at which time
Hollywood Park will have been renamed Hollywood Park Realty Enterprises, Inc.)
and providing for the allocation of tax and certain other liabilities and
obligations arising from periods prior to the completion of the
Reorganization. Hollywood Park believes that the agreements are fair to the
parties to the relevant agreements and contain terms which generally are
comparable to those which would have been reached in arm's-length negotiations
with unaffiliated parties (although such comparisons are difficult with
respect to certain agreements which relate to the specific circumstances of
the Reorganization and the transactions contemplated thereby).
The following description summarizes the material terms of such agreements,
but is qualified in its entirety by reference to the texts of such agreements.
Distribution Agreement
Hollywood Park and HP Operating Company will enter into the Distribution
Agreement providing for, among other things, certain corporate transactions
required to effect the Reorganization and other arrangements between Hollywood
Park and HP Operating Company subsequent to the Reorganization.
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The Distribution Agreement will provide for assumptions of liabilities and
cross-indemnities designed to allocate generally, effective as of the
Effective Date, financial responsibility for the liabilities arising
out of or in connection with (i) the real estate business of HP Realty and its
subsidiaries and (ii) the gaming/sports/entertainment business of HP Operating
Company and its subsidiaries. The Distribution Agreement will also provide for
the allocation generally of the financial responsibility for the liabilities
arising out of or in connection with former and present businesses not
described in the immediately preceding sentence to or among HP Realty and HP
Operating Company. The Distribution Agreement will also provide that HP Realty
and HP Operating Company will use their respective commercially reasonable
efforts to achieve an allocation of indebtedness of Hollywood Park that
reflects the capital structure after the Reorganization of HP Realty and HP
Operating Company as contemplated in the discussion under "--Allocation of
Indebtedness."
The Distribution Agreement will provide that neither HP Realty nor HP
Operating Company will take any action that would jeopardize the intended tax
consequences of the Reorganization. Specifically, in the event Hollywood Park
decides to report the principal Reorganization transactions generally as tax-
free transactions, each of HP Realty and HP Operating Company will agree to
maintain indefinitely its status as a company engaged in the active conduct of
a trade or business, as defined in Section 355(b) of the Internal Revenue
Code. Neither HP Realty nor HP Operating Company expects this limitation to
inhibit its financing or other activities or its ability to respond to
unanticipated developments.
The Distribution Agreement will also provide that, except as otherwise set
forth therein or in any other agreement, all costs or expenses incurred on or
prior to the Effective Date in connection with the Reorganization will be
charged to and paid by Hollywood Park, provided that Hollywood Park shall not
be responsible for those costs or expenses specifically incurred by HP
Operating Company. Except as set forth in the Distribution Agreement or any
related agreement, each party shall bear its own costs and expenses incurred
after the Effective Date.
Tax Allocation Agreement
HP Realty and HP Operating Company will enter into a Tax Allocation
Agreement to the effect that HP Operating Company and its subsidiaries will
pay their share of the tax liability of the affiliated group for the tax years
that HP Operating Company and its subsidiaries were included in Hollywood
Park's consolidated federal income tax return. The Tax Allocation Agreement
will also provide for sharing, where appropriate, of state, local and foreign
taxes attributable to periods prior to the Reorganization, as well as certain
other matters.
Employee Benefits Agreement
HP Realty and HP Operating Company will enter into an Employee Benefits
Agreement which will provide for the allocation of Hollywood Park's 401(k)
Investment Plan, and of medical, dental, life, disability, and other employee
welfare benefit plans, among HP Realty and HP Operating Company upon the
completion of the Reorganization. The Agreement will provide for the treatment
described below of the 401(k) Investment Plan and of medical, dental, life,
disability, and other employee welfare benefits. See "--Employee Benefits and
Compensation Matters." In addition, the Employee Benefits Agreement will
provide that, as of the completion of the Reorganization, HP Realty and HP
Operating Company shall generally each assume all liability for their
respective active employees under their respective employee welfare benefit
plans, compensation and bonus plans, and 401(k) plans.
Lease Agreements
After the Reorganization, HP Realty and its subsidiary Turf Paradise (which
will be renamed Turf Paradise Realty Enterprises, Inc. ("Turf Paradise
Realty")) will lease to HP Operating Company and its subsidiary Turf Paradise
Operating Company the land and facilities at the Hollywood Park Race Track,
the Hollywood Park-Casino and the Turf Paradise Race Track. The following is a
summary of the principal terms of these leases:
Hollywood Park Property Lease Agreement. This lease, between HP Realty and
HP Operating Company, covers the land and facilities relating to the Hollywood
Park Race Track and simulcast operations and the
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Hollywood Park-Casino. Under the terms of this lease, HP Operating Company
will be required to make rental payments to HP Realty equal to $720,000 per
month plus the amount by which the sum of the following amounts exceeds the
aggregate monthly rent in each calendar year: (i) 1.5% of the wagers placed at
Hollywood Park on live Hollywood Park races, (ii) 0.75% of Hollywood Park's
remaining pari-mutuel handle, including wagers placed at Hollywood Park on
races simulcast at Hollywood Park and off-track wagers placed on Hollywood
Park races, (iii) 5% of HP Operating Company's other revenues from the
Hollywood Park Race Track, including admission fees and concession sales, and
(iv) 5% of HP Operating Company's gross gaming revenues from the Hollywood
Park-Casino. This lease will become effective upon completion of the
Reorganization, and expires five years thereafter, with two options to renew
for five years each, and with rent to be adjusted to the fair market rental
value of the leased premises at the time of each renewal.
Turf Paradise Property Lease Agreement. This lease, between Turf Paradise
Realty (a subsidiary of HP Realty) and Turf Paradise Operating Company (a
subsidiary of HP Operating Company), covers the land and facilities relating
to the Turf Paradise Race Track and simulcast operations. Under the terms of
this lease, Turf Paradise Operating Company will be required to make rental
payments to Turf Paradise Realty equal to $120,000 per month plus the amount
by which the sum of the following amounts exceeds the aggregate monthly rent
in each calendar year: (i) 1.5% of the wagers placed at Turf Paradise on live
Turf Paradise races, (ii) 1% of Turf Paradise's remaining pari-mutuel handle,
including wagers placed at Turf Paradise on races simulcast at Turf Paradise
and off-track wagers placed on Turf Paradise races, and (iii) 5% of Turf
Paradise Operating Company's other revenues from the Turf Paradise Race Track,
including admission fees and concession sales. This lease will become
effective upon completion of the Reorganization, and expires five years
thereafter, with two options to renew for five years each, and with rent to be
adjusted to the fair market rental value of the leased premises at the time of
each renewal.
Each of the foregoing leases will be "triple net", i.e., the lessee will pay
directly, or reimburse the lessor for, all costs related to the operation of
the property, including utilities, insurance, property taxes and the cost of
all maintenance, repairs, replacements and improvements on the property.
Achievement of the anticipated benefits of the Reorganization (see "--
Purpose of the Reorganization") will be dependent, in part, upon the amount of
HP Realty's rental income that is available for distribution to holders of the
Paired Shares. See "--Federal Income Tax Consequences" and "Risk Factors--
Uncertain Level of Dividends."
The Board believes that the conflicts of interest that could otherwise arise
from the contractual relationships described above will be minimized due to
the common ownership of HP Realty and HP Operating Company that will result
from the pairing of their stock. Accordingly, none of the foregoing agreements
or any other agreement will provide for a formal mechanism for avoiding or
resolving conflicts of interest.
EFFECT OF REORGANIZATION ON RIGHTS OF STOCKHOLDERS
The Reorganization will change the rights of Hollywood Park's stockholders
in several significant respects. First, the HP Realty By-Laws, the HP
Operating Company By-Laws and the Pairing Agreement will impose restrictions
on the transferability of shares of HP Realty Common Stock and HP Operating
Company Common Stock designed to implement the pairing. Second, the HP Realty
Charter and the HP Operating Company Charter will impose on stockholders
additional transfer restrictions designed to protect HP Realty's qualification
as a REIT, including restrictions generally prohibiting any stockholder from
owning more than 9.8% of the outstanding Paired Shares. See "Description of
Capital Stock of the Companies."
TRADING
Hollywood Park Common Stock is currently publicly held and traded on the New
York Stock Exchange (the "NYSE") under the symbol "HPK." After the
Reorganization, HP Realty Common Stock and HP Operating Company Common Stock
will be publicly held and will trade only in combination as units (each unit
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consisting of one share of HP Realty Common Stock and one share of HP
Operating Company Common Stock) under the name "Hollywood Park Enterprises."
Hollywood Park intends to file an application for the listing of the units on
the NYSE under Hollywood Park's existing symbol "HPK."
EMPLOYEE BENEFITS AND COMPENSATION MATTERS
Hollywood Park maintains a 401(k) Investment Plan for the benefit of its
employees and employees of certain subsidiaries, including HP Operating
Company. Hollywood Park also maintains certain plans providing medical,
dental, life, disability, and similar insurance coverages to its employees and
employees of certain subsidiaries, including HP Operating Company. On or
before the completion of the Reorganization, HP Operating Company will become
an additional sponsor, for the benefit of its employees and employees of
certain subsidiaries, of the 401(k) Investment Plan and other employee benefit
plans heretofore maintained by Hollywood Park. HP Realty will continue to
sponsor, or will adopt as an additional sponsor, the 401(k) Investment Plan
and other employee benefit plans for the benefit of its employees and Turf
Paradise's employees. HP Realty will reimburse HP Operating Company for any
costs and expenses HP Operating Company incurs under the 401(k) Investment
Plan and other employee benefit plans for the benefit of HP Realty employees,
and vice versa. HP Realty and HP Operating Company will each maintain its own
compensation and bonus plans after the Reorganization.
At the Annual Meeting, Hollywood Park's stockholders will be asked to
approve the adoption of the new stock option plan for HP Operating Company. In
connection with the Reorganization, Hollywood Park's outstanding stock options
will be adjusted so that option holders receive Paired Shares upon exercise.
See "The Hollywood Park Operating Company 1998 Stock Option Plan."
ALLOCATION OF INDEBTEDNESS
Hollywood Park currently has a $100 million reducing revolving credit
facility (the "Bank Credit Facility") with a bank syndicate led by Bank of
America NT&SA. As of February 9, 1998, Hollywood Park had outstanding under
the Bank Credit Facility borrowings of $10 million and a $2 million letter of
credit. It is anticipated that, in connection with the Reorganization,
Hollywood Park will repay any outstanding borrowings under the Bank Credit
Facility, and HP Realty and HP Operating Company will negotiate new lines of
credit that will reflect their separate existence. Although Hollywood Park
believes that the Reorganization may enable HP Realty and HP Operating Company
to borrow on favorable terms after the Reorganization, negotiations have not
commenced with any banks regarding new lines of credit, and there can be no
assurance that HP Realty and HP Operating Company will be able to obtain bank
lines of credit on as favorable terms as the terms of the Bank Credit
Facility. See "Risk Factors--Dependence on Future Borrowings."
On August 6, 1997, Hollywood Park and HP Operating Company, as co-obligors,
issued $125 million aggregate principal amount of Series A 9 1/2% Senior
Subordinated Notes due 2007 (together with any Series B Notes that may be
issued in exchange for Series A Notes, the "Notes"). The Notes are guaranteed
on a senior subordinated basis by all of Hollywood Park's other existing and
certain future direct and indirect material subsidiaries (the "Guarantors").
Following the Reorganization, each of HP Realty and HP Operating Company would
continue to be a co-obligor on the Notes and the Guarantors would remain as
guarantors. Hollywood Park and HP Operating Company have entered into an
agreement that, as between Hollywood Park and HP Operating Company, HP
Operating Company would be primarily responsible for payments on the Notes,
but that agreement in no way limits the obligations of Hollywood Park under
the Notes to third-party creditors.
Following the Reorganization, HP Realty and HP Operating Company will be
required to make an offer to repurchase the Notes at 101% of the aggregate
principal amount of the Notes (or if there is a decline in the rating of the
Notes as a result of the Reorganization, the repurchase price shall be 102%),
plus accrued and unpaid interest to the date of repurchase. Management does
not believe that a significant amount of the outstanding Notes will be
submitted for redemption in connection with the Reorganization because the
Notes are currently trading at a premium to the repurchase price, and believes
HP Realty and HP Operating Company will
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be able to refinance any Notes redeemed with bank and/or subordinated debt
financing on terms at least as favorable to the companies as the Notes.
However, if HP Realty and HP Operating Company are required to repurchase a
significant portion of the Notes, there can be no assurance that replacement
financing will be available on favorable terms. See "Risk Factors--Dependence
on Future Borrowings" and "Management's Discussion and Analysis of Financial
Condition and Results of Operations--Liquidity and Capital Resources."
The indenture (the "Indenture") governing the Notes permits Hollywood Park
and HP Operating Company, without the consent of the holders of the Notes, to
amend the Indenture covenants to provide for the Reorganization and such
related modifications to the Indenture and the Notes as may be necessary to
permit the implementation of, and the continuing operations of HP Operating
Company and Hollywood Park after giving effect to, the Reorganization,
including the making of operating lease payments by HP Operating Company to HP
Realty, the distribution by HP Realty of such amounts as may be required by
the Code and the regulations promulgated thereunder to maintain REIT status,
which would include 95% of its taxable income (excluding net capital gains)
under current law, and any other modifications to the covenants that may be
necessary to comply with the applicable provisions of the Code and the
regulations promulgated thereunder, or may be necessary, in the good faith
determination of the respective Boards of Directors of Hollywood Park and HP
Operating Company as evidenced by Board resolutions, to provide for the same
relative benefits and restrictions as existed under the Indenture prior to the
Reorganization.
INTEREST OF CERTAIN PERSONS IN THE REORGANIZATION
As a result of the Reorganization, individuals who are directors and
executive officers of Hollywood Park (each of whom will be a director or
executive officer of HP Realty and/or HP Operating Company) will receive
Paired Shares in respect of the Hollywood Park Common Stock held by such
individuals. See "Security Ownership of Certain Beneficial Owners and
Management." In addition, stock options currently held by such individuals
will be adjusted in the Reorganization so that such individuals receive Paired
Shares upon exercise. See "The Hollywood Park Operating Company 1998 Stock
Option Plan." Information concerning the management of HP Realty and HP
Operating Company after the Reorganization is set forth under "--Directors,
Officers and Employees of HP Operating Company and HP Realty" and "Election of
Directors."
STOCK CERTIFICATES; METHOD OF EXCHANGE
After the Reorganization is completed, each outstanding stock certificate
that previously evidenced ownership of shares of Hollywood Park Common Stock
shall be deemed for all corporate purposes (including voting), other than for
dividends or transfers of securities, to evidence ownership of the same number
of shares of HP Realty Common Stock and an equal number of shares of HP
Operating Company Common Stock. The stock transfer books of Hollywood Park
will be closed at the close of business on the business day immediately
preceding the Effective Time, and the holders of record of Hollywood Park
Common Stock as of the Effective Time will be the holders of record of Paired
Shares immediately after the Effective Time.
As soon as practicable after the Effective Time, ChaseMellon Shareholder
Services, L.L.C. (the "Exchange Agent") will mail to each Hollywood Park
stockholder of record a letter of transmittal with instructions to be used by
such stockholder in surrendering certificates which, prior to the
Reorganization, represented shares of Hollywood Park Common Stock in exchange
for new certificates representing Paired Shares. Letters of transmittal will
also be available after the Effective Time at the offices of the Exchange
Agent. YOU SHOULD NOT SURRENDER YOUR HOLLYWOOD PARK STOCK CERTIFICATES FOR
EXCHANGE UNTIL THE REORGANIZATION HAS BEEN COMPLETED AND YOU HAVE OBTAINED A
LETTER OF TRANSMITTAL.
Upon the surrender of a Hollywood Park Common Stock certificate to the
Exchange Agent together with a duly executed letter of transmittal and such
other documents as may be reasonably required by the Exchange Agent, the
holder of such certificate will be entitled to receive in exchange therefor a
new certificate representing a number of Paired Shares of each of HP Realty
Common Stock and HP Operating Company Common Stock equal to the number of
Hollywood Park shares represented by the certificate surrendered. The new
certificates
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will be printed "back-to-back," such that each certificate evidencing shares
of HP Operating Company Common Stock will be printed on the reverse side of a
certificate evidencing an equal number of shares of HP Realty Common Stock.
Each back-to-back certificate will bear legends referring to the restrictions
on transfer of the Paired Shares which are imposed by the Pairing Agreement
and the Certificate of Incorporation and By-Laws of each company. It will be a
condition to the issuance of any certificate for any Paired Shares in a name
other than the name in which the surrendered Hollywood Park Common Stock
certificate is registered that the person requesting the issuance of such
certificate either pay to the Exchange Agent any transfer or other taxes
required by reason of the issuance of a certificate for Paired Shares in a
name other than the registered holder of the certificate surrendered, or
establish to the satisfaction of the Exchange Agent that such tax has been
paid or is not applicable.
After the Effective Time, there will be no further registration of transfers
on the stock transfer books of Hollywood Park of shares of Hollywood Park
Common Stock that were issued and outstanding immediately prior to the
Effective Time. If, after the Effective Time, certificates representing shares
of Hollywood Park Common Stock are presented for transfer, no transfer shall
be effected on the stock transfer books of HP Realty or HP Operating Company
with respect to such shares and no certificate shall be issued representing
the Paired Shares exchangeable for such shares of Hollywood Park Common Stock
unless and until the old stock certificate representing such shares of
Hollywood Park Common Stock is delivered to the Exchange Agent together with a
properly completed letter of transmittal (or such other documents as are
satisfactory to HP Realty, HP Operating Company and the Exchange Agent in
their sole discretion). Until a certificate representing Hollywood Park Common
Stock has been surrendered to the Exchange Agent, each such certificate will
be deemed at any time after the Effective Time to represent only the right to
receive upon such surrender the certificate representing the Paired Shares to
which the Hollywood Park stockholder is entitled under the terms of the
Reorganization. Upon completion of the Reorganization, shares of Hollywood
Park Common Stock will cease to be traded on the New York Stock Exchange, and
there will be no further market for Hollywood Park Common Stock.
IT IS IMPORTANT FOR FORMER HOLDERS OF HOLLYWOOD PARK COMMON STOCK TO
EXCHANGE THEIR HOLLYWOOD PARK STOCK CERTIFICATES FOR NEW "BACK-TO-BACK" STOCK
CERTIFICATES PROMPTLY AFTER THE EFFECTIVE DATE OF THE REORGANIZATION SINCE THE
HOLLYWOOD PARK CERTIFICATES WILL NOT CONSTITUTE GOOD DELIVERY FOR SETTLEMENT
OF TRADES IN THE PAIRED SHARES THEY WILL EVIDENCE. MOREOVER, NO DIVIDENDS OR
OTHER DISTRIBUTIONS DECLARED BY HP REALTY OR BY HP OPERATING COMPANY AFTER THE
EFFECTIVE TIME WILL BE PAID ON THE HP REALTY COMMON STOCK OR THE HP OPERATING
COMPANY COMMON STOCK EVIDENCED BY OUTSTANDING HOLLYWOOD PARK CERTIFICATES
UNTIL SUCH OLD CERTIFICATES ARE SURRENDERED FOR EXCHANGE, BUT UPON SURRENDER
OF THE HOLLYWOOD PARK CERTIFICATES, ANY UNPAID DIVIDENDS OR DISTRIBUTIONS WILL
BE PAID WITHOUT INTEREST.
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BUSINESS OF HP OPERATING COMPANY
AFTER THE REORGANIZATION
GENERAL
After the Reorganization, HP Operating Company will be the owner of all of
Hollywood Park's current holdings and operations except the land and
facilities at the Hollywood Park property in Inglewood and the Turf Paradise
property in Phoenix, both of which it will operate under a lease from HP
Realty, and except for certain ancillary businesses. Consequently, like
Hollywood Park currently, HP Operating Company will continue as a diversified
gaming, sports and entertainment company.
HP Operating Company (through Boomtown) will own and operate the Boomtown
Reno, Boomtown Biloxi and Boomtown New Orleans casino properties. HP Operating
Company will also operate, under leases from HP Realty, the Hollywood Park
Race Track and simulcast facilities, the Hollywood Park-Casino and the Turf
Paradise Race Track and simulcast facilities. See "The Reorganization--
Relationship Between the Companies After the Reorganization." HP Operating
Company will also own (through HP/Compton, Inc. and HP Casino, Inc.) Crystal
Park LLC, whose Crystal Park Hotel and Casino will continue to be operated,
under lease, by an unaffiliated operator, and will operate (through Sunflower)
The Woodlands Race Track pending resolution of the Sunflower reorganization.
Subject to receipt of regulatory approvals, HP Operating Company (through HP
Yakama and HPY Consulting) will also fund the construction of, provide
consulting services to, and receive a share of the net revenues of, an Indian
casino in Washington State.
BUSINESS STRATEGY
HP Operating Company's strategic plan will be to grow its gaming, sports and
entertainment businesses by (i) expanding its existing properties, (ii)
working with HP Realty to develop and operate new projects on the currently
unimproved real estate at HP Realty's existing sites and developing profits at
new sites (including sites not owned by HP Realty), and (iii) making selected
acquisitions, principally in the gaming industry, to diversify its operations
and to achieve economies of scale. Some of these acquisitions would be made in
cooperation with HP Realty, where HP Realty would own and lease to HP
Operating Company the real estate assets and HP Operating Company would
actively manage the operating businesses acquired.
GAMING OPERATIONS
HP Operating Company's gaming establishments will consist of Boomtown's
western-themed casinos located in or near Reno, Nevada, New Orleans, Louisiana
and Biloxi, Mississippi, as well as two card club casinos located in the
metropolitan Los Angeles, California area and (subject to regulatory
approvals) interests in Indian gaming facilities in Yakima County, Washington
and Kansas City, Kansas.
Boomtown Reno. Boomtown Reno operates on 569 acres in Verdi, Nevada (seven
miles west of Reno, Nevada and two miles from the California border) on
Interstate 80, the major highway connecting Northern California and Reno.
Boomtown Reno, which caters to middle-income customers, offers its guests a
40,000-square foot casino, including 1,320 slot machines and 44 table games
and two Keno games. Boomtown Reno also offers a 122-room hotel, a 35,000-
square foot entertainment center featuring a theater, an indoor miniature golf
course, a restaurant and a ferris wheel, a 16-acre truck stop with
approximately 200 parking spaces, a 203-space full-service recreational
vehicle park, a service station, a mini-mart and other related amenities.
Boomtown New Orleans. Boomtown New Orleans operates on a 50-acre site in
Harvey, Louisiana, approximately ten miles from the French Quarter of New
Orleans, and caters to the approximately 300,000 local residents of the West
Bank of the Mississippi River near New Orleans. Gaming operations are
conducted from a 250-foot replica of a paddle-wheel riverboat, offering 911
slot machines and 55 table games in a 30,000 square foot casino. The land-
based facility adjacent to the riverboat dock is composed of a western-themed,
88,000-square foot facility, which includes a restaurant, a 20,000 square foot
family entertainment center and a western saloon/dancehall.
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Boomtown Biloxi. Boomtown Biloxi operates on nineteen acres on Biloxi,
Mississippi's historic Back Bay, one-half mile from Interstate 110, the main
highway connecting Interstate 10 and the Gulf of Mexico. This facility
consists of a land-based facility which houses all non-gaming activities and a
33,632-square foot casino constructed on a 400 x 110 foot barge permanently
moored to the land-based building. The property offers 1,038 slot machines, 35
table games and various restaurants and other nongaming amenities, and caters
principally to the over 250,000 local residents of the Biloxi area and to the
employees of other casinos in the area.
Hollywood Park-Casino. The Hollywood Park-Casino, which operates on the same
premises as the Hollywood Park Race Track, offers 145 gaming tables in 30,000-
square feet of gaming space. The Hollywood Park-Casino offers certain forms of
card games which are permitted in California, including Poker, Pai Gow and
California Blackjack. Patrons of the Hollywood Park-Casino bet solely against
each other and pay a fee for seats at gaming tables or for each hand played.
Therefore, the casino does not participate in the wagers made or in the
outcome of any of the games played.
Crystal Park Casino. The Crystal Park Casino operates in the metropolitan
Los Angeles area and features 100 gaming tables and 282 hotel rooms which
operate under the Radisson Hotels International, Inc. flag. Games offered are
similar to those offered at the Hollywood Park-Casino. In order to comply with
California law, which does not allow publicly-traded companies to operate card
club casinos (other than on the same property as a race track, such as the
Hollywood Park-Casino), the Crystal Park Casino has been leased to and
operated by unaffiliated operators.
Yakama Project. HP Yakama and HPY Consulting, which will be wholly-owned
subsidiaries of HP Operating Company after the Reorganization, have entered
into agreements under which they will fund (up to $9,000,000) the construction
and development of, provide development services to, and receive a share of
the net revenues of, an Indian casino in Washington State. The casino, which
is currently under construction and is expected to open in the second quarter
of 1998, will feature a 600 seat bingo hall, certain table games including
Blackjack, Poker, Craps, Roulette, Mini-bac and Caribbean Stud, and will offer
electronic pull tabs and electronic bingo, but will not offer slot machines.
See "Management's Discussion and Analysis of Financial Condition and Results
of Operations--Overview."
Kansas Project. HP Kansas, Inc. (which will be a wholly-owned subsidiary of
HP Operating Company after the Reorganization) has entered into a partnership
agreement with respect to the development of an Indian gaming facility to be
constructed on the grounds of The Woodlands property in Kansas City, Kansas.
The project is subject to regulatory approval, as well as the approval of
Sunflower's plan of reorganization by the U.S. Bankruptcy Court and
Sunflower's creditors. See "--Racing Operations--Sunflower Racing" below.
RACING OPERATIONS
Hollywood Park Race Track. The Hollywood Park Race Track is situated on 378-
acre Hollywood Park property in Inglewood, California, in the Los Angeles
metropolitan area. Since 1938, the Hollywood Park Race Track has been ranked
among the country's most distinguished thoroughbred racing facilities and, in
1997, hosted the Breeders' Cup championship racing series for the third time.
Hollywood Park conducts two live on-track thoroughbred horse race meets
annually, totalling approximately 100 race days per year. Hollywood Park
simulcasts its live races, directly or indirectly through re-transmissions, to
861 locations in 40 states and four countries.
Turf Paradise. Turf Paradise operates on approximately 275 acres in the
northwest section of Phoenix, Arizona. Turf Paradise conducts a live
thoroughbred meet that starts in September and runs through May and also
offers limited quarter horse and Arabian horse racing during certain periods
of the year. Turf Paradise simulcasts its live races to 34 off-track sites in
Arizona and 34 out-of-state hubs, from which the signal is further
disseminated to sites in New York, New Jersey, Pennsylvania, Nevada and
Canada, among others.
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Sunflower Racing. Hollywood Park also owns, through its subsidiary
Sunflower, The Woodlands Racetrack in Kansas City, Kansas. In 1996, Sunflower
filed for reorganization under Chapter 11 of the U.S. Bankruptcy Code. A plan
of reorganization was filed with the Bankruptcy Court but remains subject to
approval of the court and the creditors. The plan of reorganization provides
for, subject to the approval of federal, state and tribal gaming authorities,
the sale of The Woodlands to the Wyandotte Tribe of Oklahoma and the
construction of a casino on the property. HP Kansas, Inc. and a non-affiliated
partner would make loans to fund (up to a currently estimated amount of
approximately $15 million to $20 million) the acquisition and development of,
provide consulting services to, and receive a share of the revenues of the
casino. See "Management's Discussion and Analysis of Financial Condition and
Results of Operations--Liquidity and Capital Resources."
REGULATION AND LICENSING
Because HP Operating Company, after the Reorganization, will operate the
Hollywood Park and Turf Paradise race tracks and the Hollywood Park-Casino,
and will own and operate (through its various subsidiaries) Boomtown and all
of Hollywood Park's other current gaming and racing properties, HP Operating
Company will be subject to the various federal, state and local regulations
and licensing requirements that are currently applicable to the gaming and
racing activities of Hollywood Park and its subsidiaries. Hollywood Park and
HP Operating Company will seek all approvals that are required under
applicable gaming and racing laws for it to effect the Reorganization and will
apply for all licenses that will be necessary for HP Operating Company and its
subsidiaries to conduct their gaming and racing activities after the
Reorganization, the receipt of which is a condition to completion of the
Reorganization. See "The Reorganization--Conditions to the Reorganization" and
"--Regulatory Approvals and Third-Party Consents." For a detailed discussion
of these regulations and requirements, see the discussion under the heading
"Regulation and Licensing" in Hollywood Park's Registration Statement on Form
S-4 (Registration No. 333-34471) filed with the Securities and Exchange
Commission on August 27, 1997, as amended, which is hereby incorporated by
reference into this Proxy Statement. See "Incorporation of Certain Documents
by Reference."
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BUSINESS OF HP REALTY
AFTER THE REORGANIZATION
GENERAL
After the Reorganization, HP Realty will be a REIT, and will primarily be an
owner, developer and lessor of real property. In particular, HP Realty will
own the Hollywood Park Race Track land and facilities and, through its
subsidiary Turf Paradise, Inc., the Turf Paradise Race Track land and
facilities, both of which it will lease to HP Operating Company. In the
immediate future, it is anticipated that substantially all of HP Realty's
revenues will consist of lease payments from HP Operating Company and HP
Operating Company's subsidiaries on these facilities.
HP Realty will own approximately 378 acres in Inglewood, California, which
is located in the heart of the Los Angeles metropolitan area. The property
houses the 60,000 square foot Hollywood Park-Casino, the Hollywood Park Race
Track and the executive offices of Hollywood Park, which will be the executive
offices of both HP Realty and HP Operating Company (under a lease with HP
Realty). In addition, HP Realty will operate the Hollywood Park Golf and
Sports Center, located on the Inglewood property. The Hollywood Park Race
Track, Hollywood Park-Casino and required parking covers approximately 228
acres, leaving approximately 150 acres available for immediate development. HP
Realty will lease the race track, simulcast wagering, and card club casino
facilities on its Inglewood property to HP Operating Company which will
operate the facilities. See "The Reorganization--Relationship Between the
Companies After the Reorganization" and "Business of HP Operating Company
After the Reorganization."
Turf Paradise, located in the northwest section of Phoenix, Arizona, covers
approximately 275 acres. The property includes the Turf Paradise Race Track, a
thoroughbred racing facility located in Phoenix, Arizona and approximately 100
acres of undeveloped land. HP Realty, through Turf Paradise, will lease the
race track and simulcast wagering facilities on this property to Turf Paradise
Operating Company, a subsidiary of HP Operating Company, which will operate
the facilities. See "The Reorganization--Relationship Between the Companies
After the Reorganization" and "Business of HP Operating Company After the
Reorganization." In addition, Turf Paradise will operate the Turf Paradise
Travel Trailer Park.
BUSINESS STRATEGY
HP Realty's strategic plan is to maximize the net income it distributes to
its stockholders in the long-term by expanding its real estate holdings and
increase their value by (i) continuing to derive lease income from HP
Operating Company and its subsidiaries on the Hollywood Park and Turf Paradise
properties; (ii) developing unimproved real estate at its existing properties
and (iii) acquiring and developing new properties. Some of HP Realty's
acquisitions may be made in conjunction with future acquisitions of gaming,
sports, entertainment and related businesses by HP Operating Company, with HP
Realty owning and leasing to HP Operating Company the land and facilities, and
HP Operating Company conducting the operations of the business acquired.
Hollywood Park is exploring further development at its Inglewood and Phoenix
properties, and continues to have discussions with developers regarding
proposed retail, entertainment and other projects for both of these
properties, including a proposed state-of-the-art football stadium at the
Inglewood property. HP Realty would continue these efforts, and would seek to
develop such multi-use retail, entertainment and/or sports venues. Hollywood
Park has not entered into any definitive agreements concerning any of these
projects, and the ultimate uses have not yet been determined. Any decisions by
Hollywood Park (or HP Realty after the Reorganization) to begin these projects
would be dependent upon, among other things, the execution of definitive
agreements, the availability of project financing with acceptable terms, and
the attainment of the necessary permits and certifications, for which there
can be no assurance.
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FEDERAL INCOME TAX MATTERS
The following sets forth a summary of the material federal income tax
consequences that are generally applicable to holders of Hollywood Park Common
Stock from the Reorganization and to holders of the Paired Shares from the
ownership and disposition of the Paired Shares. The following summary is based
upon current provisions of the Code, applicable Treasury regulations, judicial
authority and administrative rulings and practice. Legislative, judicial or
administrative changes or interpretations may be forthcoming that could alter
or modify the statements and conclusions set forth herein. Any such changes or
interpretations may or may not be retroactive and could affect the tax
consequences to holders. The following summary rests on a number of factual
bases and assumptions and could be adversely affected if Hollywood Park's
understanding of the applicable facts or expectations as to the applicable
facts are inaccurate. In addition, certain future events could cause all or
part of the federal income tax consequences of the Reorganization to differ
from those anticipated and, thus, could render any description of the
anticipated federal income tax consequences in this Proxy Statement
inaccurate.
No rulings have been or will be issued by the Internal Revenue Service (the
"IRS") on any tax issue connected with the Reorganization or on any other tax
matter discussed in this Proxy Statement. In August 1997, Hollywood Park
submitted a request for advance rulings (the "Ruling Request") to the IRS on
certain aspects of the Reorganization, including certain tax issues connected
with the TPI Restructuring, the HPOC Spin-Off, and the qualification of HP
Realty as a REIT. In January 1998, the IRS informally advised Irell & Manella
LLP ("Irell & Manella"), tax counsel for Hollywood Park, and Arthur Andersen
LLP, Hollywood Park's accounting firm, that the IRS had tentatively concluded
that it would not issue the requested rulings. As a result, Hollywood Park
withdrew the Ruling Request and will proceed with the Reorganization as
described in this Proxy Statement without any advance rulings from the IRS.
Holders should note that without advance rulings from the IRS there can be no
assurance that the IRS will take a view similar to Hollywood Park's with
respect to the tax consequences described below. Except for the opinion of
counsel described below relating to certain tax issues connected with the
qualification of HP Realty as a REIT, no opinions of counsel have been or will
be rendered on any tax issue connected with the Reorganization or on any other
tax matter discussed in this Proxy Statement.
The tax treatment of a holder of the Hollywood Park Common Stock or of the
Paired Shares may vary depending on such holder's particular situation.
Certain holders (including tax-exempt organizations, insurance companies,
financial institutions, broker-dealers, holders who do not hold their stock as
a capital asset, holders who acquired their stock in connection with stock
option plans or other compensation transactions, taxpayers subject to the
alternative minimum tax, foreign corporations and persons who are not citizens
or residents of the United States) may be subject to special rules not
discussed below. In addition, the following summary does not address any tax
consequences under foreign, state or local tax laws.
EACH HOLDER OF THE HOLLYWOOD PARK COMMON STOCK OR OF THE PAIRED SHARES IS
URGED TO CONSULT SUCH HOLDER'S OWN TAX ADVISOR AS TO THE SPECIFIC TAX
CONSEQUENCES OF THE REORGANIZATION OR OF OWNING AND DISPOSING OF THE PAIRED
SHARES, INCLUDING THE APPLICABILITY AND EFFECT OF ANY FEDERAL, STATE, LOCAL OR
FOREIGN TAX LAWS IN SUCH HOLDER'S PARTICULAR CIRCUMSTANCES.
FEDERAL INCOME TAX CONSEQUENCES OF CONTRIBUTIONS AND SPIN-OFFS
Tax Consequences of TPI Restructuring and HPOC Spin-Off: Assumption that
Transactions Will Be Taxable
Hollywood Park intends to proceed with the Reorganization without any
advance rulings from the IRS. Although proceeding with the Reorganization
without such rulings may result in significant tax liabilities to Hollywood
Park and its stockholders without a distribution of any cash to pay the tax,
Hollywood Park believes that the benefits from the reinstatement of paired-
share REIT status are likely to more than offset such tax liabilities.
Although the Company, based on a review of the applicable facts and
circumstances at the time of the HPOC Spin-Off, may report the TPI
Restructuring and the HPOC Spin-Off generally as tax-free transactions, in
considering and voting upon the Reorganization Amendments and any other
matters that are necessary to effect
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the planned Reorganization, the stockholders of Hollywood Park should assume
that the TPI Restructuring and the HPOC Spin-Off will both constitute taxable
transactions which will result in tax liabilities for both Hollywood Park and
its stockholders. Based on that assumption, the anticipated federal income tax
consequences for Hollywood Park and its stockholders are as described below.
See "--Effects on Hollywood Park" and "--Effects on Stockholders of Hollywood
Park."
Based upon estimates prepared by the Company, the tax liability associated
with the Reorganization could be approximately $54 million for Hollywood Park
and the taxable distribution (consisting of dividends, return of capital, and
taxable gain in excess of return of capital) to Hollywood Park's stockholders
associated with the Reorganization could be approximately $130 million (or
$4.95 per share of Hollywood Park Common Stock, based on the current number of
outstanding shares of common stock). See "--Calculation of Estimated Tax
Liabilities of Hollywood Park and Stockholders" and "--Possibility that
Transactions May Be Reported as Tax-Free." Further, since such calculations
are only based on estimates, the actual tax liabilities may be less but could
be significantly more than the estimated amounts.
Effects on Hollywood Park. If the TPI Restructuring is a taxable
transaction, it would result in the recognition of gain by the Company equal
to (i) the excess, if any, of the fair market value of the assets contributed
by Turf Paradise to Turf Paradise Operating Company over Turf Paradise's tax
basis in such assets or (ii) the excess of the fair market value of the assets
retained by Turf Paradise over Turf Paradise's tax basis in such assets. The
gain recognized by the Company would be equal to the amount described in (ii)
if Turf Paradise, as a result of becoming a qualified REIT subsidiary (see
"Federal Income Taxation of HP Realty and Requirements for Qualification as
REIT--Requirements for Qualification as REIT--Qualified REIT Subsidiary"),
were treated as being liquidated as part of the Reorganization and, as a
consequence, as having made a taxable distribution to Hollywood Park of the
assets retained by Turf Paradise. For a calculation of estimated tax
liabilities, see "--Calculation of Estimated Tax Liabilities of Hollywood Park
and Stockholders."
If the HPOC Spin-Off is a taxable transaction, it would result in the
recognition of gain by Hollywood Park to the extent that the fair market value
of the shares of HP Operating Company Common Stock distributed in the HPOC
Spin-Off exceeds Hollywood Park's tax basis in such shares. Depending on the
fair market value of the shares of HP Operating Company Common Stock on the
date of the HPOC Spin-Off, the foregoing tax liability could be substantial.
For a calculation of estimated tax liabilities, see "--Calculation of
Estimated Tax Liabilities of Hollywood Park and Stockholders."
As a result of the HPOC Spin-Off and regardless of whether the HPOC Spin-Off
constitutes a taxable transaction, Hollywood Park will also be required to
recognize (i) deferred intercompany gain, if any, resulting from any
transaction between any company leaving the Hollywood Park affiliated group
with any other member of the affiliated group, and (ii) income in the amount
of any excess loss account with respect to the stock of one or more of the
companies leaving the Hollywood Park affiliated group. See "--Deferred
Intercompany Gain and Excess Loss Accounts." In addition, Hollywood Park may
be required to recognize gain as a result of the transfer of certain real
estate assets from HP Operating Company to Hollywood Park. See "--Transfer of
HP Operating Company Real Estate Assets."
Effects on Stockholders of Hollywood Park. If the HPOC Spin-Off is a taxable
transaction, it would also result in a taxable distribution to the
stockholders of Hollywood Park. Each holder of Hollywood Park Common Stock
would be treated as receiving a taxable distribution in an amount equal to the
fair market value of the shares of HP Operating Company Common Stock
distributed to such holder as part of the HPOC Spin-Off. This distribution
will be taxed first as a dividend to the extent of such holder's pro rata
share of Hollywood Park's current and accumulated earnings and profits (which
would include the amount of gain recognized by the Company as a result of the
TPI Restructuring and the HPOC Spin-Off, less the applicable corporate tax),
and then as a nontaxable return of capital to the extent of such holder's
adjusted tax basis in the Hollywood Park Common Stock, with any remaining
amount being taxed as capital gain (assuming such stock is held as a capital
asset). Any dividends may be subject to back-up withholding with respect to
individuals who, prior to the Reorganization, had not provided their correct
taxpayer identification numbers on the IRS's Form W-9 or a
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substitute thereof. The dividends-received deduction under Section 243 of the
Code may be available for some corporate holders, subject to the limitations
applicable to the dividends-received deduction including those pertaining to
"extraordinary dividends" under Section 1059 of the Code. Depending on the
fair market value of the shares of HP Operating Company Common Stock on the
date of the HPOC Spin-Off, the foregoing distributions may result in
significant tax liabilities to stockholders without the companies having
distributed to stockholders any cash out of which to satisfy such liabilities.
For a calculation of estimated tax liabilities, see "--Calculation of
Estimated Tax Liabilities of Hollywood Park and Stockholders."
Calculation of Estimated Tax Liabilities of Hollywood Park and
Stockholders. Assuming the HPOC Spin-Off is a taxable transaction, based on
Hollywood Park's tax basis in its HP Operating Company shares and its earnings
and profits as of December 31, 1997 (which amounts may increase or decrease
prior to completion of the Reorganization on account of 1998 events), and
based on Hollywood Park's estimate that the aggregate fair market value of the
shares of HP Operating Company distributed in the HPOC Spin-Off would be
approximately $130 million (approximately six times estimated 1997 EBITDA,
less the amount of certain liabilities), (i) the combined state and federal
tax liability to Hollywood Park would be approximately $29 million and
(ii) Hollywood Park stockholders would be treated as receiving a taxable
dividend of approximately $71 million (or $2.70 per share of Hollywood Park
Common Stock, based on the current number of outstanding shares). In addition,
stockholders who have a tax basis in shares of Hollywood Park Common Stock of
less than $2.25 per share would realize taxable capital gain equal to the
amount by which $2.25 exceeds such stockholders' tax basis in such a share of
Hollywood Park Common Stock (assuming such stock is held as a capital asset).
To the extent the distribution does not result in such dividend or capital
gain treatment, it will reduce the tax basis of the shares of Hollywood Park
Common Stock for stockholders. Although Hollywood Park believes that a
valuation equal to six times estimated 1997 EBITDA less the amount of certain
liabilities represents a fair estimate of the fair market value of HP
Operating Company, there can be no assurance that the fair market value of the
HP Operating Company shares would not be found to be significantly greater
than the $130 million used in the foregoing example, resulting in increased
tax liabilities for Hollywood Park and its stockholders. Among other things,
if it were determined that some portion of the value attributable to HP
Realty's exemption from Section 269B of the Code, providing it with special
rights to reinstate a paired REIT-operating company structure, should be
allocated to HP Operating Company, then the fair market value of the HP
Operating Company shares might be increased to reflect such value.
Hollywood Park has retained Morgan Stanley & Co. Incorporated to advise it
in connection with matters relating to the restoration of the paired share
structure, including evaluation of a proposed business combination with or
investment by a potential strategic partner (a "Strategic Transaction"). A
Strategic Transaction could provide evidence of the value of the paired share
structure. Any additional value (in excess of the $130 million valuation used
in the foregoing example) attributed to the HP Operating Company shares
distributed to Hollywood Park stockholders in the HPOC Spin-Off would (i)
increase the combined state and federal tax liability of Hollywood Park by
approximately 41% of the amount of such additional value and (ii) increase the
total amount of the taxable distribution to Hollywood Park stockholders by
100% of the amount of such additional value (approximately 59% of which would
be treated as taxable dividend and approximately 41% of which would be treated
as taxable capital gain or return of tax basis in their Hollywood Park Common
Stock). See also "Risk Factors--Uncertain Amount of Corporate and Stockholder
Tax Liability" and "Unaudited Pro Forma Combined Consolidated Condensed
Financial Statements--Notes to Post-REIT Unaudited Pro Forma Consolidated
Condensed Balance Sheets." If the IRS were to assert that the valuation of the
HP Operating Company shares, as reported for tax purposes by Hollywood Park,
was too low and should therefore be increased for purposes of determining the
foregoing tax liabilities, and if the IRS were to prevail in its position,
then Hollywood Park would also become liable for interest (based on the
applicable rates provided by the IRS from time to time) on the additional tax
owed by it and could also become liable for a 20% penalty on its underpayment
of income tax, and the stockholders of Hollywood Park would also become liable
for interest on the additional tax owed by them and, depending on their
individual circumstances, could also become subject to understatement
penalties.
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Whether or not the HPOC Spin-Off constitutes a taxable transaction,
Hollywood Park will also be required to recognize income in the amount of any
excess loss accounts with respect to the stock of certain of its
subsidiaries. See "--Deferred Intercompany Gain and Excess Loss Accounts."
Hollywood Park estimates that the aggregate amount of the excess loss accounts
will be approximately $21 million (corresponding to a combined state and
federal tax liability of approximately $8 million) as of December 31, 1997,
although the amount of the excess loss accounts (and thus the amount of income
required to be recognized and corresponding tax liability) could increase or
decrease prior to completion of the Reorganization as a result of 1998 events.
In addition, Hollywood Park may be required to recognize gain as a result of
the transfer of certain real estate assets from HP Operating Company to
Hollywood Park. See "--Transfer of HP Operating Company Real Estate Assets."
In that event, based on the estimated value of HP Operating Company's real
estate assets as of December 31, 1997 (which amount may increase or decrease
prior to the HPOC Contribution on account of 1998 events), Hollywood Park
would expect to recognize gain in the amount of approximately $20 million
(corresponding to a combined state and federal tax liability of approximately
$8 million), reduced to reflect the amount of basis, if any, that it is
permitted to use to offset such gain.
Assuming the TPI Restructuring is a taxable transaction, it would result in
the recognition of gain by the Company. Based on Turf Paradise's tax basis in
its assets as of December 31, 1997 (which amounts may increase or decrease
prior to completion of the Reorganization on account of 1998 events), the
combined state and federal tax liability to the Company would be approximately
(i) $4 million (which is already reflected in the approximately $29 million
combined state and federal tax liability to Hollywood Park described above),
or (ii) if the IRS was to successfully assert that Turf Paradise, because it
would become a qualified REIT subsidiary, should be treated as having made a
taxable distribution to Hollywood Park of the assets retained by Turf
Paradise, $9 million (which would be in addition to the approximately $29
million combined state and federal tax liability to Hollywood Park described
above). If the additional tax liability reflected in (ii) applies, then
Hollywood Park stockholders would also be treated as receiving approximately
$13 million more (or $.49 more per share of Hollywood Park Common Stock, based
on the current number of outstanding shares) in taxable dividend and
approximately $13 million less (or $.49 less per share of Hollywood Park
Common Stock, based on the current number of outstanding shares) in taxable
capital gain and return of tax basis in their Hollywood Park Common Stock.
Possibility that Transactions May Be Reported as Tax-Free
Although in voting on the proposal to amend Hollywood Park's charter in
order to facilitate the Reorganization, stockholders should assume that both
the TPI Restructuring and the HPOC Spin-Off will constitute taxable
transactions and will be reported as such, Hollywood Park may, based on a
review of the applicable facts and circumstances at the time of the HPOC Spin-
Off (including the structure of any Strategic Transaction), determine instead
to report the TPI Restructuring and the HPOC Spin-Off as generally tax-free
transactions under Section 355 and Section 368(a)(1)(D) of the Code. In that
event, subject to the limitations and qualifications referred to herein,
Hollywood Park may report that (i) the TPOC Contribution, followed by the TPOC
Spin-Off, qualifies as a tax-free reorganization pursuant to Section
368(a)(1)(D) of the Code (a "Section 368(a)(1)(D) Reorganization"); (ii) the
TPOC Spin-Off qualifies as a tax-free distribution pursuant to Section 355 of
the Code (a "Section 355 Spin-Off"); (iii) the HPOC Contribution, followed by
the HPOC Spin-Off, qualifies as a Section 368(a)(1)(D) Reorganization; and
(iv) the HPOC Spin-Off qualifies as a Section 355 Spin-Off. However, there can
be no assurance that, if Hollywood Park were to take such positions, the IRS
would not challenge them and prevail on one or more of the positions. If the
IRS were to prevail on its positions, then in addition to the tax liabilities
previously described for a taxable TPI Restructuring and HPOC Spin-Off,
Hollywood Park would become liable for interest thereon (based on the
applicable rates provided by the IRS from time to time) and could also become
liable for a 20% penalty on its underpayment of income tax if the IRS
successfully asserts that the Reorganization should be treated as falling
within the corporate tax shelter provisions of Section 6662 of the Code. The
stockholders of Hollywood Park would also become liable for interest on the
tax owed by them, and depending on their individual circumstances, could also
become subject to understatement penalties.
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If Hollywood Park determines to report the TPI Restructuring and the HPOC
Spin-Off as generally tax-free transactions, then it would be reported that
(i) no gain or loss was recognized by the Company as a result of the TPOC
Contribution or the TPOC Spin-Off; (ii) no gain or loss was recognized by
Hollywood Park on its receipt of Turf Paradise Operating Company common stock
in the TPOC Spin-Off; (iii) no gain or loss was recognized by Hollywood Park
or HP Operating Company as a result of the HPOC Contribution or the HPOC Spin-
Off
(except as noted below in "--Deferred Intercompany Gain and Excess Loss
Accounts" and "--Transfer of HP Operating Company Real Estate Assets"); and
(iv) no gain or loss was recognized by holders of Hollywood Park Common Stock
on their receipt of HP Operating Company Common Stock in the HPOC Spin-Off.
The Code and applicable Treasury regulations impose both subjective and
objective requirements that must be met in order for a distribution of stock
of a subsidiary to qualify as a Section 355 Spin-Off. Because of the
subjective nature of some of these requirements and the lack of relevant legal
authority on others, there is no assurance that the IRS would not challenge
the qualifications of the TPOC Spin-Off and the HPOC Spin-Off as Section 355
Spin-Offs or that it would not prevail in such a challenge. Among the factors
that, if not resolved consistently with the requirements for a tax-free spin-
off, could cause the TPI Restructuring and the HPOC Spin-Off to be taxable
transactions are the following: whether the TPOC Spin-Off and the HPOC Spin-
Off (collectively, the "Spin-Offs") will be carried out for a real and
substantial, non-federal tax, corporate business purpose; whether Hollywood
Park and various subsidiaries satisfy the five-year active trade or business
requirements; whether the Spin-Offs will be used principally as a device for
the distribution of earnings and profits to stockholders; whether Turf
Paradise (as a result of becoming a qualified REIT subsidiary) is treated as
having made a taxable distribution of its retained assets to Hollywood Park;
and the nature or structure of one or more Strategic Transactions.
If, based on a review of facts and circumstances at the time of the HPOC
Spin-Off, Hollywood Park determines that the HPOC Spin-Off may be reported as
a generally tax-free transaction but that the TPI Restructuring, if
implemented, should be reported as a taxable transaction, Hollywood Park may,
depending on the facts and circumstances at the time, choose to eliminate the
TPOC Contribution and TPOC Spin-Off in order to avoid the corporate tax
liabilities that the TPI Restructuring may generate. Instead, Hollywood Park
would contribute all of the stock of Turf Paradise to HP Operating Company in
the HPOC Contribution.
Effect of New Legislation on Tax-Free Treatment. In August 1997, the
President signed into law the Taxpayer Relief Act of 1997 (the "1997 Act"),
Section 1012 of which adds new subsections (e) and (f) to Section 355 of the
Code. Even if Hollywood Park determines to report either the TPOC Spin-Off or
the HPOC Spin-Off as tax-free Section 355 Spin-Offs, if Section 355(e)-(f)
were to become applicable to the Spin-Offs, these provisions might cause the
Spin-Offs to be taxable to Hollywood Park (but not to Hollywood Park's
stockholders). This legislation would apply to the Spin-Offs only if, as part
of a plan including the Spin-Offs, 50% or more of the voting power or value
(in stock or assets) of HP Realty or HP Operating Company was acquired
directly or indirectly, by one or more persons (for purposes of this
discussion, a "Change of Control"). Under the 1997 Act, any Change of Control
within two years before or after the Spin-Offs will be presumed part of a plan
including the Spin-Offs. Accordingly, there is some chance that the Spin-Offs
could become taxable to Hollywood Park if HP Realty or HP Operating Company
undergoes a Change of Control within two years after the Spin-Offs. If a
Strategic Transaction within two years after the Spin-Offs resulted in a
Change of Control, the IRS would likely argue that the Spin-Offs are taxable
to Hollywood Park.
In addition, Section 1012 of the 1997 Act adds a new subsection (g) to
Section 358 of the Code. Under Section 358(g), in the case of a distribution
to which Section 355 of the Code applies and which, as in the case of the TPOC
Spin-Off, involves the distribution of stock from one member of an affiliated
group to another member of such group, the government may provide adjustments
to the adjusted basis of any stock which (1) is in a corporation which is a
member of such group, and (2) is held by another member of such group, to
appropriately reflect the proper treatment of such distribution. This new
provision could affect the amount of the tax basis allocated to the Turf
Paradise common stock and the Turf Paradise Operating Company common stock,
and the allocation of other tax attributes between HP Realty and HP Operating
Company. If this new provision were applied retroactively to the TPOC Spin-
Off, the collateral effects that it would have on the Reorganization,
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such as on the amount of the earnings and profits required to be distributed
as a dividend by HP Realty in its first REIT year, are unclear and could
adversely affect some of the tax consequences of the Reorganization.
Effect of Other Transactions on Tax-Free Treatment. In addition to the
provisions of new Section 355(e)-(f), certain other requirements applicable to
tax-free spin-off transactions might, as a result of transactions entered into
by Hollywood Park before or after the Reorganization, preclude Hollywood Park
from reporting the Spin-Offs as generally tax-free transactions (for either
Hollywood Park or its stockholders) or, if Hollywood Park has already taken
such a reporting position, have an adverse impact thereon. Such other
requirements include and relate to whether, despite the implementation of such
transactions, the Hollywood Park stockholders at the time of the Spin-Offs are
treated as retaining sufficient control of HP Operating Company (under
standards applicable to Section 368(a)(1)(D) Reorganizations) and a sufficient
continuity of interest in each of HP Realty and HP Operating Company (under
standards applicable to Section 355 Spin-Offs). In particular, these issues
could be implicated if HP Realty and HP Operating Company later issue
additional Paired Shares in acquisitions and such acquisitions are treated as
integrated with the Spin-Offs.
Deferred Intercompany Gain and Excess Loss Accounts
Regardless of whether the HPOC Spin-Off constitutes a taxable or tax-free
transaction, Hollywood Park will be required to recognize deferred
intercompany gain, if any, resulting from any transaction between any company
leaving the Hollywood Park affiliated group with any other member of the
affiliated group. The amount of deferred intercompany gain which is not
already reflected in the other tax liabilities described herein is estimated
by Hollywood Park to be relatively insubstantial as of December 31, 1997,
although that amount could increase prior to completion of the Reorganization
as a result of events subsequent to December 31, 1997. In addition,
immediately prior to the HPOC Spin-Off, Hollywood Park will have an excess
loss account with respect to the stock of one or more of the companies leaving
the Hollywood Park affiliated group as a result of the Spin-Offs, including
Sunflower. Whether or not the HPOC Spin-Off is taxable, Hollywood Park will be
required to recognize income in the amount of any such excess loss account.
Hollywood Park estimates that the aggregate amount of the excess loss accounts
will be approximately $21 million as of December 31, 1997, although the amount
of the excess loss accounts (and the amount of income required to be
recognized) could increase or decrease prior to completion of the
Reorganization as a result of Sunflower's 1998 operating results and other
events subsequent to December 31, 1997.
Transfer of HP Operating Company Real Estate Assets
Prior to the HPOC Spin-Off, HP Operating Company will transfer all of its
real estate assets located at the Hollywood Park property in Inglewood to
Hollywood Park in partial satisfaction of HP Operating Company's rent payment
obligations to Hollywood Park for periods preceding the completion of the
Reorganization. Because HP Operating Company's tax basis in these assets
equals the estimated fair market value of these assets, HP Operating Company
will not recognize any gain in this transaction. However, if the IRS were to
recharacterize this transfer as an exchange of HP Operating Company's real
estate assets for some of the assets transferred to HP Operating Company as
part of the HPOC Contribution and the IRS prevailed in its position, then even
if the HPOC Contribution otherwise qualifies as a tax-free transaction, based
on the estimated value of HP Operating Company's real estate assets as of
December 31, 1997 (which amount may increase or decrease prior to the HPOC
Contribution on account of 1998 events), Hollywood Park would expect to
recognize gain in the amount of approximately $20 million, less the amount of
basis, if any, that it is permitted to use to offset such gain.
The Boomtown Merger
On June 30, 1997, Boomtown became a wholly-owned subsidiary of Hollywood
Park in a reverse triangular merger (the "Boomtown Merger") qualifying as a
tax-free reorganization under Section 368(a)(2)(E) of the Code, which requires
Hollywood Park to be in control of Boomtown immediately after the merger. As a
part of the Reorganization, Hollywood Park will contribute all of its Boomtown
stock to HP Operating Company, the stock of which will be distributed to the
Hollywood Park stockholders, and Hollywood Park will no longer
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control Boomtown. The Boomtown Merger and the Reorganization are not part of
the same plan and should not be analyzed together. Accordingly, the Boomtown
Merger should retain its qualification as a tax-free reorganization under
Section 368(a)(2)(E) of the Code.
Reclassification of Hollywood Park Common Stock
In order to pair the stocks of HP Realty and HP Operating Company after the
Spin-Offs, the existing Hollywood Park Common Stock will be converted into the
new HP Realty Common Stock in a reclassification. Section 1036 of the Code
permits the exchange, without the recognition of gain or loss, of common stock
for common stock in the same corporation. Thus, the reclassification of the
existing Hollywood Park Common Stock to facilitate pairing of HP Realty and HP
Operating Company common stocks should not trigger any recognition of gain or
loss for Hollywood Park stockholders.
FEDERAL INCOME TAXATION OF HP REALTY AND REQUIREMENTS FOR QUALIFICATION AS
REIT
General
HP Realty plans to make an election to be taxed as a REIT under Sections 856
through 860 of the Code and applicable Treasury regulations (the "REIT
Provisions"), commencing with its taxable year ending December 31, 1999. In
order for HP Realty to be eligible to elect REIT status for such taxable year,
Hollywood Park will be required to complete the Reorganization by December 31,
1998. Hollywood Park believes that, commencing with such taxable year, HP
Realty will be organized and will operate in such a manner so as to qualify
for taxation as a REIT, and Hollywood Park intends for HP Realty to continue
to operate in such a manner; however, no assurance can be given that HP Realty
will qualify as a REIT or will continue to so qualify.
The REIT Provisions are highly technical and complex. The following sets
forth the material aspects of the REIT Provisions that govern the federal
income tax treatment of a REIT and its stockholders, including changes made by
the 1997 Act to the extent such changes will take effect on or before January
1, 1999. This summary is qualified in its entirety by the REIT Provisions and
administrative and judicial interpretations thereof.
As long as HP Realty qualifies for taxation as a REIT, it generally will not
be subject to federal corporate income taxes on net income that it distributes
currently to stockholders. This treatment substantially eliminates the "double
taxation" (once at the corporate level and again at the stockholder level)
that generally attaches to the income of a regular corporation subject to full
corporate-level tax (a "C corporation").
Even if HP Realty qualifies for taxation as a REIT, however, it may be
subject to federal income or excise tax as follows. First, HP Realty will be
taxed at regular corporate rates on any undistributed REIT taxable income (as
discussed below), including undistributed net capital gains. Second, under
certain circumstances, HP Realty may be subject to the "alternative minimum
tax" on its items of tax preference, if any. Third, if HP Realty has (i) net
income from the sale or other disposition of "foreclosure property" (which is,
in general, property acquired on foreclosure or otherwise on default on a loan
secured by such property or a lease of such property) or (ii) other non-
qualifying income from foreclosure property, it will be subject to tax at the
highest corporate rate on such income. Fourth, if HP Realty has net income
from "prohibited transactions" (which are, in general, certain sales or other
dispositions of property, other than foreclosure property, held primarily for
sale to customers in the ordinary course of business), such income will be
subject to a 100% tax. Fifth, if HP Realty should fail to satisfy the 75%
Gross Income Test or the 95% Gross Income Test (each of which is discussed
below), but has nonetheless maintained its qualification as a REIT because
certain other requirements have been met, it will be subject to a 100% tax on
the gross income attributable to the greater of the amount by which HP Realty
fails the 75% or 95% test, multiplied by a fraction intended to reflect HP
Realty's profitability. Sixth, if HP Realty should fail to distribute during
each calendar year at least the sum of (i) 85% of its REIT ordinary income for
such year, (ii) 95% of its REIT capital gain net income for such year, and
(iii) any undistributed taxable income from prior periods, HP Realty will be
subject to a 4% excise tax on the excess of such required distributions over
the amounts actually distributed. Seventh, pursuant to IRS Notice 88-19, 1988-
1 C.B. 486, if
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HP Realty has a net unrealized built-in gain with respect to any asset (a
"Built-In Gain Asset") held by HP Realty on January 1, 1999 or acquired by HP
Realty thereafter from a corporation that is or has been a C corporation in
certain transactions in which the basis of the Built-In Gain Asset in the
hands of HP Realty is determined by reference to the basis of the asset in the
hands of the C corporation, and HP Realty directly or indirectly recognizes
gain on the disposition of such asset during the 10-year period (the
"Recognition Period") beginning on January 1, 1999 with respect to assets held
by HP Realty on such date or, with respect other assets, the date on which
such asset is acquired by HP Realty, then, to the extent of the Built-In Gain
(i.e., the excess of (a) the fair market value of such asset over (b) HP
Realty's adjusted basis in such asset, determined as of the beginning of the
Recognition Period), such gain will be subject to tax at the highest regular
corporate rate pursuant to Treasury regulations that have not yet been
promulgated. The results described above with respect to the recognition of
Built-In Gain assume that HP Realty will make an election pursuant to IRS
Notice 88-19 with respect to assets held by HP Realty on January 1, 1999 and
with respect to assets acquired by HP Realty thereafter from a corporation
that is or has been a C corporation. Hollywood Park expects that it will have
Built-In Gain Assets as of January 1, 1999 and, thus, direct or indirect sales
of such Built-In Gain Assets by HP Realty after 1998 in excess of available
loss carryforwards will result in a federal income tax liability to HP Realty.
If HP Realty were not to make an election pursuant to IRS Notice 88-19 or that
election no longer were available because of a change in applicable law,
Hollywood Park would recognize taxable gain on the Reorganization under the
Built-In Gain rules, regardless of whether the HPOC Spin-Off otherwise
constitutes a taxable transaction or a Section 355 Spin-Off.
In early February 1998, the Clinton administration proposed legislation that
would eliminate the availability of the election under IRS Notice 88-19. Based
on the Treasury Department's General Explanations of the Administration's
Revenue Proposals, it is expected that the proposed legislation would be
effective for REIT elections that are first effective for a taxable year
beginning after January 1, 1999 and would also apply to acquisitions (e.g.,
the merger of a C corporation into a REIT) after December 31, 1998. Thus, it
is expected that C corporations would continue to be permitted to elect REIT
status effective for taxable years beginning in 1998 or on January 1, 1999
without incurring the tax on conversion. If the proposed legislation is
enacted, it could substantially reduce the benefits of the Reorganization
because the cost of making certain acquisitions would be increased on account
of the inability to defer Built-In Gain on the acquired assets. Hollywood Park
believes that, at the present time, it cannot be predicted whether such
proposal will be enacted or, if enacted, in what form.
Requirements for Qualification as REIT
To qualify as a REIT, HP Realty must elect to be so treated and must meet on
a continuing basis certain requirements (as discussed below) relating to HP
Realty's organization, sources of income, nature of assets, and distribution
of income to stockholders.
The Code defines a REIT as a corporation, trust or association: (i) that is
managed by one or more trustees or directors; (ii) the beneficial ownership of
which is evidenced by transferable shares, or by transferable certificates of
beneficial interest; (iii) that would be taxable as a domestic corporation,
but for the REIT Provisions; (iv) that is neither a financial institution nor
an insurance company subject to certain provisions of the Code; (v) the
beneficial ownership of which is held by 100 or more persons; (vi) during the
last half of each taxable year not more than 50% in value of the outstanding
stock of which is owned, directly or indirectly, by five or fewer individuals
(defined in the Code to include certain entities); (vii) that as of the close
of the taxable year, has no earnings and profits accumulated in any non-REIT
year; (viii) that is not electing to be taxed as a REIT for any taxable year
prior to the fifth taxable year which begins after the first taxable year for
which its REIT status terminated or was revoked (unless the IRS has waived the
applicability of such waiting period); (ix) that has the calendar year as its
taxable year; and (x) that meets certain other tests, described below,
regarding the nature of its income and assets. The REIT Provisions provide
that conditions (i) to (iv), inclusive, must be met during the entire taxable
year and that condition (v) must be met during at least 335 days of a taxable
year of 12 months, or during a proportionate part of a taxable year of less
than 12 months. Conditions (v) and (vi) will not apply until after the first
taxable year for which an election is made by the REIT to be taxed as a REIT.
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Hollywood Park believes that HP Realty will satisfy conditions (i) through
(x) (described above). The HP Realty and HP Operating Company Charters will
provide for restrictions regarding the transfer and ownership of shares, which
restrictions are intended to assist HP Realty in satisfying and in continuing
to satisfy the share ownership requirements described in conditions (v) and
(vi) above. See "Description of Capital Stock of the Companies--Certain
Provisions of the Charters and By-Laws--Restrictions on Ownership and
Transfer." For the taxable year beginning January 1, 1999, Hollywood Park
expects that HP Realty will satisfy condition (vii) as long as the
Reorganization has been completed by such date and all accumulated non-REIT
earnings and profits are distributed to stockholders prior to January 1, 2000;
for subsequent taxable years, Hollywood Park expects that the dividends to be
paid by HP Realty will enable it to continue to satisfy condition (vii).
Because Hollywood Park has not been taxed as a REIT since 1991, it satisfies
condition (viii).
As noted above in condition (vii), in order to be taxed as a REIT, HP Realty
generally must not have any earnings and profits at the close of a taxable
year that were accumulated in any taxable year in which the REIT provisions
did not apply. If, as assumed above, the HPOC Spin-Off will constitute a
taxable transaction (see "Tax Consequences of TPI Restructuring and HPOC Spin-
Off--Assumption that Transactions Will Be Taxable"), then the amount of
Hollywood Park's taxable distribution to stockholders as part of the HPOC
Spin-Off would be expected to eliminate any earnings and profits that had been
accumulated by Hollywood Park in any taxable year in which the REIT provisions
had not applied to it, and no cash distribution, in addition to distribution
of HP Operating Company stock, would be required.
However, if Hollywood Park were to determine that it will report the HPOC
Spin-Off as a generally tax-free transaction (see "--Possibility that
Transactions May Be Reported as Tax-Free"), then as a result of the HPOC Spin-
Off, the earnings and profits of Hollywood Park immediately before the HPOC
Spin-Off would be allocated between HP Realty and HP Operating Company
pursuant to applicable Treasury regulations, which prescribe certain
alternative methods for making such allocation. In the case of the HPOC Spin-
Off, it is expected that, under the regulations, such allocation would be made
based on the relative net asset bases of HP Realty and HP Operating Company.
It is expected that, taking into account its estimated earnings and profits
through December 31, 1997, the earnings and profits to be allocated to HP
Realty on that basis would be approximately $7.7 million. Events during 1998
would affect the amount of earnings and profits to be allocated to HP Realty
as a result of the HPOC Spin-Off, if such an allocation were to be made. In
any event, if Hollywood Park were to determine to report the HPOC Spin-Off as
a generally tax-free transaction, it would be Hollywood Park's intention that
HP Realty distribute the amount of such earnings and profits allocated to it
prior to the end of the first taxable year for which HP Realty elects to be
taxed as a REIT. If the IRS were subsequently to challenge the method by which
Hollywood Park's earnings and profits were allocated between HP Realty and
HP Operating Company, it could be determined that HP Realty failed to
distribute the entire amount of such earnings and profits prior to the end of
the first taxable year for which HP Realty elected to be taxed as a REIT. If
this were to occur, HP Realty would fail to qualify as a REIT for one or more
taxable years.
Pursuant to applicable Treasury regulations, in order to avoid certain
penalties, HP Realty must maintain certain records and request certain
information from its stockholders designed to disclose the actual ownership of
its stock. HP Realty intends to comply with these requirements.
Opinion of Irell & Manella. Prior to completion of the Reorganization, Irell
& Manella will issue an opinion letter on certain tax matters connected with
the qualification of HP Realty as a REIT (the "Tax Opinion"). The Tax Opinion
is not binding on the IRS or any court, and no assurance can be given that the
IRS will not challenge part or all of the conclusions reflected in the Tax
Opinion or that such a challenge would not be successful. When this summary
describes that Irell & Manella will, as part of the Tax Opinion, render an
opinion that a result "should" pertain, it means that if the IRS were to
assert a contrary view and if all of the facts and issues were completely and
competently presented to a court, it is more likely than not that the view
stated herein and in the Tax Opinion would prevail. The Tax Opinion will be
subject to certain limitations and qualifications and will rely upon and be
premised on the accuracy of certain assumptions and certain representations
and statements of Hollywood Park. No assurance can be given that the IRS will
not take a contrary position as to the applicable facts or that the IRS would
not prevail in its position. Further, the
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anticipated federal income tax treatment described in the Tax Opinion may be
changed, perhaps retroactively, by legislative, administrative, or judicial
action at any time.
Irell & Manella will, as part of the Tax Opinion, render an opinion
substantially to the effect that, commencing with HP Realty's taxable year
ending December 31, 1999, HP Realty should be organized and operated in
conformity with the requirements for qualification as a REIT, and its proposed
method of operation should enable it to continue to meet the requirements for
qualification and taxation as a REIT under the Code for its subsequent taxable
years. This opinion will be based, in part, on certain assumptions and on
certain factual representations of Hollywood Park, including without
limitation an assumption that HP Realty and HP Operating Company will be
respected as separate corporate entities despite the pairing of their shares
and representations concerning HP Realty's business and properties, ownership,
organization, sources of income, prior status and operations, future
operations, and levels of distributions. Such qualification and taxation as a
REIT depends upon HP Realty's ability to meet, through annual operating
results, certain distribution levels, specified diversity of stock ownership,
and various other qualification tests imposed under the REIT Provisions, as
discussed below. HP Realty's annual operating results will not be reviewed by
Irell & Manella. No assurance can be given that the actual results of HP
Realty's operations for any particular taxable year will satisfy such
requirements. For a discussion of the potential effect of the pairing of the
shares on REIT qualification and the tax consequences of failure to qualify as
a REIT, see "--Paired Shares" and "--Failure to Qualify" below.
Paired Shares. Section 269B of the Code provides that if the shares of a
REIT and a non-REIT are paired, then the REIT and the non-REIT shall be
treated as one entity for purposes of determining whether either company
qualifies as a REIT, including for purposes of applying the Gross Income Tests
and the Asset Tests (described below). As described above, the shares of HP
Realty and HP Operating Company will be paired after the Reorganization. If
Section 269B applied to HP Realty and HP Operating Company, for example, then
HP Realty would not be able to satisfy the Gross Income Tests (described
below). This is because HP Realty would be considered to have received the
gross income from the racing and casino businesses of HP Operating Company,
and thus would not be eligible to be taxed as a REIT.
Pursuant to the terms of the grandfathering rule set forth in Section
136(c)(3) of P.L. 98-369 (the "Grandfathering Rule"), however, Section 269B
does not apply if the shares of the REIT and the non-REIT were paired as of
June 30, 1983 and the REIT was taxable as a REIT as of June 30, 1983. The
shares of HP Realty (as Hollywood Park would be renamed) and HP Operating
Company were paired as of June 30, 1983 and remained so through the end of
1991, and HP Realty filed its tax return as a REIT for the taxable period
including June 30, 1983 and for all subsequent periods through the end of the
1991 taxable year. Although HP Realty and HP Operating ceased operating as a
paired-share REIT in 1992, the Grandfathering Rule does not, by its terms,
require that the shares of the REIT and the non-REIT be paired at all times
after June 30, 1983, or that the REIT be taxed as a REIT at all times after
June 30, 1983.
The IRS may take the position that the Grandfathering Rule was intended to
protect only the expectations of existing paired-share REITs and their
stockholders who had relied on the validity of paired-share REIT arrangements
in issuing and purchasing paired shares and that, consequently, HP Realty and
HP Operating Company would not come within the Grandfathering Rule's intention
because Hollywood Park's current stockholders have purchased or held their
stock without relying on law allowing that corporation to be part of a paired-
share arrangement with a REIT. However, no such intention is stated in the
Grandfathering Rule or its legislative history. Moreover, grandfathering
clauses, by their very nature, are intended to be exceptions from the policy
supporting the related change in the law. They are added to legislation for
the specific purpose of permitting conduct inconsistent with the legislation
to which they relate. Accordingly, a grandfathering clause should generally be
interpreted in strict accordance with its language. Since the literal language
of the Grandfathering Rule applies to Hollywood Park's situation, Hollywood
Park believes that Section 269B should not apply to HP Realty and HP Operating
Company and is prepared to proceed with the Reorganization, taking the
position that Section 269B does not apply to HP Realty and HP Operating
Company based on the literal language of the Grandfathering Rule.
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A bill currently pending in Congress, H.R. 2676 (the "Technical Corrections
Bill"), contains a provision (the "Grandfathering Rule Amendment") that would
clarify that the Grandfathering Rule applies to entities that were paired
REITs as of June 30, 1983 whether or not they were paired entities for all
periods after June 30, 1983. This bill was passed by the U.S. House of
Representatives on November 5, 1997 and is currently pending in the U.S.
Senate. However, there can be no assurance that the Technical Corrections Bill
will be passed by Congress and signed into law by the President, or if it is,
that the Grandfathering Rule Amendment will survive in the final bill.
In the absence of enactment of the Grandfathering Rule Amendment, Hollywood
Park intends to seek an opinion of counsel regarding the availability of the
Grandfathering Rule to HP Realty and HP Operating Company. Irell & Manella has
indicated that, unless there is a change in federal tax law adversely
impacting the availability of the Grandfathering Rule (see immediately
following paragraph), it would be willing, as part of the Tax Opinion, to
render an opinion substantially to the effect that the termination of the
paired-share status of Hollywood Park and HP Operating Company and of
Hollywood Park's REIT election for the taxable years ended December 31, 1992
through 1998 should not result in Section 269B becoming applicable to HP
Realty. There are, however, no judicial or administrative authorities
interpreting the Grandfathering Rule, and Irell & Manella's opinion would be
based solely on the literal language of the Grandfathering Rule and certain
factual representations made by Hollywood Park, including without limitation
that Hollywood Park and HP Operating Company were stapled entities as of June
30, 1983, and that as of such date, Hollywood Park was a REIT. There can be no
assurance that the IRS would not take a contrary position as to the
availability of the Grandfathering Rule and the applicability of Section 269B
or that the IRS would not prevail in its position. Indeed, during the Ruling
Request process, when the IRS was presented with the same applicable facts and
circumstances as would be addressed in such opinion of counsel, the IRS
informally advised Hollywood Park's tax counsel and accounting firm that the
IRS disagreed with Hollywood Park's position on this matter. See "Risk
Factors--Absence of Rulings from the Internal Revenue Service" and "--
Consequences of Failure to Qualify as a REIT--Paired Shares and Grandfathering
Rule."
Also, there can be no assurance that the federal government will not enact
legislation in the future that limits or eliminates the ability of paired-
share REITs, including HP Realty and HP Operating Company, to avail themselves
of the Grandfathering Rule. In early February 1998, the Clinton administration
proposed legislation that would limit the tax-favored status enjoyed by
paired-share REITs. According to the Treasury Department's General
Explanations of the Administration's Revenue Proposals (the "Treasury
Explanation"), under the proposed legislation, for purposes of determining
whether any grandfathered entity is a REIT, the paired entities would be
treated as one entity with respect to properties acquired on or after the date
of first Congressional committee action regarding the proposed legislation and
with respect to activities or services relating to such properties (i.e.,
properties acquired on or after the effective date) that are undertaken or
performed by one of the paired entities on or after such date. The Treasury
Explanation states that while the market largely ignored the grandfathered
paired-share REITs for a significant period of time after 1984, recently
promoters have begun exploiting these paired-share REITs to accumulate large
holdings of properties that could not be operated directly by a REIT and that
these entities have used their tax-favored grandfathered status to obtain a
competitive advantage over others and to expand their operations greatly
beyond the levels and types of businesses conducted in 1984. If the proposed
legislation is enacted before the Reorganization has been consummated, or in
Hollywood Park's judgment is likely to be enacted, Hollywood Park may abandon
the Reorganization. If the proposed legislation is enacted after the
Reorganization has been consummated, the legislation would substantially
impair the ability of HP Realty and HP Operating Company to avail themselves
of the benefits of a paired-share REIT structure. Hollywood Park believes
that, at the present time, it cannot be predicted whether such proposal will
be enacted or, if enacted, in what form. The proposed legislation could also
deter third parties from pursuing Strategic Transactions with Hollywood Park
and thereby reduce the potential benefits of the Reorganization. The staff of
the Congressional Joint Committee on Taxation also has indicated that it plans
to look at the issue of paired-share REITs at some point in the future. See
"Risk Factors--Potential Consequences of Proposed Legislation."
Even if Section 269B of the Code does not apply to HP Realty and HP
Operating Company, the IRS could assert that HP Realty and HP Operating
Company should be treated as one entity under general tax principles
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and that, therefore, HP Realty does not qualify to be taxed as a REIT. In
general, such an assertion should be upheld only if the separate corporate
identities are a sham or unreal. Not all of the directors of HP Operating
Company will also be directors of HP Realty. In addition, HP Realty and HP
Operating Company will have separate creditors (with certain exceptions) and
will be subject to different state law licensing and regulatory requirements.
HP Realty and HP Operating Company will each maintain separate books and
records and all material transactions among them have been and will be
negotiated and structured with the intention of achieving an arm's-length
result. Based on the foregoing, Hollywood Park expects the separate corporate
identities of HP Realty and HP Operating Company to be respected.
Due to the paired structure, HP Realty and HP Operating Company will be
controlled by the same interests. As a result, the IRS could, pursuant to
Section 482 of the Code, seek to distribute, apportion or allocate gross
income, deductions, credits or allowances between or among them, including
with respect to any such items arising under HP Realty's leases of real
property to HP Operating Company and Turf Paradise Operating Company, if the
IRS determines that such distribution, apportionment or allocation is
necessary in order to prevent evasion of taxes or clearly to reflect income.
Hollywood Park and HP Operating Company intend that all material transactions
between HP Realty and HP Operating Company will be negotiated and structured
with the objective of achieving an arm's-length result. As a result, the
potential application of Section 482 of the Code should not have a material
effect on HP Realty or HP Operating Company.
As described above, all material transactions between HP Realty and HP
Operating Company will be negotiated and structured with the intention of
achieving an arm's-length result. HP Realty and HP Operating Company intend to
diligently pursue arriving at such a result. However, because HP Realty and HP
Operating Company will be controlled by the same interests, they may, in
practice, face certain difficulties that are normally not confronted by
parties bargaining at arm's length, and thus there can be no assurance that
the IRS would not challenge the terms of such transactions.
The IRS has announced that it will not issue a ruling on whether a
corporation whose stock is "paired" with or "stapled" to stock of another
corporation will qualify as a REIT, if the activities of the corporations are
integrated. This issue has never been resolved by the courts and, thus, there
can be no assurance that the IRS would not challenge HP Realty's qualification
as a REIT on this basis, or that, if the IRS did so, it would not prevail.
Before the IRS adopted the foregoing no-ruling policy in 1981, several
taxpayers had obtained rulings from the IRS holding substantially to the
effect that if they established a paired-share REIT structure, which several
of them then did, such pairing would not preclude the purported REIT from
qualifying as such under the REIT Provisions. Such rulings are directed only
to the taxpayers that requested them and may not be used or cited as precedent
by other taxpayers, such as Hollywood Park. Hollywood Park, before
establishing a paired-share REIT structure in 1982, had initially submitted a
request for such a ruling from the IRS. However, while that request for a
ruling was pending in 1981, the IRS adopted the no-ruling policy described
above, and thus no such ruling was issued to Hollywood Park.
Qualified REIT Subsidiary. A corporation which is a "qualified REIT
subsidiary" will not be treated as a separate corporation for purposes of
applying the REIT Provisions. A qualified REIT subsidiary is any corporation
if 100% of the stock of such corporation is held by the REIT. Because 100% of
the stock of Turf Paradise Realty (as Turf Paradise, Inc. would be renamed)
will be held by HP Realty, Turf Paradise Realty should be a qualified REIT
subsidiary. Thus, the separate entity status of Turf Paradise Realty should be
disregarded in applying the Gross Income Tests, the Asset Tests and other REIT
Provisions described below to HP Realty.
Gross Income Tests. In order to maintain qualification as a REIT, HP Realty
must annually satisfy two gross income requirements (the "Gross Income
Tests"). First, at least 75% of HP Realty's gross income (excluding gross
income from prohibited transactions) for each taxable year must be "qualifying
income." Qualifying income generally includes certain defined types of income
derived directly or indirectly from investments relating to real property or
mortgages on real property (including "rents from real property," as described
below, and in certain circumstances, interest) or from certain types of
qualified temporary investments. Second, at least 95% of HP Realty's gross
income (excluding gross income from prohibited transactions) for
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each taxable year must be derived from the same items which qualify under the
75% Gross Income Test and from dividends, interest, and gain from the sale or
disposition of stock or securities that do not constitute dealer property or
from any combination of the foregoing.
Rents received from a tenant will not qualify as "rents from real property"
in satisfying the Gross Income Tests if HP Realty, or a direct or indirect
owner of 10% or more of the stock of HP Realty, directly or constructively
owns 10% or more of such tenant. In addition, if rent attributable to personal
property leased in connection with a lease of real property is greater than
15% of the total rent received under the lease, then the portion of rent
attributable to such personal property will not qualify as "rents from real
property." Moreover, an amount received or accrued will not qualify as "rents
from real property" (or as interest income) for purposes of the Gross Income
Tests if it is based in whole or in part on the income or profits of any
person. However, an amount received or accrued generally will not fail to
qualify as "rents from real property" solely by reason of being based on a
fixed percentage or percentages of receipts or sales. Finally, for rents
received to qualify as "rents from real property," HP Realty generally must
not operate or manage the real property or furnish or render services to
tenants, other than through an "independent contractor" from whom HP Realty
derives no revenue. The "independent contractor" requirement, however, does
not apply to the extent that the services provided by HP Realty are "usually
or customarily rendered" in connection with the rental of space for occupancy
only, and are not otherwise considered "rendered for the convenience of the
occupant." If HP Realty receives income for services not usually or
customarily rendered to tenants in connection with the rental of space for
occupancy ("impermissible tenant services income") in an amount that exceeds
1% of all amounts received or accrued by the REIT during such taxable year
with respect to such property, no amounts received with respect to that
property will constitute "rents from real property." In addition, the REIT
will be treated as receiving an amount of impermissible tenant services income
equal to at least 150% of the direct cost of the REIT in furnishing such
service or managing or operating such property.
Substantially all of HP Realty's income will initially be derived from
leases of real property to HP Operating Company and Turf Paradise Operating
Company. These leases will be "triple-net" leases that generally provide for
payment of rent equal to the greater of a fixed rent or fixed percentages of
various sources of revenues, including pari-mutuel handle at the race tracks
and gross gaming revenues at the Hollywood Park-Casino. See "The
Reorganization--Relationship Between the Companies After the Reorganization."
In order for the rents paid under such leases to constitute "rents from real
property," the leases must be respected as true leases for federal income tax
purposes and not treated as service contracts, joint ventures,
ownership interests in lessees or some other type of arrangement. The
determination of whether the leases are true leases depends upon an analysis
of all of the surrounding facts and circumstances. In making such a
determination, courts have considered a variety of factors, including the
intent of the parties, the form of the agreement, the degree of control over
the property that is retained by the property owner, the extent to which the
property owner retains the risk of loss with respect to the property, the
existence of a business purpose for entering into the lease, the opportunity
to profit from the lease, the payment of rent at fair market value, the
existence of terms and conditions consistent with an arm's-length negotiation,
and conformity to normal business practices.
Prior to completion of the Reorganization, Irell & Manella will, as part of
the Tax Opinion, render an opinion substantially to the effect that the leases
should be treated as true leases for federal income tax purposes. This opinion
will be based, in part, on factual representations of Hollywood Park,
including without limitation the following: (i) the lessors and the lessees
intend for their relationship to be that of lessor and lessee and each such
relationship will be documented by a lease agreement; (ii) the lessees will
have the right to exclusive possession and use and quiet enjoyment of the
leased premises during the term of the leases; (iii) the lessees will bear the
cost of, and be responsible for, day-to-day maintenance and repair of the
leased premises, other than the cost of certain capital expenditures, and will
dictate how the leased premises are operated and maintained; (iv) the lessees
will bear all of the costs and expenses of operating the leased premises
during the term of the leases; (v) the term of the leases is less than the
economic life of the leased premises and the lessees do not have purchase
options with respect to the leased premises; (vi) the lessees are required to
pay substantial fixed rent during the term of the leases; (vii) each lessee
stands to incur substantial losses or reap substantial profits
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depending on how successfully it operates the leased premises; (viii) the
lessors and the lessees have a valid business purpose for entering into the
leases; (ix) the rents under the leases will be determined based on fair
market value; (x) the terms and conditions of the leases will be consistent
with arm's-length negotiations; and (xi) the leases will conform to normal
business practices. However, there are no authorities involving leases between
paired companies. Therefore, the opinion of Irell & Manella will be based upon
an analysis of the facts and circumstances (and in this regard Irell & Manella
would rely on factual representations made by Hollywood Park) and upon rulings
and judicial decisions involving situations that are analogous. There can be
no assurance that the IRS would not take a contrary position as to whether the
leases constitute true leases for federal income tax purposes or that the IRS
would not prevail in its position. If any lease is recharacterized as a
service contract, a partnership agreement, or an ownership interest in a
lessee, rather than as a true lease, HP Realty would not be able to satisfy
either the 75% or 95% Gross Income Tests and, as a result, would lose its REIT
status. See "Risk Factors--Consequences of Failure to Qualify as a REIT--Gross
Income Tests."
If HP Realty were to own, directly or indirectly, 10% or more of HP
Operating Company or Turf Paradise Operating Company, the rent paid to HP
Realty by HP Operating Company or Turf Paradise Operating Company with respect
to property leased by HP Realty to HP Operating Company or Turf Paradise
Operating Company would not qualify as "rents from real property." In order to
reduce the risk of such a situation, which would result in the
disqualification of HP Realty as a REIT, the HP Realty and HP Operating
Company Charters will contain restrictions on the amount of HP Realty shares
and HP Operating Company shares that any one person can own. These
restrictions generally will provide that any attempt by any one person to
actually or constructively acquire 9.8% or more of the outstanding Paired
Shares will be ineffective. See "Description of Capital Stock of the
Companies--Certain Provisions of the Charters and By-Laws--Restrictions on
Ownership and Transfer." However, notwithstanding such restrictions, because
the Code's constructive ownership rules for purposes of the 10% ownership
limit are broad and it is not possible to continually monitor direct and
indirect ownership of Paired Shares, it is possible that some person may at
some time own sufficient Paired Shares to prevent HP Realty from satisfying
the requirements to be taxed as a REIT.
Another requirement for rent payments under a lease to constitute "rents
from real property" is that the rent attributable to personal property under
the lease must not be greater than 15% of the rent received under the lease.
For this purpose, rent attributable to personal property is the amount that
bears the same ratio to the total rent for the taxable year as the average of
the adjusted basis of the personal property at the beginning and at the end of
the taxable year bears to the average of the aggregate adjusted basis of both
the real property and personal property leased under, or in connection with,
such lease. If the IRS were successfully to assert that with respect to one or
more of the leases rent attributable to personal property is greater than 15%
of the total rent, then it is possible that HP Realty would not be able to
satisfy either the 75% or 95% Gross Income Test and, as a result, would lose
its REIT status. With respect to both the leases and future acquisitions, HP
Realty will monitor the 15% test to continue to qualify as a REIT.
A further requirement for qualification of rent under the leases as "rents
from real property" is that the rent must not be based on the income or
profits of any person. The percentage rent under the leases will qualify as
"rents from real property" if it is based on percentages of receipts or sales
and the percentages (i) are fixed at the time the leases are entered into;
(ii) are not renegotiated during the term of the leases in a manner that has
the effect of basing percentage rent on income or profits; and (iii) conform
with normal business practice. More generally, percentage rent will not
qualify as "rents from real property" if, considering the leases and all the
surrounding circumstances, the arrangement does not conform with normal
business practice, but is in reality used as a means of basing the percentage
rent on income or profits. Hollywood Park intends for the leases to conform
with normal business practice and expects the percentage rent to be treated as
"rents from real property" under this requirement.
Finally, rent under HP Realty's leases will not qualify as "rents from real
property" if HP Realty renders or furnishes certain prohibited services to the
occupants of the properties. So long as the leases are treated as true leases,
HP Realty should not be treated as rendering or furnishing any prohibited
services to the occupants of the properties.
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Although the income from the operation of the Hollywood Park Golf and Sports
Center and the income from the operation of the Turf Paradise Travel Trailer
Park will not be considered to be qualifying income, Hollywood Park expects
that other qualifying income will be large enough in amount for HP Realty to
satisfy the Gross Income Tests. Even if this expectation is met, however, a
REIT is, as described earlier, subject to a 100% tax on net income from
"prohibited transactions" (including the sale or other disposition of property
held primarily for sale to customers in the ordinary course of business), and
thus in the case of the Hollywood Park Golf and Sports Center, certain net
income from sales of inventory items will be subject to such tax. In addition,
if Hollywood Park's expectation is not met and HP Realty failed the Gross
Income Tests, HP Realty may lose its status as a REIT, and, even if it retains
its status, it will be subject to a 100% tax with respect to certain excess
net income (the gross income attributable to the greater of the amount by
which HP Realty fails the 75% Gross Income Test or the 95% Gross Income Test,
multiplied by a fraction intended to reflect HP Realty's profitability). See
"--Failure to Qualify."
If HP Realty fails to satisfy one or both of the 75% or 95% Gross Income
Tests for any taxable year, it may nevertheless qualify as a REIT for such
year if it is entitled to relief under certain provisions of the Code. These
relief provisions generally will be available if HP Realty's failure to meet
such tests is due to reasonable cause and not willful neglect, HP Realty
attaches a schedule of the sources of its income to its tax return, and any
incorrect information on the schedule was not due to fraud with intent to
evade tax. It is not possible to state whether in all circumstances HP Realty
would be entitled to the benefit of these relief provisions. As discussed
above, even if these relief provisions apply, a 100% tax would be imposed with
respect to the excess net income.
Asset Tests. In order to maintain qualification as a REIT, HP Realty, at the
close of each quarter of its taxable year, must also satisfy three tests
relating to the nature of its assets (the "Asset Tests"). First, at least 75%
of the value of HP Realty's total assets must be represented by real estate
assets (including (i) its allocable share of real estate assets held by
partnerships in which HP Realty owns a direct or indirect interest, (ii) stock
or debt instruments held for not more than one year purchased with the
proceeds of a stock offering or long-term (at least five years) debt offering
of HP Realty, and (iii) shares in qualified REITs, cash, cash items and
government securities. Second, not more than 25% of HP Realty's total assets
may be represented by securities other than those in the 75% asset class.
Third, of the investments included in the 25% asset class, the value of any
one issuer's securities owned by HP Realty may not exceed 5% of the value of
HP Realty's total assets, and HP Realty may not own more than 10% of any one
issuer's outstanding voting securities (excluding securities of a qualified
REIT subsidiary or another REIT).
Hollywood Park anticipates that commencing with the taxable year ending
December 31, 1999, HP Realty will be able to comply with the Asset Tests if
the Reorganization is completed during 1998. Substantially all of HP Realty's
investments will be qualifying real estate assets, with certain exceptions
which are small enough in amount so as not to disqualify HP Realty from
satisfying the Asset Tests, and except for the stock of Turf Paradise Realty,
which will be disregarded as a qualified REIT subsidiary (discussed above).
After initially meeting the Asset Tests at the close of any quarter, HP
Realty will not lose its status as a REIT for failure to satisfy the Asset
Tests at the end of a later quarter solely by reason of changes in asset
values. If the failure to satisfy the Asset Tests results from an acquisition
of securities or other property during a quarter, the failure can be cured by
disposition of sufficient non-qualifying assets within 30 days after the close
of that quarter. HP Realty intends to maintain adequate records of the value
of its assets to comply with the Asset Tests and to take such actions within
30 days after the close of any quarter as may be required to cure any non-
compliance.
Annual Distribution Requirements. HP Realty, in order to qualify as a REIT,
will be required to distribute dividends (other than capital gain dividends)
to its stockholders in an amount at least equal to (i) the sum of (a) 95% of
HP Realty's "REIT taxable income" (computed without regard to the dividends
paid deduction and HP Realty's net capital gain) and (b) 95% of the net income
(after tax), if any, from foreclosure property, minus (ii) the sum of certain
items of non-cash income. In addition, if HP Realty disposes of any Built-In
Gain Asset during its Recognition Period, HP Realty will be required, pursuant
to Treasury regulations that have not yet been promulgated, to distribute at
least 95% of the Built-In Gain (after tax), if any, recognized on the
disposition
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of such asset. Distributions must be paid in the taxable year to which they
relate, or in the following taxable year if declared before HP Realty timely
files its tax return for such year and if paid on or before the first regular
dividend payment after such declaration. To the extent that HP Realty does not
distribute all of its net capital gain or distributes at least 95%, but less
than 100%, of its "REIT taxable income," as adjusted, it will be subject to
tax on the undistributed portion at the applicable regular corporate tax
rates.
Furthermore, if HP Realty should fail to distribute during each calendar
year at least the sum of (i) 85% of its REIT ordinary income for such year,
(ii) 95% of its REIT capital gain income for such year, and (iii) any
undistributed taxable income from prior periods, HP Realty will be subject to
a 4% excise tax on the excess of such required distribution over the amounts
actually distributed.
HP Realty intends to make timely distributions sufficient to satisfy the
annual distribution requirements and to the extent practical, avoid payment of
material amounts of federal income or excise tax by HP Realty.
It is possible, however, that HP Realty, from time to time, may experience
timing differences between the actual receipt of income and actual payment of
deductible expenses and the inclusion of such income and deduction of such
expenses in arriving at REIT taxable income. In addition, it is also possible
that, from time to time, HP Realty may be allocated a share of net capital
gain attributable to the sale of depreciated property that exceeds its
allocable share of cash attributable to that sale. In such cases, HP Realty
may not have sufficient cash or other liquid assets to meet the distribution
requirements described above. In order to meet the distribution requirements
in such cases, HP Realty may find it necessary to arrange for short-term or
possible long-term borrowings or to pay dividends in the form of taxable stock
dividends.
Under certain circumstances, HP Realty may be able to rectify a failure to
meet the above distribution requirements for a year by paying "deficiency
dividends" to stockholders in a later year, which may be included in HP
Realty's deduction for dividends paid for the earlier year. Thus, HP Realty
may be able to avoid being taxed on amounts distributed as deficiency
dividends; however, HP Realty will be required to pay interest based upon the
amount of any deduction taken for deficiency dividends.
Failure to Qualify
If HP Realty fails to qualify for taxation as a REIT in any taxable year,
and the relief provisions do not apply, HP Realty will be subject to tax
(including any applicable alternative minimum tax) on its taxable income
at regular corporate rates. Distributions to stockholders in any year in which
HP Realty fails to qualify will not be deductible by HP Realty nor will they
be required to be made. The corporate tax liabilities arising from such
failure to qualify could have a material adverse effect on HP Realty. Such
failure could result in significant tax liabilities to HP Realty at a time
when, due to prior distributions to stockholders, it may not have sufficient
cash or other liquid assets to pay the tax. To obtain the funds necessary to
pay such tax liabilities, HP Realty may be required to arrange for short-term
or possible long-term borrowings or to sell some of its assets. In addition,
HP Realty's failure to qualify as a REIT would reduce the cash available for
distribution by HP Realty to its stockholders. Furthermore, if HP Realty fails
to qualify as a REIT, all distributions to stockholders will be taxable as
ordinary income to the extent of HP Realty's current and accumulated earnings
and profits, without the possibility of designating certain capital gain
income to be taxed to the stockholders as capital gains, and, subject to
certain limitations of the Code, corporate distributees may be eligible for
the dividends-received deduction. Unless entitled to relief under specific
statutory provisions, HP Realty will also be disqualified from taxation as a
REIT for the four taxable years following the year during which qualification
was lost. It is not possible to state whether in all circumstances HP Realty
would be entitled to such statutory relief.
FEDERAL INCOME TAXATION OF HP OPERATING COMPANY
Substantially all of HP Operating Company's taxable income will consist of
income derived from the operation of its race tracks and casinos. HP Operating
Company will be subject to federal income tax on its taxable income.
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CONSTRAINTS ON FUTURE TRANSACTIONS
The proposed paired-share REIT structure will limit the types of tax-free
techniques that HP Realty and HP Operating Company can use to effect
acquisitions following the Reorganization. Stockholders of the acquired
company may be taxed on a portion of the non-cash consideration received in
the acquisition, and large stockholders of the acquired company may be
required to receive enough taxable non-stock consideration to assure that they
do not own, directly or indirectly, more than 9.8% of either HP Operating
Company or HP Realty after the acquisition. In addition, if HP Operating
Company and HP Realty seek to divide the assets of an acquired corporation to
exploit the paired-share REIT structure in connection with its business, some
part of the acquisition transaction will likely be taxable to the acquired
corporation. Finally, the Clinton administration has proposed legislation that
would eliminate the ability of REITs to defer, under IRS Notice88-19, taxable
gain on appreciated assets at the time a REIT makes certain acquisitions; if
the proposed legislation is enacted, it could substantially reduce the
benefits of the Reorganization because the cost of making certain acquisitions
would be increased on account of the inability to defer tax on appreciated
acquired assets. These factors may make proposed acquisitions by HP Operating
Company and HP Realty less attractive to potential acquisition targets. See
"Risk Factors--Potential Consequences of Proposed Legislation," "--Constraints
on Equity Financing" and "--Constraints on Future Transactions."
FEDERAL INCOME TAXATION OF HOLDERS OF PAIRED SHARES
If the separate corporate identities of HP Realty and HP Operating Company
are respected, then notwithstanding that the Paired Shares may be transferred
only as a unit, holders of Paired Shares will be treated for U.S. federal
income tax purposes as holding equal numbers of shares of HP Realty Common
Stock and HP Operating Company Common Stock. The tax treatment of
distributions to stockholders and of any gain or loss upon sale or other
disposition of the Paired Shares (as well as the amount of any gain or loss)
must therefore be determined separately with respect to each share of HP
Realty Common Stock and each share of HP Operating Company Common Stock
contained within each Paired Share.
As long as HP Realty qualifies as a REIT, distributions up to the amount of
HP Realty's current or accumulated earnings and profits (and not designated as
capital gain dividends) will be taken into account by holders of HP Realty
Shares as ordinary income and will not be eligible for the dividends-received
deduction for corporations. Distributions that are properly designated by HP
Realty as capital gain dividends will be treated as gain from the sale or
exchange of a capital asset held for more than one year (to the extent they do
not exceed HP Realty's actual net capital gain for the taxable year) without
regard to the period for which the holder has held such holder's stock.
Corporate holders may be required to treat up to 20% of certain capital gain
dividends as ordinary income, and capital gains dividends are not eligible for
the dividends-received deduction.
Distributions in excess of HP Realty's current and accumulated earnings and
profits will not be taxable to a holder to the extent that they do not exceed
the adjusted basis of the holder's HP Realty shares, but rather will reduce
the adjusted basis of such HP Realty shares. To the extent that such
distributions exceed the adjusted basis of a holder's HP Realty shares they
will be included in income as gain realized from the sale of such shares, as
discussed below. In addition, any dividend declared by HP Realty in October,
November or December of any year payable to a holder of record on a specified
date in any such month shall be treated as both paid by HP Realty and received
by the holder on December 31 of such year, provided that the dividend is
actually paid by HP Realty during January of the following calendar year.
If HP Realty elects to retain and pay tax on its net capital gains, HP
Realty's stockholders will be required to include their proportionate share of
the undistributed long-term capital gains in income and will receive a credit
for their share of the tax paid by HP Realty. The basis of HP Realty's
stockholders' shares would be increased by a corresponding amount.
HP Realty will be treated as having sufficient earnings and profits to treat
as a dividend any distribution by HP Realty up to the amount required to be
distributed in order to avoid imposition of the 4% excise tax discussed above.
As a result, holders may be required to treat certain distributions that would
otherwise result in a tax-free
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return of capital as taxable distributions. Moreover, any "deficiency
dividend" will be treated as a "dividend" (either as ordinary or capital gain
dividend, as the case may be), regardless of HP Realty's earnings and profits.
Distributions from HP Realty and gain from the disposition of HP Realty
shares will not be treated as passive activity income and, therefore,
stockholders generally will not be able to apply any "passive losses" against
such income. Dividends from HP Realty (to the extent they do not constitute a
return of capital) will generally be treated as investment income for purposes
of the investment interest expense limitation. Gain from the disposition of
shares and capital gains dividends will not be treated as investment income
unless the holders elect to have the gain taxed at ordinary income rates for
purposes of the investment interest expense limitation.
Distributions from HP Operating Company up to the amount of HP Operating
Company's current or accumulated earnings and profits will be taken into
account by holders of HP Operating Company Shares as ordinary income and will
be eligible for the dividends-received deduction for corporations.
Distributions in excess of HP Operating Company's current and accumulated
earnings and profits will not be taxable to a holder to the extent that they
do not exceed the adjusted basis of the holder's HP Operating Company Shares,
but rather will reduce the adjusted basis of such HP Operating Company Shares.
To the extent that such distributions exceed the adjusted basis of a holder's
HP Operating Company Shares they will be treated as gain realized from the
sale of such shares, as discussed below.
In general, a holder of Paired Shares will realize capital gain or loss on
the disposition of Paired Shares equal to the difference between the amount
realized on such disposition and the holder's adjusted basis in such Paired
Shares. The tax basis for each share of HP Realty Common Stock and each share
of HP Operating Company Common Stock should be determined separately by
allocating a holder's basis in its Hollywood Park Common Stock between the HP
Realty Common Stock and the HP Operating Company Common Stock based on their
relative fair market values at the time of the Reorganization. Upon a taxable
sale of a Paired Share, the amount realized should be allocated between HP
Realty Common Stock and HP Operating Company Common Stock based on their then
relative fair market values. Such gain or loss will generally constitute long-
term capital gain or loss if the holder held such Paired Shares for more than
one year and, in the case of an individual, will be taxed at a lower rate if
the shares have been held for more than 18 months. However, any loss upon a
sale or exchange of HP Realty Shares by a holder who has held such shares for
six months or less (after applying certain holding period rules) will be
treated as a long-term capital loss to the extent of distributions from HP
Realty required to be treated by such holder as long-term capital gain.
Holders of Paired Shares may not include in their individual income tax
returns any net operating losses or capital losses of HP Realty or HP
Operating Company.
INFORMATION REPORTING REQUIREMENTS AND BACKUP WITHHOLDING
Under certain circumstances, holders of Paired Shares may be subject to
backup withholding at a rate of 31% on payments made with respect to, or on
cash proceeds of a sale or exchange of, Paired Shares. Backup withholding will
apply only if the holder: (i) fails to furnish its taxpayer identification
number ("TIN") (which, for an individual, would be his or her Social Security
number); (ii) furnishes an incorrect TIN; (iii) is notified by the IRS that it
has failed to report properly payments of interest and dividends; or (iv)
under certain circumstances, fails to certify, under penalty of perjury, that
it has furnished a correct TIN and has not been notified by the IRS that it is
subject to backup withholding for failure to report interest and dividend
payments. Backup withholding will not apply with respect to payments made to
certain exempt recipients, such as corporations and tax-exempt organizations.
In addition, HP Realty and HP Operating Company may be required to withhold a
portion of capital gain distributions made to any holders who fail to certify
their non-foreign status. Additional issues may arise pertaining to
information reporting and withholding with respect to non-U.S. holders of
Paired Shares and each non-U.S. holder should consult his or her tax advisor
with respect to any such information reporting and withholding requirements.
61
<PAGE>
UNAUDITED PRO FORMA COMBINED CONSOLIDATED CONDENSED
FINANCIAL STATEMENTS
The following unaudited pro forma combined consolidated condensed financial
statements (the "Pro Forma Statements") are first presented prior to giving
effect to the Reorganization ("Pre-REIT") by combining the financial results
of Hollywood Park and Boomtown giving effect to the Boomtown Merger and the
issuance of the Notes. Following the Pre-REIT Pro Forma Statements, are Pro
Forma Statements presented after giving effect to the Reorganization ("Post-
REIT") for each of HP Realty and HP Operating Company.
The Pre-REIT unaudited pro forma consolidated statements of operations ("Pro
Forma Statements of Operations") were prepared by combining the audited
consolidated statement of operations of Hollywood Park for the year ended
December 31, 1996, with the unaudited consolidated statement of operations of
Boomtown for the year ended December 31, 1996, and by combining the unaudited
statement of operations of Hollywood Park for the nine months ended September
30, 1997, which includes the results of operations of Boomtown from and after
July 1, 1997, with Boomtown's results of operations for the six months ended
June 30, 1997. Historically, Boomtown reported results on a fiscal year end of
September 30. The acquisition of Boomtown was accounted for under the purchase
method of accounting for a business combination. The Pre-REIT unaudited
consolidated condensed balance sheet ("Pro Forma Balance Sheet") as of
September 30, 1997, includes the accounts of both Hollywood Park and Boomtown
and reflects the accounting for the issuance of the Notes.
The Pre-REIT Pro Forma Statements are presented exclusive of the financial
results of Boomtown's Las Vegas property, which was divested in connection
with the Boomtown Merger. The Pre-REIT Pro Forma Statements of Operations
include pro forma adjustments to give effect to the issuance of the Notes and
the application of the proceeds therefrom.
The Post-REIT Pro Forma Statements include pro forma adjustments to give
effect to the Reorganization, and assume that the real estate assets of Turf
Paradise will be retained by a wholly-owned subsidiary of HP Realty.
The Pre-REIT and Post-REIT Pro Forma Statements are presented for
illustrative purposes only, and are not necessarily indicative of the
operating results or financial position that would have occurred if the
Boomtown Merger, the issuance of the Notes and the Reorganization had been
consummated in an earlier period, nor are they necessarily indicative of
future operating results or financial position.
The Pre-REIT and Post-REIT Pro Forma Statements are based on, and should be
read in conjunction with, the historical consolidated financial statements and
related notes thereto of Hollywood Park and Boomtown.
62
<PAGE>
HOLLYWOOD PARK, INC.
UNAUDITED PRO FORMA COMBINED CONSOLIDATED
STATEMENTS OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 1996
(PRIOR TO GIVING EFFECT TO THE REORGANIZATION)
<TABLE>
<CAPTION>
PRO FORMA
ADJUSTMENTS
TO PRO FORMA PRE-REIT
HOLLYWOOD ELIMINATE ADJUSTED PRO FORMA
PARK, BOOMTOWN, BOOMTOWN BOOMTOWN, PRO FORMA COMBINED
INC. INC. LAS VEGAS INC. ADJUSTMENTS CONSOLIDATED
--------- --------- ----------- --------- ----------- ------------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C>
REVENUES:
Gaming................. $ 50,717 $188,942 $(30,960) $157,982 $ 0 $ 208,699
Racing................. 71,308 0 0 0 0 71,308
Food and beverage...... 13,947 16,677 (7,887) 8,790 0 22,737
Hotel and recreational
vehicle park.......... 0 7,427 (5,744) 1,683 0 1,683
Truck stop and service
station............... 0 14,859 (159) 14,700 0 14,700
Other income........... 7,253 13,413 (3,210) 10,203 0 17,456
-------- -------- -------- -------- -------- ---------
143,225 241,318 (47,960) 193,358 0 336,583
-------- -------- -------- -------- -------- ---------
EXPENSES:
Gaming................. 27,249 111,364 (21,644) 89,720 0 116,969
Racing................. 30,167 0 0 0 0 30,167
Food and beverage...... 19,573 20,015 (9,860) 10,155 0 29,728
Hotel and recreational
vehicle park.......... 0 3,110 (2,471) 639 0 639
Truck stop and service
station............... 0 13,462 (83) 13,379 0 13,379
Administrative......... 41,477 63,021 (17,272) 45,749 0 87,226
Other.................. 2,485 4,132 (143) 3,989 0 6,474
Depreciation and
amortization.......... 10,695 10,880 (956) 9,924 (312)(a) 20,818
-- -- -- -- 444 (b) --
-- -- -- -- 67 (c) --
Hollywood Park/Boomtown
Merger costs.......... 0 1,291 0 1,291 0 1,291
Write off of investment
in a business......... 11,412 0 0 0 0 11,412
Loss on sale of
business.............. 0 36,563 0 36,563 0 36,563
-------- -------- -------- -------- -------- ---------
143,058 263,838 (52,429) 211,409 199 354,666
-------- -------- -------- -------- -------- ---------
Operating income
(loss)................. 167 (22,520) 4,469 (18,051) (199) (18,083)
Interest expense ...... 942 13,988 (299) 13,689 (216)(d) 15,468
-- -- -- -- 329 (e) --
-- -- -- -- (11,843)(f) --
-- -- -- -- 692 (g) --
-- -- -- -- 11,875 (h) --
-------- -------- -------- -------- -------- ---------
Income (loss) before
minority interests and
income taxes........... (775) (36,508) 4,768 (31,740) (1,036) (33,551)
Minority interest ..... 15 (164) 0 (164) 0 (149)
-------- -------- -------- -------- -------- ---------
Income (loss) before
income taxes........... (790) (36,344) 4,768 (31,576) (1,036) (33,402)
Income tax expense
(benefit)............. 3,459 (320) 1,370 1,050 (388)(i) 4,121
-------- -------- -------- -------- -------- ---------
Income (loss) before
extraordinary item..... $ (4,249) $(36,024) $ 3,398 $(32,626) $ (648) $ (37,523)
======== ======== ======== ======== ======== =========
Dividend requirement on
convertible preferred
stock.................. $ 1,925 $ 1,925
Loss before
extraordinary item
allocated to common
shareholders........... $ (6,174) $ (39,448)
======== =========
Per common share:
Loss before
extraordinary item--
primary............... $ (1.65)
Loss before
extraordinary item--
fully diluted......... $ (1.65)
Number of common
shares-primary........ 23,868
Number of common
shares-fully diluted.. 26,160
</TABLE>
63
<PAGE>
HOLLYWOOD PARK, INC.
UNAUDITED PRO FORMA COMBINED CONSOLIDATED
STATEMENTS OF OPERATIONS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1997
(PRIOR TO GIVING EFFECT TO THE REORGANIZATION)
<TABLE>
<CAPTION>
PRO FORMA
ADJUSTMENTS
TO PRO FORMA
HOLLYWOOD ELIMINATE ADJUSTED PRE-REIT
PARK, BOOMTOWN, BOOMTOWN BOOMTOWN, PRO FORMA PRO FORMA
INC.(1) INC.(2) LAS VEGAS INC. ADJUSTMENTS CONSOLIDATED
--------- --------- ----------- --------- ----------- ------------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C>
REVENUES:
Gaming................. $83,990 $ 98,787 $(15,438) $ 83,349 $ 0 $167,339
Racing................. 48,084 0 0 0 0 48,084
Food and beverage...... 13,016 9,028 (4,107) 4,921 0 17,937
Hotel and recreational
vehicle park.......... 581 3,768 (2,973) 795 0 1,376
Truck stop and service
station............... 4,897 6,646 (76) 6,570 0 11,467
Other income........... 7,781 5,737 (416) 5,321 0 13,102
------- -------- -------- -------- ------- --------
158,349 123,966 (23,010) 100,956 0 259,305
------- -------- -------- -------- ------- --------
EXPENSES:
Gaming................. 45,117 54,804 (11,918) 42,886 0 88,003
Racing................. 21,615 0 0 0 0 21,615
Food and beverage...... 16,920 11,698 (5,115) 6,583 0 23,503
Hotel and recreational
vehicle park.......... 199 1,714 (1,380) 334 0 533
Truck stop and service
station............... 4,461 6,093 (47) 6,046 0 10,507
Administrative......... 39,231 30,678 (7,082) 23,596 0 62,827
Other.................. 3,262 1,882 (66) 1,816 0 5,078
Depreciation and
amortization.......... 11,939 8,820 (298) 8,522 222 (b) 20,717
-- -- -- -- 34 (c) --
Hollywood Park/Boomtown
Merger costs.......... 0 1,487 0 1,487 0 1,487
Write off of investment
in a business......... 0 0 0 0 0 0
Loss on sale of
business.............. 0 1,271 (914) 357 0 357
------- -------- -------- -------- ------- --------
142,744 118,447 (26,820) 91,627 256 234,627
------- -------- -------- -------- ------- --------
Operating income
(loss)................. 15,605 5,519 3,810 9,329 (256) 24,678
Interest expense....... 3,782 6,951 (101) 6,850 (108)(d) 11,051
-- -- -- -- 165 (e) --
-- -- -- -- (5,922)(f) --
-- -- -- -- 346 (g) --
-- -- -- -- 5,938 (h) --
------- -------- -------- -------- ------- --------
Income (loss) before
minority interests and
income taxes........... 11,823 (1,432) 3,911 2,479 (675) 13,627
Minority interest...... 80 0 0 0 0 80
------- -------- -------- -------- ------- --------
Income (loss) before
income taxes........... 11,743 (1,432) 3,911 2,479 (675) 13,547
Income tax expense
(benefit)............. 4,624 (587) 2,051 1,464 (256)(i) 5,832
------- -------- -------- -------- ------- --------
Income (loss) before
extraordinary item..... $ 7,119 $ (845) $ 1,860 $ 1,015 $ (419) $ 7,715
======= ======== ======== ======== ======= ========
Dividend requirement on
convertible preferred
stock.................. $ 1,520 $ 1,520
Income before
extraordinary item
available to common
shareholders........... $ 5,599 $ 6,195
======= ========
Per common share:
Income before
extraordinary item--
primary............... $ 0.26
Number of common
shares--primary....... 24,073
</TABLE>
- --------
(1)Includes Boomtown's results of operations from and after July 1, 1997.
(2)Includes Boomtown's results of operations for the six months ended June 30,
1997.
64
<PAGE>
HOLLYWOOD PARK, INC.
UNAUDITED CONSOLIDATED CONDENSED BALANCE SHEET
AS OF SEPTEMBER 30, 1997
(PRIOR TO GIVING EFFECT TO THE REORGANIZATION)
<TABLE>
<CAPTION>
HOLLYWOOD
PARK, INC.(1)
--------------
(IN THOUSANDS)
ASSETS
------
<S> <C>
Current Assets:
Cash and cash equivalents..................................... $ 22,007
Restricted cash............................................... 1,209
Other receivables............................................. 10,049
Deferred tax assets........................................... 8,103
Prepaid expenses and other assets............................. 20,098
--------
Total current assets......................................... 61,466
Notes receivable................................................ 9,450
Property, plant and equipment, net.............................. 293,737
Goodwill, net................................................... 33,342
Other assets.................................................... 15,384
--------
$413,379
========
<CAPTION>
LIABILITIES AND
STOCKHOLDERS' EQUITY
--------------------
<S> <C>
Current Liabilities:
Accounts payable.............................................. $ 10,625
Accrued liabilities........................................... 33,073
Current portion of notes payable.............................. 4,005
--------
Total current liabilities.................................... 47,703
Notes payable................................................... 132,163
Deferred tax liabilities........................................ 11,005
--------
Total liabilities............................................ 190,871
Minority interest............................................... 3,033
Stockholders' equity:
Capital stock--
Common........................................................ 2,619
Capital in excess of par...................................... 222,023
Accumulated deficit........................................... (5,167)
--------
Total stockholders' equity................................... 219,475
--------
$413,379
========
</TABLE>
- --------
(1) Includes the accounts of Boomtown, and all activity related to the
issuance of the Notes and the redemption of the Boomtown Notes
(as defined).
65
<PAGE>
HOLLYWOOD PARK, INC.
NOTES TO PRE-REIT UNAUDITED PRO FORMA COMBINED CONSOLIDATED
STATEMENTS OF OPERATIONS
ASSUMPTIONS. The Pre-REIT Pro Forma Statements of Operations for the year
ended December 31, 1996, and for the nine months ended September 30, 1997, are
presented as if the Boomtown acquisition, the divestiture of Boomtown Las
Vegas, and the issuance of the Notes had taken place on January 1, 1996 and
1997, respectively. The Pre-REIT Pro Forma Statements of Operations have been
prepared by combining the audited consolidated statements of operations of
Hollywood Park for the year ended December 31, 1996, with the unaudited
consolidated statements of operations of Boomtown for the year ended December
31, 1996, and by combining the unaudited consolidated statements of operations
for the nine months ended September 30, 1997 for Hollywood Park, which
includes Boomtown's results of operations from and after July 1, 1997, with
Boomtown's results of operations for the six months ended June 30, 1997.
(Historically, Boomtown reported results on a fiscal year end of September
30.)
The Boomtown Merger was accounted for under the purchase method of
accounting for a business combination. The total purchase price was based on
the issuance of approximately 5,809,000 shares of Hollywood Park Common Stock
at a price of $9.8125 per share.
PRE-REIT PRO FORMA ADJUSTMENTS. The following adjustments have been made to
the Pre-REIT Pro Forma Statements of Operations:
(a) To eliminate the amortization of the issuance costs associated with
Boomtown's 11.5% First Mortgage Notes due 2003 (the "Boomtown Notes").
(b) To record the amortization of the issuance costs associated with the
Notes.
(c) To record the amortization of the excess purchase price over net
assets acquired. Total estimated excess purchase price of approximately
$2.7 million will be amortized over 40 years on a straight line basis.
(d) To eliminate the amortization of the discount associated with the
Boomtown Notes.
(e) To record the interest expense associated with the promissory note
from the Company to the lessor of Boomtown's Las Vegas property as required
by the agreement to divest this property.
(f) To eliminate the interest expense associated with the Boomtown Notes.
(g) To amortize the up-front loan fees associated with the Bank Credit
Facility.
(h) To record the interest expense associated with the Notes at 9.5%.
(i) To record the estimated 40% tax benefit associated with the pro forma
expenses, after adding back the amortization of goodwill (see (c)) which is
not deductible for income tax purposes.
EXTRAORDINARY ITEM. The accompanying pro forma statements of operations
exclude an extraordinary loss of approximately $14.2 million (approximately
$8.4 million net of tax effect) recorded by Boomtown in the period June 30,
1997, related to the tender and consent costs (approximately $9.0 million) and
the write-off of deferred financing costs (approximately $5.2 million)
associated with the early extinguishment of the Boomtown Notes.
RECLASSIFICATIONS. Certain reclassifications have been made to Hollywood
Park's and Boomtown's historical consolidated statements of operations to
conform to the Pre-REIT Pro Forma Statements of Operations.
PRO FORMA PER SHARE DATA. The pro forma per share amounts, as presented in
the Pre-REIT Pro Forma Statements of Operations, were based on the weighted
average number of shares outstanding during the period, inclusive of the
effect, when dilutive, of the exercise of stock options. Included were
approximately 5.4 million shares of Hollywood Park Common Stock issued in the
Boomtown Merger (after giving effect to the retirement of the approximately
446,000 shares of Hollywood Park Common Stock that were issued in the Boomtown
66
<PAGE>
HOLLYWOOD PARK, INC.
NOTES TO PRE-REIT UNAUDITED PRO FORMA COMBINED CONSOLIDATED
STATEMENTS OF OPERATIONS--(CONTINUED)
Merger but then repurchased by Hollywood Park from the lessor of Boomtown's Las
Vegas property concurrently with the disposition of that property).
COMBINATION COSTS. Hollywood Park recorded costs of approximately $5.6
million related to the Boomtown Merger. These costs were incorporated into the
price of the acquisition under the purchase method of accounting for a business
combination. Costs incurred by Boomtown were expensed as incurred.
67
<PAGE>
HOLLYWOOD PARK, INC.
NOTES TO PRE-REIT UNAUDITED CONSOLIDATED CONDENSED
BALANCE SHEET
BASIS OF PRESENTATION. As of September 30, 1997, Hollywood Park's balance
sheet reflects all activity related to the issuance of the Notes and the
Boomtown Merger.
EXTRAORDINARY ITEM. The historical "Hollywood Park, Inc." column on the
accompanying pro forma balance sheet reflects the write-off of the deferred
financing costs (approximately $5.2 million) associated with the Boomtown
Notes, which was recorded by Boomtown in the period ended June 30, 1997, and
it reflects a corresponding reduction to retained earnings.
68
<PAGE>
HOLLYWOOD PARK REALTY ENTERPRISES, INC.
UNAUDITED PRO FORMA CONSOLIDATED STATEMENT OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 1996
(AFTER GIVING EFFECT TO THE REORGANIZATION)
<TABLE>
<CAPTION>
PRE-REIT
PRO FORMA PRE-REIT
HOLLYWOOD PRO FORMA REIT POST-REIT
PARK, INC. HP REALTY PRO FORMA PRO FORMA
CONSOLIDATED RECLASSIFIED ADJUSTMENTS HP REALTY
------------ ------------ ----------- ---------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C>
REVENUES:
Gaming..................... $208,699 $ 0 $ 0 $ 0
Racing..................... 71,308 0 0 0
Food and beverage.......... 22,737 0 0 0
Hotel and recreational
vehicle park.............. 1,683 0 0 0
Truck stop and service
station................... 14,700 0 0 0
Rental of property......... 0 0 14,623(1) 14,623
Other...................... 17,456 1,154 0 1,154
-------- ------- ------- -------
336,583 1,154 14,623 15,777
-------- ------- ------- -------
EXPENSES:
Gaming..................... 116,969 0 0 0
Racing..................... 30,167 0 0 0
Food and beverage.......... 29,728 0 0 0
Hotel and recreational
vehicle park.............. 639 0 0 0
Truck stop and service
station................... 13,379 0 0 0
Administrative............. 87,226 937 0 937
Other...................... 6,474 675 0 675
Depreciation and
amortization.............. 20,818 6,134 0 6,134
Hollywood Park/Boomtown
Merger costs.............. 1,291 0 0 0
Write off of investment in
a business................ 11,412 0 0 0
Loss on sale of business... 36,563 0 0 0
-------- ------- ------- -------
354,666 7,746 0 7,746
-------- ------- ------- -------
Operating income (loss)...... (18,083) (6,592) 14,623 8,031
Interest expense............. 15,468 134 0 134
-------- ------- ------- -------
Income (loss) before minority
interests and income taxes.. (33,551) (6,726) 14,623 7,897
Minority interest............ (149) 0 0 0
-------- ------- ------- -------
Income (loss) before income
taxes....................... (33,402) (6,726) 14,623 7,897
Income tax expense
(benefit)................... 4,121 (1,597) 1,597(2) 0
-------- ------- ------- -------
Income (loss) before
extraordinary item.......... $(37,523) $(5,129) $13,026 $ 7,897
======== ======= ======= =======
Dividend requirement on
convertible preferred
stock....................... $ 1,925 $ 1,925 $ 0 $ 1,925
Income available to common
shareholders before
extraordinary item.......... $(39,448) $(7,054) $13,026 $ 5,972
======== ======= ======= =======
Per common share:
Income before extraordinary
item--primary............. $ 0.25
Income before extraordinary
item--fully diluted....... $ 0.25
Number of common shares--
primary..................... 23,868
Number of common shares--
fully diluted............... 26,160
</TABLE>
69
<PAGE>
HOLLYWOOD PARK OPERATING COMPANY
UNAUDITED PRO FORMA CONSOLIDATED
STATEMENT OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 1996
(AFTER GIVING EFFECT TO THE REORGANIZATION)
<TABLE>
<CAPTION>
PRE-REIT PRE-REIT
PRO FORMA PRO FORMA POST-REIT
HOLLYWOOD HP OPERATING REIT PRO FORMA
PARK, INC. COMPANY PRO FORMA HP OPERATING
CONSOLIDATED RECLASSIFIED ADJUSTMENTS COMPANY
------------ ------------ ----------- ------------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C>
REVENUES:
Gaming................ $208,699 $208,699 $ 0 $208,699
Racing................ 71,308 71,308 0 71,308
Food and beverage..... 22,737 22,737 0 22,737
Hotel and recreational
vehicle park......... 1,683 1,683 0 1,683
Truck stop and service
station.............. 14,700 14,700 0 14,700
Other................. 17,456 16,302 0 16,302
-------- -------- -------- --------
336,583 335,429 0 335,429
-------- -------- -------- --------
EXPENSES:
Gaming................ 116,969 116,969 0 116,969
Racing................ 30,167 30,167 0 30,167
Food and beverage..... 29,728 29,728 0 29,728
Hotel and recreational
vehicle park......... 639 639 0 639
Truck stop and service
station.............. 13,379 13,379 0 13,379
Administrative........ 87,226 86,289 0 86,289
Rental of property.... 0 0 14,623 (3) 14,623
Other................. 6,474 5,799 0 5,799
Depreciation and
amortization......... 20,818 14,684 0 14,684
Hollywood
Park/Boomtown Merger
costs................ 1,291 1,291 0 1,291
Write off of
investment in a
business............. 11,412 11,412 0 11,412
Loss on sale of
business............. 36,563 36,563 0 36,563
-------- -------- -------- --------
354,666 346,920 14,623 361,543
-------- -------- -------- --------
Operating loss.......... (18,083) (11,491) (14,623) (26,114)
Interest expense...... 15,468 15,334 0 15,334
-------- -------- -------- --------
Loss before minority
interests and income
taxes.................. (33,551) (26,825) (14,623) (41,448)
Minority interest..... (149) (149) 0 (149)
-------- -------- -------- --------
Loss before income
taxes.................. (33,402) (26,676) (14,623) (41,299)
Income tax expense
(benefit)............ 4,121 5,718 (5,849)(4) (131)
-------- -------- -------- --------
Loss before
extraordinary item..... $(37,523) $(32,394) $ (8,774) $(41,168)
======== ======== ======== ========
Per common share:
Loss before
extraordinary item--
primary.............. $ (1.72)
Loss before
extraordinary item--
fully diluted........ $ (1.72)
Number of common
shares--primary........ 23,868
Number of common
shares--fully diluted... 26,160
</TABLE>
70
<PAGE>
HOLLYWOOD PARK REALTY ENTERPRISES, INC.
UNAUDITED PRO FORMA CONSOLIDATED
STATEMENT OF OPERATIONS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1997
(AFTER GIVING EFFECT TO THE REORGANIZATION)
<TABLE>
<CAPTION>
PRE-REIT
PRO FORMA PRE-REIT
HOLLYWOOD PRO FORMA REIT POST-REIT
PARK, INC. HP REALTY PRO FORMA PRO FORMA
CONSOLIDATED RECLASSIFIED ADJUSTMENTS HP REALTY
------------ ------------ ----------- ---------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C>
REVENUES:
Gaming..................... $167,339 $ 0 $ 0 $ 0
Racing..................... 48,084 0 0 0
Food and beverage.......... 17,937 0 0 0
Hotel and recreational
vehicle park.............. 1,376 0 0 0
Truck stop and service
station................... 11,467 0 0 0
Rental of property......... 0 0 9,810(1) 9,810
Other...................... 13,102 940 0 940
-------- ------- ------ ------
259,305 940 9,810 10,750
-------- ------- ------ ------
EXPENSES:
Gaming..................... 88,003 0 0 0
Racing..................... 21,615 0 0 0
Food and beverage.......... 23,503 0 0 0
Hotel and recreational
vehicle park.............. 533 0 0 0
Truck stop and service
station................... 10,507 0 0 0
Administrative............. 62,827 691 0 691
Other...................... 5,078 510 0 510
Depreciation and
amortization.............. 20,717 4,628 0 4,628
Hollywood Park/Boomtown
Merger costs.............. 1,487 0 0 0
Loss on sale of business... 357 0 0 0
-------- ------- ------ ------
234,627 5,829 0 5,829
-------- ------- ------ ------
Operating income (loss)...... 24,678 (4,889) 9,810 4,921
Interest expense............. 11,051 155 0 155
-------- ------- ------ ------
Income (loss) before minority
interests and income taxes.. 13,627 (5,044) 9,810 4,766
Minority interest............ 80 0 0 0
-------- ------- ------ ------
Income (loss) before income
taxes....................... 13,547 (5,044) 9,810 4,766
Income tax expense
(benefit)................... 5,832 (2,018) 2,018(2) 0
-------- ------- ------ ------
Income (loss) before
extraordinary item.......... $ 7,715 $(3,026) $7,792 $4,766
======== ======= ====== ======
Dividend requirement on
convertible preferred
stock....................... $ 1,520 $ 1,520 $ 0 $1,520
Income (loss) available to
common shareholders before
extraordinary item.......... $ 6,195 $(4,546) $7,792 $3,246
======== ======= ====== ======
Per common share:
Income before extraordinary
item--primary............. $ 0.13
Number of common shares--
primary..................... 24,073
</TABLE>
71
<PAGE>
HOLLYWOOD PARK OPERATING COMPANY
UNAUDITED PRO FORMA CONSOLIDATED
STATEMENT OF OPERATIONS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1997
(AFTER GIVING EFFECT TO THE REORGANIZATION)
<TABLE>
<CAPTION>
PRE-REIT PRE-REIT
PRO FORMA PRO FORMA POST-REIT
HOLLYWOOD HP OPERATING REIT PRO FORMA
PARK, INC. COMPANY PRO FORMA HP OPERATING
CONSOLIDATED RECLASSIFIED ADJUSTMENTS COMPANY
------------ ------------ ----------- ------------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C>
REVENUES:
Gaming................. $167,339 $167,339 $ 0 $167,339
Racing................. 48,084 48,084 0 48,084
Food and beverage...... 17,937 17,937 0 17,937
Hotel and recreational
vehicle park.......... 1,376 1,376 0 1,376
Truck stop and service
station............... 11,467 11,467 0 11,467
Other.................. 13,102 12,162 0 12,162
-------- -------- ------- --------
259,305 258,365 0 258,365
-------- -------- ------- --------
EXPENSES:
Gaming................. 88,003 88,003 0 88,003
Racing................. 21,615 21,615 0 21,615
Food and beverage...... 23,503 23,503 0 23,503
Hotel and recreational
vehicle park.......... 533 533 0 533
Truck stop and service
station............... 10,507 10,507 0 10,507
Administrative......... 62,827 62,136 0 62,136
Rental of property..... 0 0 9,810 (3) 9,810
Other.................. 5,078 4,568 0 4,568
Depreciation and
amortization.......... 20,717 16,089 0 16,089
Hollywood Park/Boomtown
Merger costs.......... 1,487 1,487 0 1,487
Loss on sale of
business.............. 357 357 0 357
-------- -------- ------- --------
234,627 228,798 9,810 238,608
-------- -------- ------- --------
Operating income (loss).. 24,678 29,567 (9,810) 19,757
Interest expense......... 11,051 10,896 0 10,896
-------- -------- ------- --------
Income (loss) before
minority interests and
income taxes............ 13,627 18,671 (9,810) 8,861
Minority interest........ 80 80 0 80
-------- -------- ------- --------
Income (loss) before
income taxes............ 13,547 18,591 (9,810) 8,781
Income tax expense
(benefit)............... 5,832 7,849 (3,924)(4) 3,925
-------- -------- ------- --------
Income (loss) before
extraordinary item...... $ 7,715 $ 10,742 $(5,886) $ 4,856
======== ======== ======= ========
Per common share:
Income before
extraordinary item--
primary............... $ 0.20
Number of common shares--
primary................. 24,073
</TABLE>
72
<PAGE>
HOLLYWOOD PARK REALTY ENTERPRISES, INC.
UNAUDITED PRO FORMA CONSOLIDATED CONDENSED
BALANCE SHEET
AS OF SEPTEMBER 30, 1997
(AFTER GIVING EFFECT TO THE REORGANIZATION)
<TABLE>
<CAPTION>
PRE-REIT PRE-REIT
PRO FORMA PRO FORMA
HOLLYWOOD HOLLYWOOD REIT POST-REIT
PARK, INC. PARK, INC. PRO FORMA PRO FORMA
CONSOLIDATED RECLASSIFIED ADJUSTMENTS HP REALTY
------------ ------------ ----------- ---------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
ASSETS
------
Real estate investments:
Hollywood Park Race Track
and Casino, net........... $ 0 $ 85,732 $ 0 $ 85,732
Turf Paradise Race Track,
net....................... 0 10,251 0 10,251
-------- -------- ------- --------
0 95,983 0 95,983
Cash and cash equivalents.... 22,007 3,567 0 3,567
Restricted cash.............. 1,209 0 0 0
Other receivables............ 10,049 61 0 61
Deferred tax assets.......... 8,103 0 0 0
Prepaid expenses and other
assets...................... 20,098 198 0 198
Notes receivable............. 9,450 788 0 788
Property, plant and
equipment, net.............. 293,737 0 0 0
Goodwill, net................ 33,342 0 0 0
Other assets................. 15,384 102 0 102
-------- -------- ------- --------
$413,379 $100,699 $ 0 $100,699
======== ======== ======= ========
LIABILITIES AND
STOCKHOLDERS' EQUITY
--------------------
Liabilities:
Accounts payable........... $ 10,625 $ 459 $ 0 $ 459
Accrued liabilities........ 33,073 6,062 2,600 (1) 44,149
-- -- 6,487 (2) --
-- -- 29,000 (3) --
Notes payable.............. 136,168 0 0 0
Deferred tax liabilities... 11,005 3,181 (3,181)(4) 0
-------- -------- ------- --------
Total liabilities.......... 190,871 9,702 34,906 44,608
Minority interest............ 3,033 0 0 0
Stockholders' equity:
Capital stock--
Common..................... 2,619 2,619 0 2,619
Capital in excess of par... 222,023 133,783 0 133,783
Accumulated deficit........ (5,167) (45,405) (2,600)(1) (80,311)
-- -- (6,487)(2) --
-- -- (29,000)(3) --
-- -- 3,181 (4) --
-------- -------- ------- --------
Total stockholders'
equity.................... 219,475 90,997 (34,906) 56,091
-------- -------- ------- --------
$413,379 $100,699 $ 0 $100,699
======== ======== ======= ========
</TABLE>
73
<PAGE>
HOLLYWOOD PARK OPERATING COMPANY
UNAUDITED PRO FORMA CONSOLIDATED CONDENSED
BALANCE SHEET
AS OF SEPTEMBER 30, 1997
(AFTER GIVING EFFECT TO THE REORGANIZATION)
<TABLE>
<CAPTION>
PRE-REIT PRE-REIT
PRO FORMA PRO FORMA POST-REIT
HOLLYWOOD HP OPERATING REIT PRO FORMA
PARK, INC. COMPANY PRO FORMA HP OPERATING
CONSOLIDATED RECLASSIFIED ADJUSTMENTS COMPANY
------------ ------------ ----------- ------------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
ASSETS
------
Current Assets:
Cash and cash
equivalents............ $ 22,007 $ 18,440 $ 0 $ 18,440
Restricted cash......... 1,209 1,209 0 1,209
Other receivables....... 10,049 10,029 0 10,029
Deferred tax assets..... 8,103 8,104 0 8,104
Prepaid expenses and
other assets........... 20,098 19,854 0 19,854
-------- -------- ------- --------
Total current assets.... 61,466 57,636 0 57,636
Notes receivable........ 9,450 8,662 0 8,662
Property, plant and
equipment, net......... 293,737 197,754 0 197,754
Goodwill, net........... 33,342 33,342 0 33,342
Other assets............ 15,384 15,283 0 15,283
-------- -------- ------- --------
$413,379 $312,677 $ 0 $312,677
======== ======== ======= ========
LIABILITIES AND
STOCKHOLDERS' EQUITY
--------------------
Current Liabilities:
Accounts payable........ $ 10,625 $ 9,879 $ 0 $ 9,879
Accrued liabilities..... 33,073 27,296 8,576 (5) 35,872
Current portion of notes
payable................ 4,005 4,004 0 4,004
-------- -------- ------- --------
Total current
liabilities............ 47,703 41,179 8,576 49,755
Notes payable........... 132,163 132,163 0 132,163
Deferred tax
liabilities............ 11,005 7,824 0 7,824
-------- -------- ------- --------
Total liabilities....... 190,871 181,166 8,576 189,742
Minority interest....... 3,033 3,033 0 3,033
Stockholders' equity:
Capital stock--
Common.................. 2,619 0 2,619 (6) 2,619
Capital in excess of
par.................... 222,023 88,241 (2,619)(6) 85,622
Retained earnings
(accumulated deficit).. (5,167) 40,237 (8,576)(5) 31,661
-------- -------- ------- --------
Total stockholders'
equity................. 219,475 128,478 (8,576) 119,902
-------- -------- ------- --------
$413,379 $312,677 $ 0 $312,677
======== ======== ======= ========
</TABLE>
74
<PAGE>
HOLLYWOOD PARK REALTY ENTERPRISES, INC.
HOLLYWOOD PARK OPERATING COMPANY
NOTES TO POST-REIT UNAUDITED PRO FORMA CONSOLIDATED
STATEMENTS OF OPERATIONS
ASSUMPTIONS. The HP Realty and HP Operating Company Post-REIT Pro Forma
Statements of Operations for the year ended December 31, 1996, and for the
nine months ended September 30, 1997, have been prepared by starting with the
Pre-REIT Pro Forma Statements of Operations, and reclassifying certain Pre-
REIT revenues and expenses to generate the Pre-REIT reclassified Pro Forma
Statements of Operations.
RECLASSIFICATIONS. Reclassifications were made between the historical
Hollywood Park, Inc. statements of operations and the historical HP Operating
Company statements of operations to reclassify certain expenses between
Hollywood Park, Inc. and HP Operating Company. The reclassifications included
equity in subsidiaries previously owned by Hollywood Park, Inc. (see Pre-REIT
and Post-REIT corporate organization charts, presented elsewhere herein),
staff salaries and benefits, legal fees, expansion costs, Turf Paradise
Trailer Park expenses, and similar historical expenses. Turf Paradise Trailer
Park revenue was reclassified to Hollywood Park, Inc.
PRO FORMA ADJUSTMENTS. The following adjustments have been made to generate
the Post-REIT Pro Forma Statements of Operations:
(1) To record rental revenue relating to the lease of real estate assets
from HP Realty to HP Operating Company.
(2) To eliminate the tax benefit reclassified to HP Realty. The Post-REIT
Pro Forma Statements of Operations have been prepared assuming that HP
Realty satisfies the requirements for qualification and taxation as a REIT.
Therefore, no corporate tax provision has been included in the accompanying
Post-REIT Pro Forma Statements of Operations for HP Realty. For a
discussion relating to HP Realty's qualification and taxation as a REIT,
see "Risk Factors--Absence of Rulings from the Internal Revenue Service,"
"--Potential Consequences of Proposed Legislation," "--Consequences of
Failure to Qualify as a REIT" and "Federal Income Tax Matters--Federal
Income Taxation of HP Realty and Requirements for Qualification as REIT."
(3) To record rental expense relating to the lease of real estate assets
from HP Realty to HP Operating Company.
(4) To record 40% tax benefit associated with the rental expense.
The Post-REIT Pro Forma Statements of Operations do not include pro forma
adjustments for any additional expenses expected to be incurred by HP
Operating Company as a result of the Reorganization such as directors fees,
shareholder relations expenses, or other miscellaneous expenses.
EARNINGS PER SHARE. The pro forma per share amounts were based on the
weighted average number of shares outstanding during the period, inclusive of
the effect, when dilutive of the exercise of stock options.
NONRECURRING CHARGE. The Post-REIT Pro Forma Statements of Operations do not
reflect the one-time charge for the estimated combined federal and state tax
liability, assuming the HPOC Spin-Off is a taxable transaction, of
approximately $29 million, which is described in note (3) to the Post-REIT Pro
Forma Balance Sheet.
75
<PAGE>
HOLLYWOOD PARK REALTY ENTERPRISES, INC.
HOLLYWOOD PARK OPERATING COMPANY
NOTES TO POST-REIT UNAUDITED PRO FORMA CONSOLIDATED
STATEMENTS OF OPERATIONS--(CONTINUED)
TURF PARADISE. The Post-REIT Pro Forma Statements of Operations have been
prepared assuming that the real estate assets of Turf Paradise are retained by
a wholly-owned subsidiary of HP Realty, thereby generating rental revenue for
HP Realty and rental expense for HP Operating Company. If Hollywood Park
decides, based on the facts and circumstances existing immediately prior to
the completion of the Reorganization transactions, to report the distribution
of the stock of HP Operating Company as a tax-free spin-off with the IRS, Turf
Paradise's real estate assets may be transferred (along with Turf Paradise's
operating businesses) in the Reorganization to a HP Operating Company
subsidiary instead of being retained by a subsidiary of HP Realty. See "The
Reorganization--Effect of the Reorganization" and "Federal Income Tax
Matters." The following table summarizes the impact on the Post-REIT Pro Forma
Statements of Operations if Turf Paradise's real estate assets are transferred
to a HP Operating Company subsidiary instead of being retained by a subsidiary
of HP Realty:
<TABLE>
<CAPTION>
POST-REIT POST-REIT
PRO FORMA PRO FORMA
STATEMENT OF STATEMENT OF
OPERATIONS OPERATIONS
INCLUDING EXCLUDING
TURF PARADISE TURF PARADISE
REAL ESTATE REAL ESTATE
IN THE REIT FROM THE REIT
------------- -------------
FOR THE YEAR ENDED
DECEMBER 31, 1996
---------------------------
(IN THOUSANDS, EXCEPT
PER SHARE DATA)
<S> <C> <C>
HP REALTY POST-REIT:
Income before extraordinary item................. $ 7,897 $ 6,612
Income available to common shareholders before
extraordinary item.............................. $ 5,972 $ 4,687
Earnings per share before extraordinary item..... $ 0.25 $ 0.20
HP OPERATING COMPANY POST-REIT:
Loss before extraordinary item (a)............... $(41,168) $(40,513)
Loss per share before extraordinary item......... $ (1.72) $ (1.70)
<CAPTION>
FOR THE NINE MONTHS ENDED
SEPTEMBER 30, 1997
---------------------------
(IN THOUSANDS, EXCEPT
PER SHARE DATA)
<S> <C> <C>
HP REALTY POST-REIT:
Income before extraordinary item................. $ 4,766 $ 3,542
Income available to common shareholders before
extraordinary item.............................. $ 3,246 $ 2,022
Earnings per share before extraordinary item--
primary......................................... $ 0.13 $ 0.08
HP OPERATING COMPANY POST-REIT:
Income before extraordinary item................. $ 4,856 $ 6,031
Earnings per share before extraordinary item--
primary ........................................ $ 0.20 $ 0.25
</TABLE>
- --------
(a) Includes non-recurring expenses of $1,291,000 of Boomtown Merger expense,
$11,412,000 of expense for the write off of Hollywood Park's investment in
Sunflower, and $36,563,000 for Boomtown's loss on the sale of its Las
Vegas property.
76
<PAGE>
HOLLYWOOD PARK REALTY ENTERPRISES, INC.
HOLLYWOOD PARK OPERATING COMPANY
NOTES TO POST-REIT UNAUDITED PRO FORMA CONSOLIDATED CONDENSED
BALANCE SHEETS
ASSUMPTIONS. The HP Realty, HP Operating Company and Combined Post-REIT Pro
Forma Balance Sheets, as of September 30, 1997, have been prepared by starting
with the Pre-REIT unaudited Balance Sheet, and reclassifying certain Pre-REIT
assets and liabilities to generate the Pre-REIT reclassified Pro Forma Balance
Sheets.
RECLASSIFICATIONS. Reclassifications were made between Hollywood Park,
Inc.'s historical balance sheet and HP Operating Company's historical balance
sheet. The reclassifications primarily related to the transfer of certain real
estate assets to Hollywood Park, Inc., and the reclassification of deferred
tax assets and liabilities. Similar reclassifications were made between Turf
Paradise, Inc. (which will be a wholly owned subsidiary of HP Realty) and Turf
Paradise Operating Company (which will be a wholly owned subsidiary of HP
Operating Company).
PRO FORMA ADJUSTMENTS. The following adjustments have been made to generate
the Post-REIT Pro Forma Balance Sheets:
(1) To accrue the estimated legal, and other professional costs
associated with the Reorganization.
(2) To accrue dividends payable to shareholders for Earnings and Profits
allocable to the pre- Reorganization period.
(3) To accrue estimated combined federal and state tax liability,
assuming the HPOC Spin-Off is a taxable transaction, of approximately $29
million. This amount is based on Hollywood Park's tax basis in its HP
Operating Company shares as of December 31, 1997 (which amount may increase
or decrease prior to completion of the Reorganization on account of 1998
events) and Hollywood Park's estimate that the aggregate fair market value
of the shares of HP Operating Company to be distributed in the HPOC Spin-
Off would be approximately $130 million (approximately six times estimated
1997 EBITDA, less the amount of certain liabilities). However, there can be
no assurance that the fair market value of the HP Operating Company shares
would not be found to be significantly greater than $130 million. Any
additional value in excess of the $130 million valuation attributed to the
HP Operating Company shares distributed to Hollywood Park stockholders in
the HPOC Spin-Off would increase the combined state and federal tax
liability of HP Realty by approximately 41% of the amount of such
additional value, and would also result in increased tax liabilities for
Hollywood Park's stockholders. See "Risk Factors--Uncertain Amount of
Corporate and Stockholder Tax Liability" and "Federal Income Tax Matters--
Federal Income Tax Consequences of Contributions and Spin-Offs."
(4) To eliminate reclassified deferred tax liabilities.
(5) To accrue for the Excess Loss Accounts related to the stock of
Sunflower and Hollywood Park Food Services, Inc. (a wholly owned subsidiary
of HP Operating Company) owned by Hollywood Park, Inc., which will be
triggered by the Reorganization. Under federal tax law, these Excess Loss
Accounts (i.e., the amount by which subsidiary losses and other negative
adjustments exceed Hollywood Park's basis in the stock of these
subsidiaries) are required to be included in Hollywood Park's income
immediately before Hollywood Park's transfer of these subsidiaries to HP
Operating Company.
(6) To record the effect of the stock split of HP Operating Company
Common Stock to be paired with HP Realty Common Stock.
With respect to any asset as to which there is an excess of fair market
value over HP Realty's adjusted basis ("Built in Gain") as of the beginning of
the ten-year period starting on the date on which such asset was acquired by
HP Realty (the "Recognition Period"), if HP Realty recognizes gain on the
disposition of such asset during the Recognition Period, then, to the extent
of the Built in Gain, such gain will be subject to tax at the highest regular
corporate tax rate. No amount has been recorded in the accompanying Pro Forma
Statements to reflect any such potential liability.
77
<PAGE>
HOLLYWOOD PARK REALTY ENTERPRISES, INC.
HOLLYWOOD PARK OPERATING COMPANY
NOTES TO POST-REIT UNAUDITED PRO FORMA CONSOLIDATED CONDENSED
BALANCE SHEETS--(CONTINUED)
TURF PARADISE. The Post-REIT Pro Forma Balance Sheets have been prepared
assuming that the real estate assets of Turf Paradise are retained by a
wholly-owned subsidiary of HP Realty and thus are included in the REIT. The
following table summarizes the impact on the Post-REIT Pro Forma Balance
Sheets if the real estate assets of Turf Paradise are transferred to a
subsidiary of HP Operating Company, instead of being retained by a subsidiary
of HP Realty:
<TABLE>
<CAPTION>
AS OF SEPTEMBER 30, 1997
-------------------------------------------------
POST-REIT PRO FORMA POST-REIT PRO FORMA
BALANCE SHEET BALANCE SHEET
INCLUDING TURF PARADISE EXCLUDING TURF PARADISE
REAL ESTATE IN THE REIT REAL ESTATE FROM THE REIT
----------------------- -------------------------
(IN THOUSANDS)
<S> <C> <C>
HP REALTY POST-REIT:
Real estate investments,
net....................... $ 95,983 $ 85,732
Total assets............... $100,699 $ 90,346
Total liabilities.......... $ 44,608 $ 44,608
Shareholders' equity....... $ 56,091 $ 45,738
HP OPERATING COMPANY POST-
REIT:
Property, plant and
equipment, net............ $197,754 $208,005
Total assets............... $312,677 $323,030
Total liabilities.......... $189,742 $189,742
Minority interests......... $ 3,033 $ 3,033
Shareholders' equity....... $119,902 $130,255
</TABLE>
78
<PAGE>
SELECTED HISTORICAL AND PRO FORMA FINANCIAL DATA
The following selected historical financial data of Hollywood Park and
Boomtown has been derived from their respective historical financial
statements and should be read in conjunction with such consolidated financial
statements and the notes thereto included elsewhere herein. The Hollywood Park
and Boomtown unaudited historical financial statement data as of and for the
nine months ended September 30, 1997 and 1996 has been prepared on the same
basis as the historical information derived from the audited financial
statements and, in the opinion of management, contains all adjustments,
consisting only of normal recurring accruals, necessary for the fair
presentation of the results of operations for such periods and financial
position as of such dates. Historically, Boomtown has reported operating
results on a fiscal year end of September 30.
The selected unaudited pro forma combined consolidated condensed financial
data (the "Selected Pro Forma Financial Data") is first presented prior to
giving effect to the Reorganization ("Pre-REIT") by combining the financial
results of Hollywood Park and Boomtown. Following the Pre-REIT Selected Pro
Forma Financial Data, are Selected Pro Forma Financial Data schedules after
giving effect to the Reorganization ("Post-REIT") for each of HP Realty and HP
Operating Company.
The Pre-REIT Selected Pro Forma Financial Data was derived from the
unaudited pro forma combined consolidated condensed Pre-REIT financial
statements appearing elsewhere herein, which give effect to the Boomtown
Merger as a purchase, the divestiture of Boomtown's Las Vegas property, the
issuance of the Notes and the application of the proceeds therefrom. For
comparison purposes, the Pre-REIT Selected Pro Forma Financial Data is
presented for both Hollywood Park and Boomtown with a year end of December 31.
The Post-REIT Selected Pro Forma Financial Data was derived from the
unaudited pro forma combined consolidated condensed Post-REIT financial
statements appearing elsewhere herein, which include pro forma adjustments to
give effect to the Reorganization, and assume that the real property assets of
Turf Paradise will be retained by a subsidiary of HP Realty.
Certain amounts from the Pre-REIT Hollywood Park and Pre-REIT Boomtown
selected historical financial data have been reclassified to conform with the
selected presentation hereto.
The pro forma information is presented for illustrative purposes only and is
not necessarily indicative of the operating results or financial position that
would have occurred had the Boomtown Merger, the issuance of the Notes and the
Reorganization been consummated in an earlier period, nor is it necessarily
indicative of future operating results or financial position.
79
<PAGE>
HOLLYWOOD PARK, INC.
SELECTED HISTORICAL FINANCIAL DATA
(PRIOR TO GIVING EFFECT TO THE REORGANIZATION)
<TABLE>
<CAPTION>
NINE MONTHS
YEARS ENDED ENDED
DECEMBER 31, SEPTEMBER 30,
------------------------------------------------ ------------------
1992 1993 1994 1995 1996 1996 1997
-------- -------- -------- -------- -------- -------- --------
(UNAUDITED)
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS
DATA:
REVENUES:
Gaming................. $ 0 $ 0 $ 11,745 $ 26,656 $ 50,717 $ 37,917 $ 83,990
Racing................. 66,983 63,850 78,719 79,862 71,308 50,897 48,084
Food and beverage...... 10,957 10,908 20,540 19,783 13,947 10,516 13,016
Other.................. 3,004 4,227 6,320 4,271 7,253 5,197 13,259
-------- -------- -------- -------- -------- -------- --------
80,944 78,985 117,324 130,572 143,225 104,527 158,349
-------- -------- -------- -------- -------- -------- --------
EXPENSES:
Gaming................. 0 0 0 5,291 27,249 19,516 45,117
Racing................. 21,097 20,860 23,393 30,960 30,167 21,623 21,615
Food and beverage...... 8,922 9,400 21,852 24,749 19,573 14,058 16,920
Administrative and
other................. 33,480 32,538 51,151 48,647 43,962 33,603 46,544
Depreciation and
amortization.......... 5,899 6,402 9,563 11,384 10,695 7,898 11,939
Non-recurring
expenses.............. 0 850 2,964 6,088 11,412 11,412 609
-------- -------- -------- -------- -------- -------- --------
69,398 70,050 108,923 127,119 143,058 108,110 142,744
-------- -------- -------- -------- -------- -------- --------
Operating income
(loss)................. 11,546 8,935 8,401 3,453 167 (3,583) 15,605
Interest expense....... 4,883 1,517 3,061 3,922 942 918 3,782
-------- -------- -------- -------- -------- -------- --------
Income (loss) before mi-
nority interests and
income taxes........... 6,663 7,418 5,340 (469) (775) (4,501) 11,823
Minority interest...... 0 0 0 0 15 0 80
-------- -------- -------- -------- -------- -------- --------
Income (loss) before in-
come taxes and extraor-
dinary item............ 6,663 7,418 5,340 (469) (790) (4,501) 11,743
Income tax expense..... 3,135 1,025 1,568 693 3,459 3,025 4,624
-------- -------- -------- -------- -------- -------- --------
Income (loss) before ex-
traordinary item....... 3,528 6,393 3,772 (1,162) (4,249) (7,526) 7,119
Extraordinary item--Uti-
lization of
tax benefits from net
operating loss
carryforwards.......... 1,894 0 0 0 0 0 0
-------- -------- -------- -------- -------- -------- --------
Net income (loss)....... $ 5,422 $ 6,393 $ 3,772 $ (1,162) $ (4,249) $ (7,526) $ 7,119
======== ======== ======== ======== ======== ======== ========
Dividend requirements on
convertible preferred
stock.................. $ 0 $ 1,718 $ 1,925 $ 1,925 $ 1,925 $ 1,443 $ 1,520
Net income (loss) at-
tributable to (allo-
cated to) common share-
holders................ $ 5,422 $ 4,675 $ 1,847 $ (3,087) $ (6,174) $ (8,969) $ 5,599
======== ======== ======== ======== ======== ======== ========
PER COMMON SHARE:
Income (loss) before
extraordinary item.... $ 0.27 $ 0.30 $ 0.10 $ (0.17) $ (0.33) $ (0.48) $ 0.27
Net income (loss)--pri-
mary.................. $ 0.41 $ 0.30 $ 0.10 $ (0.17) $ (0.33) $ (0.48) $ 0.27
Net income (loss)--
fully diluted......... $ 0.41 $ 0.30 $ 0.10 $ (0.17) $ (0.33) $ (0.48) --
Cash dividends......... $ 0.04 $ 0.00 $ 0.00 $ 0.00 $ 0.00 $ 0.00 $ 0.00
Number of common
shares--primary........ 13,084 15,418 18,224 18,399 18,505 18,605 20,596
Number of common
shares--fully diluted.. 13,084 17,465 20,516 20,691 20,797 20,896 --
OTHER DATA:
Cash flows provided by
(used in):
Operating activities... $ 11,262 $ 13,280 $ (7,287) $ 20,291 $ 13,137 $ 11,761 $ 6,059
Investing activities... (5,250) (32,677) (7,331) (31,322) (19,893) (14,692) (5,884)
Financing activities... (4,416) 74,391 (8,877) (3,685) (3,728) (3,792) 9,910
Capital expenditures... 5,319 12,902 27,584 25,150 23,786 17,969 23,059
BALANCE SHEET DATA: (A)
Total assets........... $ 90,219 $176,424 $246,573 $283,303 $205,886 $198,631 $413,379
Other liabilities...... 34,494 21,876 36,518 101,928 47,444 43,522 61,741
Long term obligations.. 45,538 348 42,800 15,629 282 282 132,163
Stockholders' equity... 10,187 154,200 167,255 165,746 158,160 154,827 219,475
</TABLE>
- -------
(a) Balance sheet data as of September 30, 1997, includes the accounts of
Boomtown.
80
<PAGE>
BOOMTOWN, INC.
SELECTED HISTORICAL FINANCIAL DATA
(PRIOR TO GIVING EFFECT TO THE REORGANIZATION)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
JUNE 30,
YEARS ENDED SEPTEMBER 30, (UNAUDITED)
---------------------------------------------- ------------------
1992 1993 1994 1995 1996 1996 1997
------- -------- -------- -------- -------- -------- --------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS
DATA:
Revenues:
Gaming................. $42,009 $ 42,416 $ 76,326 $189,306 $188,368 $139,350 $144,353
Food and beverage...... 3,785 3,877 7,973 15,613 16,314 12,293 13,036
Hotel, truck stop and
other................. 10,059 12,780 21,700 29,929 35,553 24,882 24,070
------- -------- -------- -------- -------- -------- --------
55,853 59,073 105,999 234,848 240,235 176,525 181,459
------- -------- -------- -------- -------- -------- --------
EXPENSES:
Gaming................. 20,677 21,732 38,753 98,637 102,634 76,206 83,118
Food and beverage...... 3,170 3,349 8,179 17,639 19,213 14,569 17,159
General and administra-
tive and other........ 18,750 21,133 41,019 97,822 91,977 66,189 60,355
Depreciation and amor-
tization.............. 3,528 3,839 5,891 10,422 10,618 8,135 11,636
Compensation stock
appreciation rights
and stock options..... 2,229 0 0 0 0 0 0
Pre-opening expenses... 0 0 15,787 0 0 0 0
Loss on marketable se-
curities.............. 0 0 1,691 0 0 0 0
Hollywood Park/Boomtown
merger costs.......... 0 0 0 0 301 712 1,610
Loss on sale of a busi-
ness.................. 0 0 0 0 36,563 36,563 1,271
------- -------- -------- -------- -------- -------- --------
48,354 50,053 111,320 224,520 261,306 202,374 175,149
------- -------- -------- -------- -------- -------- --------
Operating income
(loss)................. 7,499 9,020 (5,321) 10,328 (21,071) (25,849) 6,310
Interest expense....... 3,369 1,033 5,632 13,434 13,838 10,362 10,439
------- -------- -------- -------- -------- -------- --------
Income (loss) before mi-
nority interests and
income taxes........... 4,130 7,987 (10,953) (3,106) (34,909) (36,211) (4,129)
Minority interest...... 0 0 (351) (1,105) (645) (878) 96
------- -------- -------- -------- -------- -------- --------
Income (loss) before in-
come taxes and extraor-
dinary item............ 4,130 7,987 (10,602) (2,001) (34,264) (35,333) (4,225)
Income tax expense (ben-
efit).................. 1,669 3,035 (2,779) 876 794 (50) (2,103)
------- -------- -------- -------- -------- -------- --------
Income (loss) before ex-
traordinary item....... 2,461 4,952 (7,823) (2,877) (35,058) (35,283) (2,122)
Extraordinary item (a).. 0 (370) (229) 0 0 0 8,420
------- -------- -------- -------- -------- -------- --------
Net income (loss)....... $ 2,461 $ 4,582 $ (8,052) $ (2,877) $(35,058) $(35,283) $(10,542)
======= ======== ======== ======== ======== ======== ========
Dividend requirements on
preferred stock........ $ 200 $ 50 $ 0 $ 0 $ 0 $ 0 $ 0
Net income (loss) at-
tributable to (allo-
cated to) common
shareholders........... $ 2,261 $ 4,532 $ (8,052) $ (2,877) $(35,058) $(35,283) $(10,542)
======= ======== ======== ======== ======== ======== ========
PER COMMON SHARE:
Income (loss) before
extraordinary item.... $ 0.61 $ 0.65 $ (0.90) $ (0.31) $ (3.79) $ (3.82) $ (0.21)
Net income (loss)...... $ 0.61 $ 0.60 $ (0.93) $ (0.31) $ (3.79) $ (3.82) $ (1.07)
Number of common
shares................. 3,708 7,503 8,690 9,228 9,248 9,243 9,830
BALANCE SHEET DATA:
Total assets........... $55,916 $108,616 $238,467 $239,198 $205,988 $204,186 $ -- (b)
Other liabilities...... 10,632 7,581 25,309 27,405 31,871 29,351 --
Long term obligations.. 31,973 0 105,140 106,547 103,729 104,732 --
Stockholders' equity... 13,311 101,035 108,018 105,246 70,388 70,103 --
</TABLE>
- --------
(a) Write off of unamortized loan fees associated with the early repayment of a
$15 million senior note, net of tax effect of approximately $226,000 and
$140,000, for the years ended September 30, 1993 and 1994, respectively.
Tender and consent costs associated with early extinguishment of the Boomtown
Notes for the year ended September 30, 1996 and the nine months ended June
30, 1997, net of tax effect of approximately $5.9 million for the nine months
ended June 30, 1997.
(b) As of June 30, 1997, the accounts of Boomtown were consolidated with
Hollywood Park's.
81
<PAGE>
HOLLYWOOD PARK, INC.
SELECTED UNAUDITED PRO FORMA FINANCIAL DATA
(PRIOR TO GIVING EFFECT TO THE REORGANIZATION)
<TABLE>
<CAPTION>
NINE MONTHS
YEAR ENDED ENDED
DECEMBER 31, SEPTEMBER 30,
1996 1997
------------ -------------
(IN THOUSANDS, EXCEPT PER SHARE
DATA)
<S> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
REVENUES:
Gaming..................................... $208,699 $167,339
Racing..................................... 71,308 48,084
Food and beverage.......................... 22,737 17,937
Hotel, truck stop and other................ 33,839 25,945
-------- --------
336,583 259,305
-------- --------
EXPENSES:
Gaming..................................... 116,969 88,003
Racing..................................... 30,167 21,615
Food and beverage.......................... 29,728 23,503
Administrative and other................... 107,718 78,336
Depreciation and amortization.............. 20,818 20,717
Non-recurring expenses..................... 49,266 2,453
-------- --------
354,666 234,627
-------- --------
Operating income (loss)..................... (18,083) 24,678
Interest expense........................... 15,468 11,051
-------- --------
Income (loss) before minority interests and
income taxes............................... (33,551) 13,627
Minority interest (benefit)................ (149) 80
-------- --------
Income (loss) before income taxes and
extraordinary item......................... (33,402) 13,547
Income tax expense......................... 4,121 5,832
-------- --------
Income (loss) before extraordinary item..... $(37,523) $ 7,715
======== ========
Dividend requirements on convertible
preferred stock............................ $ 1,925 $ 1,520
Income (loss) before extraordinary item
attributable to (allocated to) common
shareholders............................... $(39,448) $ 6,195
======== ========
PER COMMON SHARE:
Income (loss) before extraordinary item--
primary................................... $ (1.65) $ 0.26
Income (loss) before extraordinary item--
fully diluted............................. $ (1.65) --
Cash dividends............................. $ 0.00 $ 0.00
Number of common shares--primary............ 23,868 24,073
Number of common shares--fully diluted...... 26,160 --
<CAPTION>
AS OF
SEPTEMBER 30,
1997
PRE-REIT
-------------
<S> <C> <C> <C> <C>
BALANCE SHEET DATA:
Total assets............................... $413,379
Other liabilities.......................... 58,708
Minority interests......................... 3,033
Long term obligations...................... 132,163
Stockholders' equity....................... 219,475
</TABLE>
82
<PAGE>
HOLLYWOOD PARK REALTY ENTERPRISES, INC.
SELECTED UNAUDITED PRO FORMA FINANCIAL DATA
(AFTER GIVING EFFECT TO THE REORGANIZATION)
<TABLE>
<CAPTION>
NINE MONTHS
YEAR ENDED ENDED
DECEMBER 31, SEPTEMBER 30,
1996 1997
------------ -------------
(IN THOUSANDS, EXCEPT PER
SHARE DATA)
<S> <C> <C>
STATEMENT OF OPERATIONS DATA:
REVENUES:
Gaming........................................... $ 0 $ 0
Racing........................................... 0 0
Food and beverage................................ 0 0
Rental of property............................... 14,623 9,810
Hotel, truck stop and other...................... 1,154 940
------- --------
15,777 10,750
------- --------
EXPENSES:
Gaming........................................... 0 0
Racing........................................... 0 0
Food and beverage................................ 0 0
Administrative and other......................... 1,612 1,201
Rental of property............................... 0 0
Depreciation and amortization.................... 6,134 4,628
Loss on sale of a business....................... 0 0
Hollywood Park/Boomtown Merger costs............. 0 0
------- --------
7,746 5,829
------- --------
Operating income (loss)............................ 8,031 4,921
Interest expense................................. 134 155
------- --------
Income (loss) before minority interests and income
taxes............................................. 7,897 4,766
Minority interest................................ 0 0
------- --------
Income (loss) before income taxes and extraordinary
item.............................................. 7,897 4,766
Income tax expense............................... 0 0
------- --------
Income (loss) before extraordinary item............ $ 7,897 $ 4,766
======= ========
Dividend requirements on convertible preferred
stock (a)......................................... $ 1,925 $ 1,520
Income (loss) attributable to (allocated to) common
shareholders before extraordinary item............ $ 5,972 $ 3,246
======= ========
PER COMMON SHARE:
Income (loss) before extraordinary item--
primary......................................... $ 0.25 $ 0.13
Cash dividends................................... $ 0.00 $ 0.00
Number of common shares--primary................... 23,868 24,073
Number of common shares--fully diluted............. 26,160 --
OTHER DATA:
Funds from operations (b)........................ $14,031 --
BALANCE SHEET DATA:
Total assets..................................... $100,699
Other liabilities................................ 44,608
Stockholders' equity............................. 56,091
- --------
(a) On August 28, 1997, Hollywood Park redeemed the outstanding convertible
preferred stock for shares of Hollywood Park Common Stock, and cash
dividends on the convertible preferred stock ceased to accrue as of that
date.
(b) Funds from operations is defined as income before minority interest
(computed in accordance with generally accepted accounting principals)
excluding gains (losses) from debt restructuring and sale of property,
provision for losses, and real estate related depreciation and amortization
(excluding amortization of financing costs). Funds from operations does not
necessarily represent cash generated from operating activities in
accordance with generally accepted accounting principals and is not
necessarily indicative of cash available to fund cash needs. Funds from
operations should not be considered an alternative to net income as an
indication of HP Realty's financial performance or as an alternative to
cash flows from operating activities as a measure of liquidity.
Calculation of funds from operations:
Income before minority interest................. $ 7,897 $ 4,766
Excluding gains (losses) from debt
restructuring.................................. 0 0
Excluding gains (losses) from sale of property.. 0 0
Excluding provision for losses.................. 0 0
Add back real estate related depreciation and
amortization................................... 6,134 4,628
------- --------
$14,031 $ 9,394
======= ========
</TABLE>
83
<PAGE>
HOLLYWOOD PARK OPERATING COMPANY
SELECTED UNAUDITED PRO FORMA FINANCIAL DATA
(AFTER GIVING EFFECT TO THE REORGANIZATION)
<TABLE>
<CAPTION>
NINE MONTHS
YEAR ENDED ENDED
DECEMBER 31, SEPTEMBER 30,
1996 1997
------------ -------------
(IN THOUSANDS, EXCEPT
PER SHARE DATA)
<S> <C> <C>
STATEMENT OF OPERATIONS DATA:
REVENUES:
Gaming........................................... $208,699 $167,339
Racing........................................... 71,308 48,084
Food and beverage................................ 22,737 17,937
Rental of property............................... 0 0
Hotel, truck stop and other...................... 32,685 25,005
-------- --------
335,429 258,365
-------- --------
EXPENSES:
Gaming........................................... 116,969 88,003
Racing........................................... 30,167 21,615
Food and beverage................................ 29,728 23,503
Administrative and other......................... 106,106 77,744
Rental of property............................... 14,623 9,810
Depreciation and amortization.................... 14,684 16,089
Write off of investment in a business............ 1,291
Loss on sale of a business....................... 11,412 357
Hollywood Park/Boomtown Merger costs............. 36,563 1,487
-------- --------
361,543 238,608
-------- --------
Operating income................................... (26,114) 19,757
Interest expense................................... 15,334 10,896
-------- --------
Income before minority interests and income taxes.. (41,448) 8,861
Minority interest.................................. (149) 80
-------- --------
Income before income taxes and extraordinary item.. (41,299) 8,781
Income tax expense................................. (131) 3,925
-------- --------
Income before extraordinary item................... $(41,168) $ 4,856
======== ========
Dividend requirements on convertible preferred
stock(a).......................................... $ 0 $ 0
Income attributable to common shareholders......... $(41,168) $ 4,856
======== ========
PER COMMON SHARE:
Income before extraordinary item--primary......... $ (1.72) $ 0.20
Income (loss) before extraordinary item--fully
diluted.......................................... $ (1.72) $ 0.00
Cash dividends.................................... $ 0.00 $ 0.00
Number of common shares--primary................... 23,868 24,073
Number of common shares--fully diluted............. 26,160 --
BALANCE SHEET DATA:
Total assets...................................... $312,677
Other liabilities................................. 57,579
Minority interest................................. 3,033
Long term obligations............................. 132,163
Stockholders' equity.............................. 119,902
</TABLE>
- --------
(a) On August 28, 1997, Hollywood Park redeemed the outstanding convertible
preferred stock for shares of Hollywood Park Common Stock, and cash
dividends on the convertible preferred stock ceased to accrue as of that
date.
84
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion should be read in conjunction with, and is
qualified in its entirety by, Hollywood Park's and Boomtown's financial
statements (including the pro forma financial statements), including the notes
thereto, and the other financial information appearing elsewhere in this Proxy
Statement, as well as the discussion under "Risk Factors." The discussion
herein reflects the historical results of operations of Hollywood Park and
Boomtown which, prior to the Boomtown Merger, had been operated separately by
Hollywood Park and Boomtown, respectively, and the pro forma results of
operations of HP Realty and HP Operating Company giving effect to the
Reorganization.
OVERVIEW
Historically, Hollywood Park's primary business was the operation of
thoroughbred racing facilities. Hollywood Park is the successor to the
Hollywood Park Turf Club, which was originally organized in 1938 and
incorporated in 1981 under the name HP Realty Enterprises, Inc. Hollywood
Park's principal business was owning and operating the Hollywood Park Race
Track, located in the Los Angeles metropolitan area, one of the premier
thoroughbred racing facilities in the United States.
Since 1991, Hollywood Park has continuously diversified itself from an owner
and operator of a single horse racing property into a multi-jurisdictional
gaming, sports and entertainment company. Hollywood Park has implemented this
strategic plan through internal development of properties and a series of
selective acquisitions with a particular focus on middle-market operations
which could benefit from improved management and the access to Hollywood
Park's financial resources.
Since 1991, Hollywood Park's strategic plan has been to maximize the revenue
and cash flow of its core businesses through expansion and increased
utilization of those properties, to continue to diversify its gaming
operations, to broaden the scope of its activities to include other sports and
entertainment attractions and to maximize the revenue of its horse racing
business through selective acquisitions and, as opportunities arise, through
continued expansion and technological improvements in off-track wagering. In
late 1993 and early 1994, Hollywood Park attempted to take advantage of the
trend toward legalizing gaming in new jurisdictions by acquiring race tracks
in jurisdictions where expanded gaming legislation appeared reasonably likely.
In 1994, Hollywood Park acquired Turf Paradise, a thoroughbred racing facility
located in Phoenix, Arizona, and Sunflower, a greyhound and thoroughbred
racing facility located in Kansas City, Kansas. In Arizona, Native American
casinos have opened, at least one in close proximity to Turf Paradise, and
off-track wagering is permitted in bars. However, to date, the Arizona
legislature has not authorized expanded forms of gaming at race tracks. In
Kansas, though several legislative proposals to expand gaming were made, none
has been enacted, and competition from riverboat gaming in nearby Missouri has
resulted in Sunflower filing for reorganization under Chapter 11 of the
Bankruptcy Code. Hollywood Park's racing operations (including racing related
concessions) generated approximately $84.1 million in revenues for the year
ended December 31, 1996.
Following the acquisitions of Turf Paradise and Sunflower, Hollywood Park
has focused its expansion efforts on California card club casinos and other
casino operations, as well as on expanding its pari-mutuel operations at its
existing facilities. Since 1994, Hollywood Park has opened two California card
club casino facilities. The Hollywood Park-Casino, which opened in July 1994
and is located on the premises of the Hollywood Park Race Track, has a total
of 145 gaming tables which offer Poker, Pai Gow and California Blackjack.
Hollywood Park assumed operational control over the Hollywood Park-Casino
effective November 1995, following an amendment to California law to permit
any publicly-traded pari-mutuel racing association to operate card club
casinos on its race track premises. Until that time, the Hollywood Park-Casino
was operated under a lease arrangement by an unaffiliated operator with
Hollywood Park receiving a fixed lease payment. In late 1996, the Crystal Park
Hotel and Casino, located in the Los Angeles metropolitan area, opened with
100 table games and 282 hotel rooms. The Crystal Park Casino offers the same
games as the Hollywood Park-Casino. Crystal Park LLC, controlled by two
wholly-owned subsidiaries of Hollywood Park as discussed below,
85
<PAGE>
owns the facility and, since the Crystal Park Casino is not on any race track
premises, Crystal Park LLC entered into a five-year lease with Compton
Entertainment, Inc. ("CEI"), an unaffiliated party, to operate the card club
casino. The lease provided for monthly payments of approximately $200,000 for
the first six months, $350,000 for the months 7 through 12 and $759,000 for
months 13 through 60. On October 11, 1997, the California Attorney General
accepted CEI's withdrawal of its conditional gaming registration pursuant to a
previously negotiated agreement, and the City of Compton concurrently revoked
CEI's city gaming license. Crystal Park LLC subsequently terminated CEI's
lease, and 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 addition to the judgment for possession and for damages of approximately
$150,000, Crystal Park LLC has a claim against CEI for additional damages
relating to subsequent unpaid rent and additional unpaid amounts. As of
September 30, 1997, CEI owed Crystal Park LLC $600,000, of which $200,000 is
covered by a rent security deposit Crystal Park LLC received from CEI in
October 1996, and of which $350,000 was not recorded as revenues but instead
was fully allowed for with a $350,000 valuation allowance.
After evicting CEI, Crystal Park LLC entered into a new lease for the
Crystal Park Casino with California Casino Management, Inc. ("CCM"), a
California corporation, owned by Mr. Leo Chu. Mr. Chu presently has a
conditional gaming registration from the California Attorney General and a
gaming license from the City of Compton to operate the Crystal Park Casino.
Mr. Chu presently holds a California gaming registration to operate a small
card club in Northern California. CCM reopened the Crystal Park Casino on
December 26, 1997 for a term of four years. The lease provides for monthly
payments of $100,000 for the first six months, $350,000 for months 7 through
18, and $550,000 for months 19 through 48.
As of December 4, 1997, HP Casino, Inc. ("HP Casino"), a wholly-owned
subsidiary of Hollywood Park, acquired the membership interests in Crystal
Park LLC held by First Park Investments, LLC for $1,000,000, the amount
initially invested. HP Casino is in negotiations with Redwood Gaming, LLC to
purchase Redwood Gaming's membership interest. As a result of the First Park
transaction, Hollywood Park (through HP Casino and HP/Compton, Inc.) owns
93.2% of the membership interests of Crystal Park LLC and would own 100% of
such membership interests if the Redwood Gaming transaction is completed.
Hollywood Park significantly expanded its gaming operations when it
completed its strategic combination with Boomtown on June 30, 1997. Hollywood
Park now owns and operates, through its subsidiaries, land-based, dockside and
riverboat gaming operations in or near Reno, Nevada, New Orleans, Louisiana
and Biloxi, Mississippi, respectively. The Boomtown properties offer full
casino gaming, hotel accommodations (at Boomtown Reno), and other
entertainment amenities to primarily middle income, value-oriented customers.
On July 1, 1997, Boomtown and its subsidiaries divested their interests in
Boomtown Las Vegas, Nevada, which had consistently performed below projections
and generated significant losses. Together with its California card club
casino operations, as of September 30, 1997, Hollywood Park's casino
operations consist of 3,269 slot machines, 379 table games and 404 hotel rooms
at its gaming properties. Hollywood Park is the only company that currently
owns and operates casinos in Nevada and other states and card club casinos in
California. Hollywood Park's efforts to expand its gaming operations are now
focused on expanding its existing core gaming facilities and on new
opportunities in jurisdictions (other than Las Vegas and Atlantic City) in
which gaming has already been legalized.
In connection with the Boomtown Merger, Hollywood Park supplied Boomtown
with the funds necessary to repurchase approximately $103 million in aggregate
principal amount of Boomtown's 11.5% First Mortgage Notes due 2003 (the
"Boomtown Notes"). In addition, Hollywood Park intends to utilize its
financial resources to reduce or repurchase the financial interests of third
parties in Boomtown's operations, such as the repurchase of minority interests
in Boomtown New Orleans and National Gaming's participation in the EBITDA of
Boomtown Biloxi and the restructuring of certain Boomtown equipment operating
leases into capital leases.
During 1996 and 1997, Boomtown restructured several operating leases into
capital leases through negotiated payments on the operating lease residual
purchase options, with a corresponding reduction in operating expenses.
86
<PAGE>
Hollywood Park, through its wholly-owned subsidiaries HP Yakama, Inc. ("HP
Yakama") and HP Yakama Consulting, Inc. ("HPY Consulting"), recently entered
into agreements with the Yakama Tribal Gaming Corporation (the "Tribal
Corporation") and The Confederated Tribes and Bands of the Yakama Indian
Nation (the "Tribes") to fund the construction and development of (through HP
Yakama), and provide development services with respect to (through HPY
Consulting), a casino in Yakima County, Washington. HP Yakama has committed to
fund up to $9,000,000 to construct and equip the casino. HP Yakama has also
entered into an agreement under which it will lease the completed casino and
underlying land (the "Facility") from the Tribes, for a seven-year term
commencing with the opening of the casino, for $12,000 per year, and then
sublease the Facility to the Tribal Corporation, for the same seven-year term.
Rent due from the Tribal Corporation to HP Yakama under such sublease will
initially be 28% of net revenues (as defined in the sublease), decreasing to
as low as 22% of net revenues if aggregate net revenues exceed certain levels.
Under a Profit Participation Agreement between Hollywood Park and North
American Sports Management, Inc. ("NORAM"), which entered into the original
Memorandum of Understanding with the Tribes, NORAM will receive 22% of the
portion of the net revenues actually received by HP Yakama under the sublease.
Presently, Hollywood Park, the Tribes and the Tribal Corporation are
awaiting final approval of the documentation from the Bureau of Indian Affairs
(the "BIA"). Hollywood Park and HP Yakama also have applications pending with
the Washington State Gambling Commission (the "WGC") for Class III Indian
Gaming--Financier approval. There can be no assurance the BIA will approve the
documentation or that the WGC will grant Hollywood Park and HP Yakama the
Class III Indian Gaming--Financier approval.
For a discussion of HP Operating Company's intended efforts to continue this
strategic expansion of its gaming, sports and entertainment business of
Hollywood Park after the Reorganization, see "Business of HP Operating Company
After the Reorganization."
As of December 31, 1996, the Company had repurchased and retired (with the
last purchase being made on November 13, 1996) 222,300 common shares, at a
cost of approximately $1,962,000 pursuant to a previously announced intention
to repurchase and retire up to 2,000,000 shares of its common stock on the
open market or in negotiated transactions.
The mailing address of the principal executive offices of Hollywood Park and
HP Operating Company is 1050 South Prairie Avenue, Inglewood, California
90301, and their telephone number is (310) 419-1500.
HISTORICAL RESULTS OF OPERATIONS
The following discussion relates to historical results of operations for
Hollywood Park (excluding Boomtown) and for Boomtown separately. Hollywood
Park's revenues consist primarily of pari-mutuel wagering revenues and gaming
revenues from Hollywood Park-Casino table games, and operator lease payments
for Crystal Park and (for applicable periods) the Hollywood Park-Casino. In
fiscal 1996, pari-mutuel wagering and casino table game operations contributed
approximately 37.6% and 35.1%, respectively, of Hollywood Park's total
revenues.
Boomtown's revenues consist primarily of gaming revenues from slot and video
poker machines ("slot machines"), table games and keno as well as non-gaming
revenues generated from the properties' family entertainment centers, food and
beverage sales, hotel room sales (at Boomtown Reno) and from recreational
vehicle parks. Gaming operations have historically contributed a significant
portion of Boomtown's total revenues and substantially all of its income from
operations. In fiscal 1996, gaming operations contributed approximately 80% of
Boomtown's total revenues, and gaming revenues from slot machines provided
approximately 80% of Boomtown's gaming revenues. Boomtown's non-gaming
operations are designed primarily to enhance the gaming operations and
contribute a relatively small percentage of Boomtown's income from operations
after deducting promotional allowances and operating costs.
Boomtown's historical financial data includes results of operations at
Boomtown Las Vegas, which has since been divested pursuant to the Blue Diamond
Swap. See "--Boomtown--Disposition of Boomtown
87
<PAGE>
Las Vegas." Boomtown Las Vegas consistently generated losses and reduced the
overall profitability of Boomtown for the periods described herein.
Hollywood Park
Nine Months Ended September 30, 1997 Compared to the Nine Months Ended
September 30, 1996
As of June 30, 1997, the results of operations of Boomtown were consolidated
with those of Hollywood Park, and since the Boomtown Merger was accounted for
under the purchase method of accounting for a business combination, there is
no corresponding Boomtown activity in the 1996 results of operations. As of
April 1, 1996, Sunflower's results of operations were no longer consolidated
with Hollywood Park's results; therefore, the results of operations for the
nine months ended September 30, 1997, are exclusive of Sunflower's results of
operations, but the financial results for the nine months ended September 30,
1996, included Sunflower's results of operations through March 31, 1996. Also
included in the results of operations for the nine months ended September 30,
1996, was the $11,412,000 one time, non-cash write off of Hollywood Park's
investment in Sunflower. On May 2, 1996, the Kansas Legislature adjourned
without passing legislation that would have allowed additional gaming at
Sunflower so that Sunflower could compete with Missouri riverboat gaming. On
May 17, 1996, Sunflower filed for reorganization under Chapter 11 of the
Bankruptcy Code. Management is currently evaluating all options available to
Sunflower, and expects to continue to operate Sunflower at least until the
Bankruptcy Court issues its pending ruling regarding approval of Sunflower's
proposed plan of reorganization and all appeals of that ruling (if any) have
been finalized.
Total revenues for the nine months ended September 30, 1997, increased by
$53,822,000, or 51.5%, as compared to the nine months ended September 30,
1996, due primarily to the inclusion of $55,441,000 of Boomtown revenues in
1997, with no corresponding revenues recorded during 1996. Gaming revenues
increased by $46,073,000, or 121.5%, due primarily to Boomtown gaming revenues
of $43,765,000, and Crystal Park LLC rent revenues of $2,202,000, in 1997,
with no corresponding Boomtown or Crystal Park LLC revenues in 1996. The
Crystal Park Casino opened on October 25, 1996, under a triple net lease with
CEI. Crystal Park LLC recorded a 100% valuation allowance against the $350,000
of rent revenue due from CEI for the month of September 1997, due to the
California Attorney General revoking CEI's conditional California gaming
registration. The Company is presently in lease negotiations with CCM to
assume the lease of the Crystal Park Casino, if CEI is unable to regain its
conditional California gaming registration, subject to CCM obtaining all
required gaming registrations and licenses to operate the Crystal Park Casino
(as more fully discussed above). Racing revenues decreased by $2,813,000, or
5.5%, due primarily to one fewer live race day at Hollywood Park, and the
inclusion of $1,317,000 of racing revenues attributable to Sunflower in 1996,
and no corresponding Sunflower Racing revenues in 1997. Food and beverage
revenues increased by $2,500,000, or 23.8%, 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's Reno property, and there are no corresponding
revenues in 1996. Other income increased by $2,584,000, or 49.7%, due
primarily to the inclusion of Boomtown revenues in 1997 with no corresponding
revenues in 1996.
Total operating expenses (inclusive of approximately $44,003,000 of Boomtown
expenses in 1997) increased by $34,634,000, or 32.0%, during the nine months
ended September 30, 1997, as compared to the nine months ended September 30,
1996. Gaming expenses increased by $25,601,000, or 131.2%, primarily due to
the inclusion of Boomtown gaming expenses of $23,356,000 and increased
tournament costs at the Hollywood Park-Casino. Food and beverage expenses
increased by $2,862,000, or 20.4%, due primarily to the inclusion of
$4,039,000 of Boomtown costs in the 1997 period with no corresponding expense
in the 1996 period, netted against savings generated at the Hollywood Park-
Casino of approximately $1,194,000 during the 1997 period which resulted
primarily from the closing of a restaurant and other labor and inventory
savings. Hotel and recreational vehicle expenses and truck stop and service
station expenses related to Boomtown Reno and there are no corresponding
expenses in 1996. Administrative expenses increased by $7,047,000, or 22.3%,
due primarily to the inclusion of $10,717,000 of Boomtown expenses in the 1997
period with no corresponding expense in the 1996 period, netted against the
following items: (i) the inclusion of approximately $1,030,000 of
88
<PAGE>
Sunflower administrative costs in the 1996 period with no corresponding
expense in the 1997 period; (ii) reduced expansion and legal costs of
approximately $950,000 related to the Inglewood master site plan;
(iii) approximately $500,000 in savings related to the termination of
Hollywood Park's pension plan; and (iv) a 1997 reclassification of workers'
compensation expense from administrative expense to the functional
departments. REIT reorganization expense consisted primarily of legal and tax
expenses incurred by Hollywood Park with respect to the reinstatement of the
Company's REIT as previously discussed. Other expenses increased by
$1,234,000, or 60.8%, due primarily to the inclusion of Boomtown expenses in
1997 with no corresponding expenses in 1996. Depreciation and amortization
increased by $4,041,000, primarily due to the Boomtown and Crystal Park LLC
depreciation expense in 1997 with no corresponding expenses in 1996. Interest
expense increased by $2,864,000, or 312.0%, due to the interest on the Notes,
short term bank borrowings (all of which have been repaid) and bank commitment
fees (See Item 2. Liquidity and Capital Resources). Income tax expense
increased by $1,599,000, or 52.9%, due to increased income before income taxes
in 1997 as compared to 1996.
Year Ended December 31, 1996 Compared to the Year Ended December 31, 1995
The results of operations for the year ended December 31, 1996, included the
results of Hollywood Park operating all aspects of the Hollywood Park-Casino,
including the Casino gaming floors. Hollywood Park acquired the Hollywood
Park-Casino gaming floor business from Pacific Casino Management ("PCM") on
November 17, 1995; therefore, the results of operations for the year ended
December 31, 1995, do not include the operating results of the Hollywood Park-
Casino gaming floor business prior to November 17, 1995, but rather are
reflective of the lease arrangement then in place. The results of operations
for the year ended December 31, 1996, included Sunflower's results of
operations for the three months ended March 31, 1996, only. 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. Sunflower's results of operations are
consolidated in the financial statements for the year ended December 31, 1995.
Total revenues increased by $12,653,000, or 9.7%, for the year ended
December 31, 1996, as compared to the year ended December 31, 1995, primarily
due to Hollywood Park-Casino gaming revenues. Gaming revenues of $50,272,000
were generated from the Hollywood Park-Casino gaming activities, which
Hollywood Park acquired from PCM on November 17, 1995. During the year ended
December 31, 1995, Hollywood Park recorded $20,624,000 of lease revenues,
$6,032,000 of gaming revenues (covering the period November 17, 1995, through
December 31, 1995), and concession sales to PCM of approximately $2,773,000,
or total 1995 Hollywood Park-Casino gaming and lease related revenues of
$29,429,000. On October 25, 1996, Crystal Park opened under a triple net lease
between Hollywood Park and CEI (the operator of Crystal Park). Monthly lease
rent is fixed at $200,000 per month for months one through six; $350,000 per
month for months seven through twelve, and approximately $759,000 per month
for the remaining 48 months of the lease. Racing revenues decreased by
$5,728,000, or 7.4%, primarily due to the exclusion of Sunflower's racing
revenues for the nine months ended December 31, 1996. Food and Beverage sales
decreased by $5,836,000, or 29.5%, with approximately $2,773,000 of the
difference attributable to the inclusion of sales to PCM in 1995 with no
corresponding sales in 1996, with approximately $2,414,000 of the difference
due to the inclusion of a full year of food and beverage sales recorded for
Sunflower in 1995 and just three months of Sunflower sales recorded in 1996,
with the balance of the difference primarily due to on-track attendance
declines at Hollywood Park.
Total operating expenses increased by $15,939,000, or 12.5%, for the year
ended December 31, 1996, compared to the year ended December 31, 1995,
primarily due to the inclusion of $27,249,000 of Hollywood Park-Casino gaming
floor expenses (with corresponding gaming floor expenses of $4,919,000 in
1995), which more than offset a $7,479,000 reduction in expenses arising from
the exclusion in 1996 of Sunflower's expenses for the nine months ended
December 31, 1996. Food and Beverage expense decreased by $5,589,000, or 22.2%
with $2,089,000 of the savings attributable to the exclusion of Sunflower's
expenses subsequent to the first quarter of 1996, and with the balance of the
savings primarily attributable to cost savings programs implemented at the
Hollywood Park-Casino. Administrative expenses decreased by $5,315,000, or
11.3%, due to the inclusion of a full year of Sunflower expenses in 1995 and
just three months of corresponding costs recorded in 1996.
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Included in the 1996 results of operations was the $11,412,000 one time,
non-cash write off of Hollywood Park's investment in Sunflower. On May 2,
1996, the Kansas Legislature adjourned without passing legislation that would
have allowed additional gaming at Sunflower, and thereby, allowing Sunflower
to compete with Missouri riverboat gaming. On May 17, 1996, Sunflower filed
for reorganization under Chapter 11 of the Bankruptcy Code. Management is
currently evaluating all options available to Sunflower, and expects to
continue operate Sunflower at least until the Bankruptcy Court issues its
pending ruling regarding approval of Sunflower's proposed plan of
reorganization and all appeals of that ruling (if any) have been finalized.
Included in the 1995 results of operations was $6,088,000 of expenses (with
no corresponding expenses in 1996) related to the settlement of certain claims
in connection with a shareholder class action and related shareholder
derivative suit, as more fully described in Hollywood Park's 1996 Annual
Report on Form 10-K.
Depreciation and amortization expenses decreased by $689,000, or 6.1%,
primarily due to the exclusion of Sunflower's expenses for the nine months
ended December 31, 1996, netted against the amortization of the goodwill
associated with the November 17, 1995, acquisition of PCM. Interest expense
decreased by $2,980,000, or 76.0%, due to the exclusion of Sunflower's
interest expense for the nine months ended December 31, 1996.
Income tax expense increased by $2,766,000, due primarily to the
establishment of certain tax reserves.
Year Ended December 31, 1995 Compared to the Year Ended December 31, 1994
The 1995 consolidated financial statements include the results of operations
at Hollywood Park, the Hollywood Park-Casino, Sunflower, and Turf Paradise.
From July 1, 1994 until November 17, 1995, the Hollywood Park-Casino was
operated under a lease by an unaffiliated operator who operated the gaming
floor business and Hollywood Park operated all other activities. After a
change in California law permitting Hollywood Park to operate the casino
directly, the gaming floor business was acquired from the operator as of
November 17, 1995, accounted for under the purchase method of accounting. The
1995 Hollywood Park-Casino operating results included ten and a half months of
operations under the lease, and one and a half months under Hollywood Park's
direct ownership and control. The 1994 operating results include the six
months of Hollywood Park-Casino activities under the lease arrangement.
Sunflower was acquired as of March 31, 1994, in a transaction accounted for
under the purchase method of accounting, and therefore the 1994 statement of
operations does not include Sunflower's first quarter results. Turf Paradise
was acquired as of August 11, 1994, accounted for under the pooling of
interests method of accounting. Accordingly, the 1994 results have been
restated to include the operating results of Turf Paradise for the full year.
Total revenues increased by $13,248,000, or 11.3%, during 1995, as compared
to the year ended December 31, 1994. Included in 1995 Gaming revenues was
$20,624,000 of Hollywood Park-Casino fixed lease rent revenue (of which the
operator paid $12,000,000 in 1995 plus $4,377,000 for food and beverage and
interest on accrued and unpaid rent) and $6,032,000 of gaming floor revenue,
compared to $11,745,000 of Hollywood Park-Casino fixed lease rent revenue in
1994, (covering six months of casino operations). Racing revenues decreased by
$1,683,000, or 2.1%, as a result of a $3,151,000 decline in racing revenues at
Sunflower due to intense competition from nearby Missouri riverboat gaming,
which more than offset simulcast racing revenue increases at both Hollywood
Park and Turf Paradise. Food and beverage revenues decreased by $757,000, or
3.7%. Food and beverage sales at Sunflower declined in 1995 by $1,343,000, as
compared to 1994, also as a result of competition from Missouri riverboat
gaming. Such Sunflower food and beverage revenues declines were offset by
increased Hollywood Park-Casino revenues, due to the casino being open for all
1995 (as opposed to only six months in 1994). Other income increased by
$777,000, or 12.3%, principally because (i) other non-casino income increased
by $940,000, or 15.0%, and (ii) revenue declines of $769,000 at Hollywood Park
due to the cancellation of the Forum Parking Agreement were offset by a full
year of Hollywood Park-Casino gift shop and health club sales in 1995 (as
opposed to only six months of such sales in 1994). A new Forum Parking
Agreement was executed on October 24, 1995, covering the one year from October
1, 1995.
Total operating expenses, inclusive of $31,938,000 of Hollywood Park-Casino
operating expenses (representing a month and a half of gaming floor operations
and twelve months of other Hollywood Park-Casino
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operations, for which there were no gaming floor expenses and just six months
of comparable other Hollywood Park-Casino operations activity in 1994),
increased by $18,196,000, or 16.7%, during the year ended December 31, 1995,
as compared to the year ended December 31, 1994. Gaming expenses of $4,919,000
were recorded in 1995, due to the November 17, 1995, acquisition of the
Hollywood Park-Casino gaming floor business from PCM. Racing expenses
decreased by $824,000, or 2.7%, primarily due to five fewer live race days at
Hollywood Park in 1995 as compared to 1994. Food and beverage expenses
increased by $3,310,000, or 15.1%, primarily due to a full year of Hollywood
Park-Casino food and beverage services in 1995 (as compared to only six months
of such activity in 1994). Administrative expenses increased by $3,294,000, or
7.8%, primarily due to expansion costs incurred in connection with card club
casino initiative campaigns, which were defeated in September and November, as
well as costs for other expansion endeavors such as a proposed stadium and
other card club casinos. All costs associated with expansion projects are
expensed during the evaluation stages.
As previously reported by the Company, and described in the Company's Annual
Report on Form 10-K for 1994, six purported class actions (the "Class
Actions") were filed beginning in September 1994, against the Company and
certain of its directors and officers in the United States District Court,
Central District of California (the "District Court") and consolidated in a
single action entitled In re Hollywood Park Securities Litigation. On
September 15, 1995, a related stockholder derivative action, entitled Barney
v. Hubbard, et al. (the "Derivative Action"), was filed in the California
Superior Court for the County of San Diego (the "State Court"). As previously
reported, on February 26, 1996, the District Court approved the settlement of
the Class Actions and entered a judgment dismissing them in their entirety. On
April 3, 1996, the State Court entered an order approving the settlement of
the Derivative Action. Hollywood Park also separately settled all purported
claims against Hollywood Park and its officers and directors by the former
controlling stockholder of Turf Paradise in connection with Hollywood Park's
acquisition of Turf Paradise. After giving effect to the amounts to be
received by Hollywood Park in settlement of the Derivative Action and from its
insurance carrier, Hollywood Park's net settlement payment in the Class
Actions, the Derivative Action and in resolving the claims of the former
controlling stockholder of Turf Paradise, was approximately $6,100,000
(inclusive of all related costs and expenses), which was expensed in the
fourth quarter of 1995.
The 1994 Hollywood Park-Casino pre-opening and training costs of $2,337,000
were primarily related to wages paid during the on-the-job training of staff
hired to open the Hollywood Park-Casino on July 1, 1994. There were no similar
costs in 1995. The Turf Paradise acquisition costs were a result of the August
11, 1994, acquisition of Turf Paradise by Hollywood Park; there were no
similar costs in 1995.
Depreciation and amortization increased by $1,821,000, or 19.0%, for the
year ended December 31, 1995, as compared to the year ended December 31, 1994.
The increase was mainly due to Hollywood Park-Casino operations, and costs
associated with the first quarter of 1995 at Sunflower with no corresponding
amount in 1994. Interest expense increased by $860,000, or 28.1%, principally
due to an additional three months of Sunflower interest expense in the 1995
results. Sunflower's 1994 results are exclusive of the first quarter.
Income tax expense decreased by $875,000, due primarily to the decrease in
pre-tax income in the year ended December 31, 1995 as compared to the year
ended December 31, 1994.
Allowance for bad debts increased by $1,682,000 as of the year ended
December 31, 1995, as compared to the year ended December 31, 1994. The
increase was attributable to the November 17, 1995 acquisition of the gaming
floor business of the Hollywood Park-Casino. To remain competitive in the
local card club business, the Hollywood Park-Casino extends credit to card
players; whereas, the Company's racing business does not extend credit to
players.
Boomtown
Disposition of Boomtown Las Vegas
On July 1, 1997, Boomtown and its subsidiaries exchanged substantially all
of their interest in Boomtown Las Vegas (including substantially all of the
operating assets and the notes receivable of approximately $27.3
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million from the landowner/lessor of the Boomtown Las Vegas property, IVAC, a
California general partnership of which Edward P. Roski, Jr. ("Roski"), a
former Boomtown director, is a general partner) with Majestic Resorts, LLC
("Majestic") for two notes aggregating approximately $8.5 million in principal
amount issued by IVAC, cash, assumption by Majestic (guaranteed by Roski) of
the note and lease obligations of Boomtown Las Vegas, and relief from the real
estate lease obligations of Boomtown Las Vegas payable to IVAC (such
transactions being collectively referred to as the "Blue Diamond Swap").
Boomtown Las Vegas was divested by Boomtown because it had generated
significant operating losses since it opened, and had reduced the overall
profitability of Boomtown. As a result of the Blue Diamond Swap, IVAC was
relieved of the obligation to repay Boomtown the aforementioned loans of $27.3
million. In addition, concurrently with the consummation of the Blue Diamond
Swap, Hollywood Park purchased 446,491 shares of Hollywood Park Common Stock
received by Roski in the Boomtown Merger for a purchase price of approximately
$3.5 million, paid in the form of a Hollywood Park promissory note. See
"Election of Directors--Certain Relationships and Related Transactions."
Nine Months Ended June 30, 1997 Compared to Nine Months Ended June 30, 1996
For the nine months ended June 30, 1997, total revenues increased by $4.9
million, or 2.8%, as compared to total revenues for the nine months ended June
30, 1996. Gaming revenues increased by $5.0 million, or 3.6%, primarily a
result of increase in gaming revenues at Boomtown Biloxi. Boomtown Biloxi has
been able to increase market share in the Gulf Coast region due to enhanced
marketing and player promotions. The increase in gaming revenues during the
nine months ended June 30, 1997, was offset by a 13.9% decrease in gaming
revenues at Boomtown Reno, primarily due to severe winter weather conditions.
During the three months ended December 31, 1996, the Pacific Northwest,
including Reno and northern California, experienced unusually intense weather
conditions, thereby reducing the traffic flow on Interstate 80, upon which
Boomtown Reno depends on as a primary source of gaming patrons. Food and
beverage sales increased by $0.7 million, or 6.0%, due primarily to quality
improvements and marketing programs.
Total operating expenses for the nine months ended June 30, 1997, decreased
by $27.6 million, or 13.6%, as compared to the nine months ended June 30,
1996. Included in the expenses for the nine months ended June 30, 1996, was
the one time $36.6 million loss incurred on the sale of Boomtown's Las Vegas
property. Upon the closing of the sale of the Las Vegas property, Boomtown
incurred an additional $1.2 million of expenses that were reflected in the
results of operations for the nine months ended June 30, 1997. The one time
charge of $14.2 million related to Boomtown's consent and tender of the
Boomtown Notes was treated as an extraordinary loss for the nine months ended
June 30, 1997. There was no comparable charge for the nine months ended June
30, 1996. Boomtown recorded non-recurring costs of $1.6 million related to the
Boomtown Merger during the nine months ended June 30, 1997, compared to
$0.7 million of Boomtown Merger costs during the corresponding period in 1996.
Operating expenses, adjusted for the various one time/non-recurring charges
discussed above, for the nine months ended June 30, 1997, increased by $6.8
million, or 4.1%, as compared to similarly adjusted operating expenses for the
nine months ended June 30, 1996. Gaming equipment leases expense decreased by
$1.7 million, or 34.6%, primarily as a result of restructuring several
operating leases to capital leases; thereby, eliminating gaming lease rent
expense. Food and beverage expense increased by $2.9 million, or 20.2%,
primarily due to the 1997 expansion of food and beverage services at Boomtown
New Orleans. General and administrative expenses decreased by $2.1 million, or
4.3%, with approximately $1.1 million of the decrease primarily a result of
the restructuring of operating leases for furniture and fixtures to capital
leases; thereby, eliminating the associated lease rent expense, and with the
balance of the decrease primarily related to payroll saving at Boomtown Reno
due to the associated gaming revenue declines, as previously discussed.
Marketing and promotion expenses increased by $2.2 million, or 12.7%,
primarily related to enhanced marketing efforts at Boomtown Biloxi.
Depreciation and amortization expenses increased by $3.5 million, or 43.0%,
primarily due to reductions in the estimated useful lives of existing assets,
and due to the restructuring of several operating leases to capital leases
during the nine months ended June 30, 1997.
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Fiscal Year 1996 Compared to Fiscal Year 1995
Net loss for the fiscal year ended September 30, 1996, was $35.1 million
compared to a net loss of $2.9 million for the fiscal year ended September 30,
1995. Included in the results of operations for the fiscal year ended
September 30, 1996, was a one time non-cash charge of $36.6 million related to
the Blue Diamond Swap (as described previously). There was no corresponding
expense in the results of operations for the fiscal year ended September 30,
1995.
During the fiscal year ended September 30, 1996 total revenues were $236.0
million compared to $231.8 million in the prior year. Gaming revenues were
$188.4 million in 1996 as compared to $189.3 million in 1995. Gains in gaming
revenues at Boomtown Reno and Boomtown Biloxi during 1996 were offset by
decreases in gaming revenues at Boomtown New Orleans and Boomtown Las Vegas
(which was divested in the Blue Diamond Swap). Gaming revenues primarily
consist of revenues from slot machines, table games and Keno. Boomtown Reno's
gaming revenues grew 5.2% over the prior year primarily as a result of
increased casino patronage due to higher traffic volume on Interstate 80, on
which Boomtown Reno is heavily dependent for customers. Boomtown Biloxi's
gaming revenues have improved due to expansion of the gaming market in the
Gulf Coast region combined with increased marketing and promotional efforts.
Boomtown Biloxi's gaming revenues increased by 10.0% over the prior year.
Boomtown New Orleans' gaming revenues were negatively affected by additional
cruising of its riverboat casino as mandated by law. Gaming revenues at
Boomtown Las Vegas continued to be less than expected and lower than the prior
year resulting from increased competition with other casino operators for the
local customer market.
Non-gaming revenues primarily consist of revenues generated from food and
beverage, hotel, recreational vehicle park, family entertainment center,
truckstop, service station, mini-mart and other. Non-gaming revenues for the
years ended September 30, 1996 and 1995 were $47.7 million and $42.5 million,
respectively. Increases in non-gaming revenues were recorded at all four of
the Boomtown properties, with the majority of the consolidated improvement due
to higher fuel sales at the Boomtown Reno truckstop as well as the expansion
of the cabaret show at Boomtown New Orleans.
The consolidated gaming margin was 57.4% for fiscal 1996, compared to 58.2%
in the prior year. The decline is primarily a result of a change in the
calculation of gaming taxes at Boomtown New Orleans resulting in the taxes
being reclassified and charged as a gaming expense in the current year. During
the prior year, the taxes were calculated based on a flat charge per admission
and recorded as general and administrative expenses. Additionally, Boomtown's
consolidated gaming margin was negatively affected by additional gaming leases
entered into in April 1995 resulting in higher gaming equipment lease expense
during the period. This decline in the consolidated gaming margin was offset
by improvements from Boomtown Biloxi resulting from the discontinuance of the
property's FunFlight program in October 1995.
Marketing, general and administrative expenses primarily consist of
advertising and promotional costs, salaries and wages and related benefits,
non-gaming taxes and licenses, professional fees and other overhead expenses.
Marketing expenses were $22.4 million for the year ended September 30, 1996, a
14.3% increase over the prior year's expense of $19.6 million. Marketing
expenses consist of costs associated with printed advertising, outdoor signs,
media advertising, promotional events, Boomtown's bus tour and FunFlight
programs and other marketing and administrative expenses. The increase in
marketing expenses during fiscal 1996 resulted from additional advertising at
Boomtown Biloxi and Boomtown Las Vegas in order to promote the Boomtown brand
and compete for the local customer market in those areas. Higher promotional
events and player's club redemption costs at all Boomtown casinos also
contributed to the increase.
General and administrative ("G&A") expenses were $70.6 million for the year
ended September 30, 1996, a 6.2% decline from the $75.3 million recorded
during the prior year. G&A expenses were less at Boomtown Las Vegas and
Boomtown New Orleans, offset by higher expenses at Boomtown Biloxi. The
reduction at Boomtown New Orleans primarily resulted from a reclassification
of gaming taxes from G&A to gaming operating expenses during the current year.
Lower expenses at Boomtown Las Vegas resulted from a reduction
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of costs in most overhead departments due to cost control efforts. The
increase in Boomtown Biloxi's G&A expenses was attributable to higher property
rent as well as building and grounds maintenance costs associated with the
aging of the building and barge. Boomtown continues to concentrate on
aggressive cost reduction programs for all of its properties.
During the year ended September 30, 1996 Boomtown incurred charges of
approximately $1.1 million related to the Boomtown Merger, as well as $500,000
associated with its license application in the state of Indiana.
Depreciation and amortization expense rose 1.9% to $10.6 million for the
year ended September 30, 1996, a result of ordinary course capital
improvements and additions and the restructuring of certain operating leases
to capital leases at Boomtown Biloxi and Boomtown New Orleans, thereby
capitalizing the equipment and depreciating the costs over the remaining
estimated useful lives.
During the year ended September 30, 1996, Boomtown took a non-cash charge of
$36.6 million related to the Blue Diamond Swap. The charge included the write-
off of Boomtown's investment in lease of $12.7 million, an $18.9 million
write-down of the related party notes receivable to $8.5 million, and the
write-off of the remaining net assets less the liabilities assumed by Roski of
$5.0 million (approximate value at June 30, 1996). The after-tax loss amounted
to $35.7 million, or $3.86 per share.
The recorded provision for income taxes for the year ended September 30,
1996, does not reflect the anticipated benefit from the write-off associated
with the Blue Diamond Swap. The write-off of the $12.7 million investment in
lease is not deductible for income tax purposes. In addition, the remaining
income tax benefit arising from the Blue Diamond Swap has been offset by a
valuation allowance because of the uncertainty regarding the future
realization of the related deferred tax asset.
Fiscal Year 1995 Compared to Fiscal Year 1994
Gaming revenues as a percent of total revenues increased from 73.8% to 81.7%
from fiscal 1994 to fiscal 1995. This was due to the opening of the three new
gaming properties, particularly Boomtown Biloxi and Boomtown New Orleans.
Boomtown Biloxi's and Boomtown New Orleans' gaming revenues provided
approximately 90% and 97% of each partnership's total revenues, respectively.
Gaming revenues increased 148% or $113 million, primarily due to the opening
of the three new gaming properties in the third and fourth quarters of fiscal
1994. Boomtown Reno's gaming revenue decreased 3%, from $43.8 million to $42.6
million due to severe winter weather conditions in the first two fiscal
quarters. The new properties, Boomtown Las Vegas, Boomtown Biloxi and Boomtown
New Orleans, contributed $32.9 million, $41.7 million and $72.2 million,
respectively, to casino revenues.
Non-gaming revenues increased $15.5 million from $27.0 million to $42.5
million. The increases were primarily related to the opening of the new gaming
properties. Boomtown Biloxi contributed an increase of $1.9 million and $1.6
million from its food and beverage operation and its family entertainment
center, respectively in addition to other income of $223,000; Boomtown New
Orleans contributed increases of $789,000 and $548,000 from its family
entertainment center, its food and beverage operation and the cabaret,
respectively, in addition to other income of $374,000; and Boomtown Las Vegas
contributed increases of $4.9 million, $2.2 million and $1.2 million from its
food and beverage, hotel operations and recreational vehicle park,
respectively, in addition to other income of $581,000. Boomtown Reno's non-
gaming revenues increased by $717,000 of which $314,000 was due to the opening
of a steakhouse in May 1994. The remainder of the increases at Boomtown Reno
were related to the family entertainment center, hotel, recreational vehicle
park, and entry fees for gaming and golf tournaments.
Gaming expenses increased $47.8 million or 153% from fiscal 1994 to fiscal
1995 and as a percent of revenues from 30.2% to 34.1%. Gaming expenses as a
percent of total revenues were 29.6%, 31.9%, 41.9% and 34.5% at Boomtown Reno,
Boomtown Las Vegas, Boomtown Biloxi, and Boomtown New Orleans, respectively.
Except for Boomtown Biloxi, the variance is due primarily to the difference in
gaming tax rates. Boomtown
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Biloxi's variance is primarily due to the addition of the FunFlight program in
fiscal 1995 which had operating expenses of $3.1 million and revenues of $1.4
million. In addition, an increase of $5.4 million was related to gaming
equipment lease expenses due to the sale and leaseback of certain furniture,
fixtures and equipment at the various properties that occurred during the end
of the 1994 fiscal year and at the beginning of the 1995 fiscal year.
Non-gaming operating expenses consist of costs incurred for food and
beverage, hotel, recreational vehicle park, family entertainment center,
truckstop, service station, mini-mart and other. Non-gaming operating expenses
increased $10.7 million. The increases were primarily related to the opening
of the three new gaming properties in fiscal 1994.
Marketing, general and administrative expenses increased from $33.3 million
in fiscal 1994 to $94.9 million in fiscal 1995, an increase of $61.6 million.
This increase was primarily due to the opening of the three new gaming
properties ($59.9 million) in fiscal 1994. The remainder of the increase is
due to the addition of the player's slot club and promotions related to bus
tour programs at Boomtown Reno.
Discontinued projects primarily consist of write-offs and accruals for
development costs associated with Boomtown's research and pursuit into various
gaming jurisdictions for the purpose of applying for gaming licenses.
Significant write-offs in the third quarter included development costs related
to the following projects; Lawrenceburg, Indiana (approximately $4.3 million),
the state of Missouri ($727,000), the state of Iowa ($335,000) and other
miscellaneous projects ($220,000). In addition, Boomtown terminated a merger
and related agreements with National Gaming Corporation, Inc. in April 1995.
As a result, Boomtown wrote-off $450,000 of accumulated expenses related to
the transaction.
Depreciation and amortization expense increased $4.5 million or 77% but
decreased as a percent of revenues. The increase primarily reflects a full
years depreciation on the new assets purchased and constructed for Boomtown
Las Vegas, Boomtown Biloxi and Boomtown New Orleans during fiscal 1994. The
decrease as a percent of total revenues is due to the sale and leaseback of
certain furniture, fixtures and gaming equipment at the end of the second
quarter totalling approximately $5.2 million.
Income from operations improved from a loss from operations of $6.3 million
in fiscal 1994 to income from operations of $7.2 million in fiscal 1995, for
the reasons set forth above.
Interest expense, net of capitalized interest increased by $7.8 million.
This was due to a decrease in capitalized interest of $5.2 million offset by
an increase in interest expense of $2.6 million. Capitalized interest was
significantly higher in the prior fiscal year due to the construction of
Boomtown Biloxi, Boomtown Las Vegas and Boomtown New Orleans. Interest expense
is higher for fiscal 1995 compared to fiscal 1994 primarily due to the
additions of $3.1 million of long-term debt during the end of the fourth
quarter of fiscal 1994 and additions of $5.9 million in the second quarter of
fiscal 1995. The weighted average long-term debt outstanding and the related
interest rate for the year ended September 30, 1995 was $111.9 million and
11.7%, respectively, as compared to $109.1 million and 12.7%, respectively,
for the year ended September 30, 1994. Loss on marketable securities was $1.7
million in fiscal 1994 due to a decline in the market value of investments in
two short-term government bond funds purchased for approximately $50.0
million.
The minority partners' share of operations of the consolidated partnership
of Mississippi-I Gaming, L.P. and Louisiana-I Gaming, L.P. are reported as
"minority interest." The $1.1 million of loss related to minority interests in
fiscal 1995 is comprised of $2.0 million loss related to Mississippi-I Gaming,
L.P. offset by $.9 million of income related to Louisiana-I Gaming, L.P. The
$352,000 of minority interest in fiscal 1994 is related primarily to the
minority interest in Mississippi-I Gaming, L.P.
Boomtown has a state income tax provision of $1.1 million related to net
income generated from Boomtown New Orleans and a federal income tax benefit of
approximately $300,000 during fiscal 1995. Boomtown's federal income tax
benefit (effective rate of 15%) is lower than the federal statutory rate due
to amortization of goodwill
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and an increase in nondeductible items as a result of a change in
deductibility of meals and entertainment from 80% to 50%. At September 30,
1995, Boomtown had deferred tax assets and deferred tax liabilities of
approximately $7.1 million and $8.2 million respectively. Hollywood Park
believes that the future benefits from the deferred tax assets will be
realized in full.
As a result of the factors discussed above, the net loss decreased $5.2
million from a loss of $8.1 million in fiscal 1994 to a loss of $2.9 million
in fiscal 1995.
POST-REIT PRO FORMA RESULTS OF OPERATIONS
The following discussion relates to the pro forma results of operations for
each of HP Realty and HP Operating Company, after giving effect to the
Reorganization, as well as to the Boomtown Merger and the issuance of the
Notes.
HP Realty
Immediately after the Reorganization, substantially all of HP Realty's
revenues will be derived from rent payments made by HP Operating Company under
the leases covering the Hollywood Park Race Track, the Hollywood Park-Casino
and the Turf Paradise Race Track. See "Business of HP Realty After the
Reorganization." Rents payable to HP Realty under these leases will generally
be based, subject to certain minimum monthly payments, on varying percentages
(based on the source of revenue) of HP Operating Company's revenues from these
facilities, including revenues from pari-mutuel wagering, card club gaming
revenues and race track concession sales. See "The Reorganization--
Relationship Between the Companies After the Reorganization." Therefore, the
pro forma results of operations of HP Realty are almost entirely dependent on
the operations of these facilities. HP Realty's pro forma results of
operations also include the operations of the Hollywood Park Golf and Sports
Center (the "Golf Center") and the Turf Paradise Travel Trailer Park (the
"Trailer Park").
Nine months ended September 30, 1997
On a pro forma basis for the nine months ended September 30, 1997, HP Realty
recorded total revenues of $10,750,000. Total revenues consisted of rental of
property income of $9,810,000, related to the leasing of the Hollywood Park
Race Track, the Hollywood Park-Casino and the Turf Paradise Race Tracks to HP
Operating Company. Total revenues also included other income of $940,000,
primarily attributable to the Golf Center and the Trailer Park.
Total pro forma operating expenses during the period equaled $5,829,000.
Operating expenses consisted primarily of depreciation and amortization
expense of $4,628,000 on the assets leased to HP Operating Company and HP
Realty's other assets. Administrative costs of $691,000 consisted primarily of
legal costs, audit fees, directors fees and expenses, and general business
operating costs. Other expenses of $510,000 were primarily related to the
operation of the Golf Center and the Trailer Park. During the period, HP
Realty also incurred interest expense of $155,000, relating to general banking
fees.
Pro forma net income before extraordinary item of $4,766,000 was recorded
for the nine months ended September 30, 1997. Assuming that HP Realty's
taxable income for this period was equal to its financial statement income for
this period and assuming that such nine-month period constituted an entire
taxable year, under the Code HP Realty would have been required to distribute
at least 95% of this amount (approximately $4,528,000) to stockholders as
dividends.
Year ended December 31, 1996
On a pro forma basis for the year ended December 31, 1996, HP Realty
recorded total revenues of $15,777,000. Total revenues consisted of rental of
property income of $14,623,000, related to the leasing of the
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Hollywood Park Race Track, the Hollywood Park-Casino and the Turf Paradise
Race Tracks to HP Operating Company. Total revenues also included other income
of $1,154,000, primarily attributable to interest income and the Golf Center
and Trailer Park.
Total pro forma operating expenses during the period equaled $7,746,000.
Operating expenses consisted primarily of depreciation and amortization
expense of $6,134,000 on the assets leased to HP Operating Company and HP
Realty's other assets. Administrative costs of $937,000 consisted primarily of
legal costs, audit fees, directors fees and expenses, and general business
operating costs. Other expenses of $675,000 were primarily related to the
operation of the Golf Center and the Trailer Park. During the period, HP
Realty also incurred interest expense of $134,000, relating to general banking
fees.
Pro forma net income before extraordinary item of $7,897,000 was recorded
for the year ended December 31, 1996. Assuming that HP Realty's taxable income
for this period was equal to its financial statement income for this period,
under the Code HP Realty would have been required to distribute at least 95%
of this amount (approximately $7,502,000) to stockholders as dividends.
HP Operating Company
Immediately after the Reorganization, HP Operating Company will be the owner
of all of Hollywood Park's current assets and operating businesses except for
(i) the land and facilities at the Hollywood Park property in Inglewood,
California, (ii) the land and facilities at the Turf Paradise property in
Phoenix, Arizona, (iii) the Golf Center operations, and (iv) the Trailer Park
operations. See "Business of HP Operating Company After the Reorganization."
HP Operating Company's pro forma revenues (both by sources and by levels of
revenues) are substantially the same as the combined revenues of Hollywood
Park and Boomtown. In addition, HP Operating Company's pro forma expenses are
substantially the same as the combined expenses of Hollywood Park and
Boomtown, except HP Operating Company's pro forma expenses also include rent
payments to HP Realty on the Hollywood Park Race Track, the Hollywood Park-
Casino and the Turf Paradise Race Track. See "--Results of Operations--
Hollywood Park" and "--Results of Operations--Boomtown" above.
Nine months ended September 30, 1997
On a pro forma basis, total revenues for HP Operating Company were
$258,365,000 during the nine months ended September 30, 1997. Total revenues
primarily consisted of gaming revenues of $167,339,000 from the three Boomtown
casinos and the two California card clubs, and racing revenues of $48,084,000
from the Hollywood Park Race Track and the Turf Paradise Race Track. During
the period, HP Operating Company also recorded revenues of $17,937,000 from
food and beverage sales at its casinos and race tracks, $11,467,000 from the
operations of the truck stop and service station at Boomtown Reno, and
$1,376,000 from the operations of the hotel and recreational vehicle park at
Boomtown Reno. In addition, HP Operating Company recorded other revenue of
$12,162,000, consisting primarily of other non-gaming revenues at the Boomtown
properties and parking fees paid by Great Western Forum patrons at the
Hollywood Park Race Track property.
Total pro forma operating expenses during the nine months ended September
30, 1997 were $238,608,000. Included in total operating expenses for the
period was rental of property expense of $9,810,000 relating to the rental of
the Hollywood Park Race Track, the Hollywood Park-Casino and the Turf Paradise
Race Track. All other operating expenses were related to the various
businesses and subsidiaries of HP Operating Company.
Interest expense was recorded with respect to the Notes, the remaining
outstanding Boomtown Notes and the short term borrowing against the Bank
Credit Facility. The short term borrowing was used to fund the redemption of
the majority of the Boomtown Notes, and was repaid with the proceeds from the
issuance of the Notes. Because, as between HP Realty and HP Operating Company,
HP Operating Company has agreed to by primarily responsible for payments on
the Notes, all of the interest expense on the Notes during the period has been
allocated to HP Operating Company and none has been allocated to HP Realty.
See "The Reorganization--Allocation of Indebtedness."
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Pro forma income before minority interests and income taxes for the period
was $8,861,000. After deducting minority interest of $80,000 and income tax
expense of $3,925,000, pro forma income before extraordinary item for the nine
months ended September 30, 1997 was $4,856,000.
Year ended December 31, 1996
On a pro forma basis, total revenues for HP Operating Company were
$335,429,000 during the year ended December 31, 1996. Total revenues primarily
consisted of gaming revenues of $208,699,000 from the three Boomtown casinos
and the two California card clubs, and racing revenues of $71,308,000 from the
Hollywood Park Race Track and the Turf Paradise Race Track. During the period,
HP Operating Company also recorded revenues of $22,737,000 from food and
beverage sales at its casinos and race tracks, $14,700,000 from the operations
of the truck stop and service station at Boomtown Reno, and $1,683,000 from
the operations of the hotel and recreational vehicle park at Boomtown Reno. In
addition, HP Operating Company recorded other revenue of $16,302,000,
consisting primarily of other non-gaming revenues at the Boomtown properties
and parking fees paid by Great Western Forum patrons at the Hollywood Park
Race Track property.
Total pro forma operating expenses during the year ended December 31, 1996
were $361,543,000. Included in total operating expenses for the period was
rental of property expense of $14,623,000 relating to the rental of the
Hollywood Park Race Track, the Hollywood Park-Casino and the Turf Paradise
Race Track. A one time non-cash write off of HP Operating Company's investment
in Sunflower of $11,412,000 was recorded during the year ended December 31,
1996, due to Sunflower's inability to effectively compete with nearby Missouri
riverboat gaming. On May 17, 1996, Sunflower filed for reorganization under
Chapter 11 of the Bankruptcy Code. Also included in total expenses during the
period was a one time charge of $36,563,000 related to the disposition of
Boomtown's Las Vegas property. See "--Results of Operations--Boomtown--
Disposition of Boomtown Las Vegas." All other operating expenses were related
to the various businesses and subsidiaries of post-Reorganization HP Operating
Company.
Interest expense of $15,334,000 was recorded during the period on the Notes
and the Boomtown's First Mortgage Notes.
Pro forma loss before minority interests and income taxes for the period was
$41,448,000. After crediting minority interest of $149,000 and income tax
benefit of $131,000, pro forma loss before extraordinary item for the year
ended December 31, 1996 was $41,168,000.
LIQUIDITY AND CAPITAL RESOURCES
Hollywood Park's principal source of liquidity as of September 30, 1997, was
cash and cash equivalents of $22,007,000. Cash and cash equivalents increased
by $10,085,000 during the nine months ended September 30, 1997. Net cash
provided by operating activities was $6,059,000. Net cash used by investing
activities was $5,884,000. Cash used for capital assets of $23,059,000
included 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 $9,910,000. Cash of $125,000,000 was raised with the issuance
of the Notes on August 6, 1997 (as described below). Cash of approximately
$110,924,000 was used to redeem a majority of Boomtown's 11.5% First Mortgage
Notes. Cash was disbursed for the payment of the preferred stock dividend
through the date of conversion. Cash payments were also made on a variety of
secured notes for gaming and other operating assets held by the various
Boomtown properties, including the approximately $2,107,000 payment of a
Boomtown New Orleans note payable on the original riverboat.
Cash and cash equivalents decreased by $6,723,000 during the nine months
ended September 30, 1996. Net cash provided by operating activities was
$11,761,000. Net cash used in investing activities was $14,692,000,
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which included disbursements for the construction of the Crystal Park Casino,
along with normal and necessary capital improvements. Net cash used in
financing activities was $3,792,000, which included the payment of a secured
note, the payment of dividends on the preferred stock, and the repurchase of
the Company's common stock, netted against cash received from the minority
members of Crystal Park LLC.
Hollywood Park. On June 30, 1997, Hollywood Park and a bank syndicate led by
Bank of America finalized the Bank Credit Facility, a reducing revolving
credit facility allowing for drawings up to $225,000,000. On August 7, 1997,
the Bank Credit Facility was reduced by $125,000,000 (the aggregate principal
amount of the Notes issued as described below) to $100,000,000. Of such
$100,000,000, approximately $83.6 million was available at September 30, 1997,
as a result of covenant limitations. The Bank Credit Facility is secured by
substantially all of the assets of Hollywood Park and its significant
subsidiaries, and imposes certain customary affirmative and negative
covenants.
The Bank Credit Facility has been amended twice. The first amendment, among
other matters, reduced the availability of the facility until the Bank Credit
Facility was approved by the Louisiana Gaming Control Board. Hollywood Park
received this approval on July 10, 1997. The second amendment, among other
things, allowed the co-issuance of the Notes by HP Operating Company with
Hollywood Park.
Debt service requirements on the Bank Credit Facility consist of current
interest payments on outstanding indebtedness through September 30, 1999. As
of September 30, 1999, and on the last day of each third calendar month
thereafter, through June 30, 2001, the Bank Credit Facility will decrease by
7.5% of the commitment in effect on September 30, 1999. As of September 30,
2001, and on the last day of each third calendar month thereafter, the Bank
Credit Facility will decrease by 10% of the commitment in effect on September
30, 1999. Any principal amounts outstanding in excess of the Bank Credit
Facility commitment, as so reduced, will be payable on such quarterly
reduction dates.
The Bank Credit Facility provides for a letter of credit sub-facility of
$10,000,000, of which $2,035,000 is currently outstanding for the benefit of
Hollywood Park's California self insured workers' compensation program. The
facility also provides for a swing line sub-facility of up to $10,000,000.
Borrowings under the Bank Credit Facility bear interest at an annual rate
determined, at the election of Hollywood Park, by reference to the "Eurodollar
Rate" (for interest periods of 1, 2, 3 or 6 months) or the "Reference Rate",
as such terms are respectively defined in the Bank Credit Facility, plus
margins which vary depending upon Hollywood Park's ratio of funded debt to
earnings before interest, taxes, depreciation and amortization ("EBITDA"). The
margins start at 1.25% for Eurodollar loans and at 0.25% for Base Rate loans,
at funded debt to EBITDA ratio of less than 1.50%. Thereafter, the margin for
each type of loan increases by 25 basis points for each increase in the ratio
of funded debt to EBITDA of 50 basis points or more, up to 2.625% for
Eurodollar loans and 1.625% for Base Rate loans. However, if the ratio of
senior funded debt to EBITDA exceeds 2.50%, the applicable margins will
increase to 3.25% for Eurodollar loans, and 2.25% for Base Rate loans.
Thereafter, the margins would increase by 25 basis points for each increase in
the ratio of senior funded debt to EBITDA of 50 basis points or more, up to a
maximum of 4.25% for Eurodollar loans and 3.25% for Base Rate loans. The
applicable margins as of September 30, 1997, were 1.75% with respect to the
Eurodollar Rate based interest rate and 0.75% with respect to the Base Rate
interest rate.
The Bank Credit Facility allows for interest rate swap agreements, or other
interest rate protection agreements, up to a maximum notional amount of
$125,000,000. Presently, Hollywood Park does not utilize such financial
instruments, though it may in the future.
Hollywood Park pays a quarterly commitment fee for the average daily amount
of unused portions of the Bank Credit Facility. The commitment fee is also
dependent upon Hollywood Park's ratio of funded debt to EBITDA. The commitment
fee for the Bank Credit Facility starts at 31.25 basis points when the ratio
is less than 1.00, and increases by 6.25 basis points for each increase in the
ratio of 0.50, up to a maximum of 50 basis points. For the quarter beginning
October 1, 1997, this fee is 43.75 basis points.
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On July 3, 1997, Hollywood Park borrowed $112,000,000 from the Bank Credit
Facility to fund Boomtown's offer to purchase the Boomtown Notes, and repaid
this amount on August 7, 1997, with a portion of the proceeds from the August
6, 1997, issuance of $125,000,000 of Series A 9.5% Senior Subordinated Notes
due 2007 (together with any Series B Notes issued in exchange for the Series A
Notes, the "Notes"). The Notes were co-issued by Hollywood Park and HP
Operating Company. The balance of the proceeds from the issuance of the Notes
was primarily used for the purchase of a new riverboat for Boomtown New
Orleans, and other general corporate needs.
Interest on the Notes is payable semi-annually, on February 1st and August
1st. The Notes will be redeemable at the option of Hollywood Park and HP
Operating Company, in whole or in part, on or after August 1, 2002, at a
premium to face amount, plus accrued interest, with the premium to the face
amount decreasing on each subsequent anniversary date. The Notes are unsecured
obligations of Hollywood Park and HP Operating Company, guaranteed by all
other material restricted subsidiaries of either Hollywood Park or HP
Operating Company.
The indenture governing the Notes contains certain covenants that, among
other things, limit the ability of Hollywood Park, HP Operating Company and
their restricted subsidiaries to incur additional indebtedness and issue
preferred stock, pay dividends or make other distributions, repurchase equity
interests 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.
As of February 9, 1998, Hollywood Park had outstanding under the Bank Credit
Facility borrowings of $10 million and a $2 million letter of credit. It is
anticipated that, in connection with the Reorganization, Hollywood Park will
repay any outstanding borrowings under the Bank Credit Facility, and HP Realty
and HP Operating Company will negotiate new lines of credit that will reflect
their separate existence. Although Hollywood Park believes that the
Reorganization may enable HP Realty and HP Operating Company to borrow on
favorable terms after the Reorganization, negotiations have not commenced with
any banks regarding new lines of credit, and there can be no assurance that HP
Realty and HP Operating Company will be able to obtain bank lines of credit on
as favorable terms as the terms of the Bank Credit Facility. See "Risk
Factors--Need for Third-Party Financing." Furthermore, following the
Reorganization, HP Realty and HP Operating Company will be required to make an
offer to repurchase the Notes at 101% of the aggregate principal amount of the
Notes (or if there is a decline in the rating of the Notes as a result of the
Reorganization, the repurchase price shall be 102%), plus accrued and unpaid
interest to the date of repurchase. If HP Realty and HP Operating Company are
required to repurchase a significant portion of the Notes, there can be no
assurance that financing to replace such Notes will be available on favorable
terms. See "Risk Factors--Dependence on Future Borrowings." See "The
Reorganization--Allocation of Indebtedness" for a discussion of the
anticipated effect of the Reorganization on the Notes.
On July 1, 1997, in connection with the divestiture of Boomtown's Las Vegas
property, Hollywood Park issued an unsecured promissory note of approximately
$3,465,000 to purchase the Hollywood Park Common Stock issued to Roski in the
Boomtown Merger. The promissory note bears interest equal to the Bank of
America reference rate plus 1.0%. Interest is payable annually with five
annual principal payments of approximately $693,000 commencing July 1, 1998.
During the nine months ended September 30, 1997, Hollywood Park paid
dividends of $1,520,000 on its convertible preferred stock, representing
$70.00 per share, or $0.70 per depositary share. Effective August 28, 1997,
the Company's 2,749,900 outstanding Depositary Shares were converted into
approximately 2,291,500 shares of its common stock, thereby eliminating the
annual preferred cash dividend payment of approximately $1,925,000 for future
periods.
As of September 30, 1997, Hollywood Park liquidated its investments in
corporate bonds. During the nine months ended September 30, 1997, proceeds
from the sale or redemption of the corporate bond investments were
approximately $4,766,000, with gross realized gains and losses of
approximately $9,000, and $88,000, respectively.
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Effective December 4, 1997, HP/Compton, Inc., a wholly-owned subsidiary of
Hollywood Park, purchased First Park Investments, LLC's (owned by Mr. and Mrs.
Chu) 3.4% membership interest in Crystal Park LLC for $1,000,000, increasing
Hollywood Park's ownership in Crystal Park LLC to 93.2%.
Boomtown. In November 1993, Boomtown sold $103,500,000 of the Boomtown
Notes. On July 3, 1997, pursuant to a tender offer, Boomtown repurchased and
retired approximately $102,142,000 in principal amount of the Boomtown Notes,
at a purchase price of $1,085 per $1,000 in principal amount, along with
accrued interest thereon.
As a result of the Boomtown Merger, Boomtown, as required under the
indenture governing the Boomtown Notes, initiated a change in control purchase
offer at a price of $1,010 for each $1,000 for the remaining approximately
$1,358,000 aggregate principal amount of Boomtown Notes outstanding. This
change in control purchase offer was completed on August 12, 1997, with only
$105,000 of the remaining Boomtown Notes tendered.
On August 4, 1997, Hollywood Park executed a promissory note pursuant to
which one of the Hollywood Park entities purchased the barge and the building
shell at Boomtown Biloxi for a total cost of $5,250,000. A payment of
$1,500,000 was made on August 4, 1997, with the balance due of $3,750,000
payable in three equal annual installments of $1,250,000. Interest on the
promissory note is equal to the prime interest rate in effect on the first day
of the quarterly period. The principal amount of the promissory note, together
with accrued interest, may be repaid, without penalty, in whole or in part, at
any time.
On August 7, 1997, Boomtown New Orleans prepaid the 13.0% note payable
secured by the original riverboat, currently in use. The cost of the
prepayment (inclusive of a 1.0% prepayment penalty) was approximately
$2,107,000.
As of August 8, 1997, Boomtown New Orleans became wholly-owned by Hollywood
Park. Previously, Boomtown New Orleans was owned and operated by the Louisiana
Partnership, of which 92.5% was owned by Hollywood Park with the remaining
7.5% owned by Eric Skrmetta ("Skrmetta"). On November 18, 1996, Boomtown
entered into an agreement with Skrmetta under which it would pay approximately
$5,670,000 in return for Skrmetta's interest in the Louisiana Partnership.
Under the terms of the agreement, Boomtown made a down payment of $500,000,
and Hollywood Park paid the remaining $5,170,000 on August 8, 1997.
On September 25, 1997, Hollywood Park acquired the Crescent City Queen (to
be renamed Boomtown Belle II) riverboat from Casino Magic Corporation, at a
cost of approximately $11,700,000. Hollywood Park will invest approximately
$4,700,000 to renovate and equip the Boomtown Belle II, which is expected to
be placed in service mid-December 1997.
As of September 30, 1997, Boomtown had two notes payable for gaming and
other operating equipment totaling approximately $359,000. Boomtown also has
various capital lease obligations for gaming and other operating equipment,
totaling approximately $2,055,000.
In connection with the sale of its Las Vegas property, Boomtown took back
two notes receivable from Edward P. Roski, Jr., the former lessor of the Las
Vegas property, totaling approximately $8,465,000. The first note receivable
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.
Sunflower. On March 24, 1994, an Amended and Restated Credit and Security
Agreement (the "Sunflower Senior Credit") was executed between Sunflower and
five banks in connection with Hollywood Park's acquisition of Sunflower. As of
September 30, 1997, the outstanding balance of the Sunflower Senior Credit was
$28,667,000. The Sunflower Senior Credit is non-recourse to Hollywood Park.
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On May 17, 1996, Sunflower filed for reorganization under Chapter 11 of the
Bankruptcy Code. The Cash Collateral Agreement suspended any interest or
principal payments on the Sunflower Senior Credit until August 12, 1997. The
Bankruptcy Court has issued an order extending the Cash Collateral Agreement
until it issues its pending ruling regarding approval of Sunflower's proposed
plan of reorganization. The Cash Collateral Agreement requires Sunflower to
make certain cash payments to Wyandotte County, Kansas, the creditors under
the Sunflower Credit and Trak East (the unaffiliated operator of racing at
Sunflower).
On July 15, 1997, Sunflower presented to the Bankruptcy Court a plan of
reorganization (the "Plan") which provides for the sale of Sunflower's
property to the Wyandotte Tribe of Oklahoma (the "Wyandotte Tribe"). Under the
Plan, some or all of the land would be held by the United States Government in
trust for the Wyandotte Tribe, and a casino would be developed on the
property. Upon completion of the casino, HP Kansas, Inc. (a wholly-owned
subsidiary of Hollywood Park) and a partner (North American Sports Management
or an affiliate) will provide consulting services to the casino. Under this
arrangement, HP Kansas would be entitled to receive a share of the revenues of
the casino. Under the plan, in order to allow the property to be released as
collateral and sold to the Wyandotte Tribe, Sunflower will be required to have
standby letters of credit issued to support certain payments to be made to the
lenders under the Sunflower Senior Credit and the Wyandotte County Treasurer's
office. The aggregate amount of such letters of credit is anticipated to be in
excess of $29 million. Hollywood Park will arrange for the issuance of such
letters of credit on behalf of Sunflower.
In 1995, under a promissory note executed in December 1994, between
Hollywood Park and Sunflower, Hollywood Park advanced $2,500,000 to Sunflower
to make certain payments due on the Sunflower Senior Credit. The amounts
borrowed under the promissory note, along with accrued interest, are
subordinate to the Sunflower Senior Credit. Although Hollywood Park will
continue to pursue payment of the promissory note, for financial reporting
purposes the outstanding balance of the promissory note was written off as of
March 31, 1996.
Capital commitments; Expansion costs. As of September 30, 1997, Hollywood
Park had one material capital commitment of approximately $9,000,000 with
respect to construction of the casino for the Yakama expansion, as previously
described.
Expansion Costs. In addition to the financing needs discussed above, and the
capital needed for construction of the casino for the Yakama expansion,
Hollywood Park has other potential capital needs with respect to the Boomtown
Reno and Boomtown New Orleans. The Company expects to spend approximately
$25,000,000 on the expansion and renovation of Boomtown Reno, including
additional hotel rooms, expanded gaming space and other amenities, which is
expected to be completed by the end of 1998. The Company also expects to spend
approximately $10,000,000 on the expansion and upgrade of Boomtown New
Orleans, including the build-out of the second floor of the land-based
facility which is expected to be completed by mid-1998. The Boomtown
New Orleans Boomtown Belle II riverboat renovation is expected to cost
approximately $4,700,000 and is expected to be completed by the end of the
first quarter of 1998.
Post-REIT Pro Forma Liquidity and Capital Resources. On a pro forma basis,
as of September 30, 1997, HP Realty's principal source of liquidity was cash
and cash equivalents of $3,567,000 and HP Operating Company's principal source
of liquidity was cash and cash equivalents of $18,440,000.
Under the Code's REIT provisions, after the Reorganization HP Realty will be
required to distribute as dividends to its stockholders at least 95% of its
taxable income (other than net capital gains). Therefore, assuming taxable
income was equal to financial statement income for the relevant periods, HP
Realty would have been required to make pro forma dividend distributions of at
least $4,528,000 and $7,502,000 during the nine months ended September 30,
1997, and the year ended December 31, 1996, respectively. These dividends
would have been funded out of operating cash flows. It is expected that, after
the Reorganization, HP Realty will be able to fund its dividend obligations
and other general business operating needs from the operating cash flows
generated from the rental of real estate assets. HP Realty is expected to fund
any state and federal tax liabilities arising from the Reorganization
transactions by drawing on bank lines of credit. Based on estimates prepared
by
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Hollywood Park, the amount of such tax liabilities could be approximately $54
million, although there can be no assurance that the actual amount will not be
significantly higher. See "Risk Factors--Uncertain Amount of Corporate and
Stockholder Tax Liability."
After the Reorganization, due to its obligation to make rent payments to HP
Realty (which were approximately $9,810,000 and $14,523,000 during the nine
months ended September 30, 1997, and the year ended December 31, 1996,
respectively) and the seasonality of the horse racing and gaming businesses,
it is expected that HP Operating Company may be required to make short term
borrowings against its bank lines of credit to fund general business needs. It
is expected that such borrowings may be required during the first and fourth
calendar quarters of each year, but there can be no assurance that borrowings
would not be required during other periods. Furthermore, as stated above,
after the Reorganization HP Realty and HP Operating Company will need to
negotiate new bank lines of credit, and there can be no assurance that such
bank lines of credit will be obtained on terms as favorable as those of the
Bank Credit Facility.
General. Hollywood Park is continually evaluating future growth
opportunities in the gaming, sports and entertainment industries. After the
Reorganization, HP Realty and HP Operating Company will continue to evaluate
these opportunities. See "The Reorganization--Business Strategies of the
Reorganized Companies." Hollywood Park expects that funding for growth
opportunities, payment of interest on the Notes, payments on notes payable and
capital expenditure needs will come from existing cash balances, cash
generated from operating activities and borrowings from the credit facilities.
In the opinion of management, assuming the Bank Credit Facility is refinanced
on favorable terms and the Notes are not redeemed (or if redeemed, they are
refinanced on comparable terms), these resources will be sufficient to meet
Hollywood Park's (and after the Reorganization, HP Realty and HP Operating
Company's) anticipated cash requirements for the foreseeable future and in any
event for at least the next twelve months.
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DESCRIPTION OF CAPITAL STOCK OF THE COMPANIES
In connection with the Reorganization, (i) Hollywood Park's Certificate of
Incorporation, as amended for the Reorganization Amendments and (if approved)
the Supermajority Elimination Amendment and the Gaming Amendment, will become
HP Realty's Certificate of Incorporation (the "HP Realty Charter"), (ii) HP
Operating Company's Certificate of Incorporation (the "HP Operating Company
Charter") will be amended to be substantially similar to the HP Realty
Charter, and (iii) HP Realty's (formerly Hollywood Park's) By-Laws and HP
Operating Company's By-Laws (respectively, the "HP Realty By-Laws" and "HP
Operating Company By-Laws") will be amended to provide for the pairing of HP
Realty Common Stock and HP Operating Company Common Stock. Following the
Reorganization, the rights of stockholders of HP Realty and HP Operating
Company will be governed by the HP Realty Charter and the HP Operating Company
Charter (collectively, the "Charters"), the HP Realty By-Laws and the HP
Operating Company By-Laws (collectively, the "By-Laws"), and will continue to
be governed by the Delaware General Corporation Law.
The following discussion summarizes the material terms of the Charters and
the By-Laws. This summary does not purport to be complete and is subject to
and qualified in its entirety by reference to the Charters and the By-Laws and
the relevant provisions of the Delaware General Corporation Law. The HP Realty
Charter and the HP Operating Company Charter, as they will be amended and
restated following completion of the Reorganization (and assuming stockholder
approval of the Supermajority Elimination Amendment and the Gaming Amendment),
are attached hereto as Appendices A and B, respectively. Sections 7.2 and 7.6
(relating to the pairing of the HP Realty Common Stock and HP Operating
Company Common Stock) of each of the HP Realty By-Laws and the HP Operating
Company By-Laws, as they will be amended as of the completion of the
Reorganization, are attached hereto as Appendices C and D, respectively.
Upon consummation of the Reorganization, under the Charters, each of HP
Realty and HP Operating Company will have the authority to issue 40,000,000
shares of preferred stock, $.01 par value ("Preferred Stock"), 100,000,000
shares of common stock, $.01 par value ("Common Stock"), and 25,000,000 shares
of excess common stock, $.01 par value ("Excess Stock"). HP Realty will also
have the authority to issue 1,000 shares of common stock, $.10 par value
("Unpaired Common Stock"). No shares of Preferred Stock, Excess Stock or
Unpaired Common Stock will be outstanding immediately following the
consummation of the Reorganization.
COMMON STOCK
The holders of paired shares of HP Realty Common Stock and HP Operating
Company Common Stock will be entitled to one vote per share on all matters
voted on by stockholders of each Company, including elections of directors.
Except as otherwise required by law, by the Charters with respect to Excess
Stock or Unpaired Common Stock, or provided in any resolution adopted by the
Board of Directors of either HP Realty or HP Operating Company with respect to
any series of Preferred Stock, the holders of paired shares of HP Realty
Common Stock and HP Operating Company Common Stock exclusively possess all
voting power. The Charters do not provide for cumulative voting in the
election of directors. Subject to any preferential rights of any outstanding
series of Preferred Stock and the rights of holders of Excess Stock and
Unpaired Common Stock, the holders of paired shares of HP Realty Common Stock
and HP Operating Company Common Stock are entitled to such dividends as may be
declared from time to time by the Board of Directors of HP Realty or HP
Operating Company from funds legally available for such purpose, and upon
liquidation will be entitled to receive pro rata all assets of HP Realty and
HP Operating Company available for distribution to such holders. Upon
consummation of the Reorganization, all issued and outstanding paired shares
of HP Realty Common Stock and HP Operating Company Common Stock will be fully
paid and nonassessable, and the holders thereof will not have preemptive
rights.
PREFERRED STOCK
The Charters provide that each of HP Realty and HP Operating Company may, by
vote of its Board of Directors, issue up to 40,000,000 shares of Preferred
Stock, $.01 par value, in one or more series, and that its
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Board may fix the voting powers, preferences and relative, participating,
optional or other rights, or the qualifications, limitations or restrictions
thereon (including dividend rights, dividend rates, conversion rights, voting
rights, terms of redemption, redemption prices, liquidation preferences) and
the number of shares constituting any series or designation of such series,
without further vote or action by the stockholders. Neither HP Realty nor HP
Operating Company may authorize any series of Preferred Stock unless the
certificate of designations governing the terms of such series contains
restrictions on ownership and transfer substantially similar to those
applicable to the Common Stock and a corresponding series of excess preferred
stock is simultaneously authorized.
The issuance of Preferred Stock may have the effect of delaying, deferring
or preventing a change in control of the companies without further action by
the stockholders (and as such may be used as an anti-takeover device) and may
adversely affect the voting and other rights of the holders of HP Realty
Common Stock and HP Operating Company Common Stock. The issuance of Preferred
Stock with voting and conversion rights may adversely affect the voting power
of the holders of HP Realty Common Stock and HP Operating Company Common
Stock, including the loss of voting control to others. Depending on the terms
of a particular series of Preferred Stock and other circumstances, the
issuance of Preferred Stock could also reduce funds available for distribution
to holders of HP Realty Common Stock and HP Operating Common Stock as
dividends or upon liquidation of the companies.
EXCESS STOCK
In the event of a violation of certain transfer restrictions contained in
the Charters, shares of HP Realty Common Stock and HP Operating Company Common
Stock will automatically be converted into an equal number of shares of Excess
Stock of HP Realty and HP Operating Company, and transferred to a trust (a
"Trust"). The Excess Stock held in trust shall remain outstanding and will be
held by the trustee of the Trust (the "Trustee") for the benefit of a
charitable beneficiary (a "Beneficiary"). The Trustee and the Beneficiary will
be designated by mutual agreement of the HP Realty and HP Operating Company
Boards of Directors pursuant to the terms of the Pairing Agreement. Each share
of Excess Stock will entitle the holder to the number of votes the holder
would have if such share of Excess Stock was a share of Common Stock, on all
matters submitted to a vote of stockholders. The Trustee, as record holder of
the Excess Stock, will be entitled to vote all shares of Excess Stock. Each
share of Excess Stock will be entitled to the same dividends and distributions
(as to timing and amount) as the shares of the Common Stock from which such
Excess Stock was converted. The Trustee of the Trust, as record holder of the
Excess Stock, will be entitled to receive all dividends and distributions and
will hold such dividends and distributions in trust for the benefit of the
Beneficiary of the Trust. Upon the sale of the shares of Excess Stock to
either a permitted transferee under the Charters (the "Permitted Transferee")
or to HP Realty and HP Operating Company (if the Companies exercise their
option in the Charters to repurchase the Excess Stock), such shares of Excess
Stock will be automatically converted into an equal number of shares of Common
Stock. See "--Certain Provisions of the Charters and Bylaws--Restrictions on
Ownership and Transfer."
UNPAIRED COMMON STOCK
In connection with the Reorganization, all outstanding shares of Unpaired
Common Stock (also referred to in this Proxy Statement as "Hollywood Park
Common Stock") will be converted into shares of HP Realty Common Stock.
Following the Reorganization, there will be no shares of Unpaired Common Stock
issued or outstanding and HP Realty will be prohibited from issuing any shares
of Unpaired Common Stock while the Pairing Agreement is in effect. By the
terms, Unpaired Common Stock (i) shares ratably (in proportion to the number
of shares held) with HP Realty Common Stock in any dividends or other
distributions (including distributions upon liquidation or dissolution) by HP
Realty, (ii) except as may be otherwise required by law, votes together (on
the basis of one vote per share) with HP Realty Common Stock without regard to
class on all matters upon which stockholders are entitled to vote or to which
stockholders are entitled to give consent, and (iii) except as may be
otherwise required by law, has identical rights, preferences, privileges and
restrictions (including rights in liquidation) as HP Realty Common Stock,
except that Unpaired Common Stock will not be
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subject to the restrictions on ownership and transfer described below that are
contained in HP Realty's Charter and By-Laws and in the Pairing Agreement. See
"--The Pairing Agreement" and "--Certain Provisions of the Charters and By-
Laws--Restrictions on Ownership and Transfer."
THE PAIRING AGREEMENT
Under the Pairing Agreement, shares of HP Realty Common Stock and HP
Operating Company Common Stock and shares of Preferred Stock that are
convertible into shares of HP Realty Common Stock and HP Operating Company
Common Stock (collectively, "Paired Stock") shall not be transferrable or
transferred on the books of either HP Realty or HP Operating Company unless a
simultaneous transfer is made by the same transferor to the same transferee of
an equal number of shares of that same class or series of Paired Stock of the
other company. Neither HP Realty nor HP Operating Company may issue shares of
HP Realty Common Stock and HP Operating Company Common Stock or shares of
Preferred Stock that are convertible into shares of HP Realty Common Stock and
HP Operating Company Common Stock unless provision has been made for the
simultaneous issuance or transfer to the same person of the same number of
shares of that same class or series of Paired Stock of the other company and
for the pairing of such shares. The Pairing Agreement also provides for (i)
the simultaneous issuance and pairing of Excess Stock upon the violation of
the REIT Restrictions, and (ii) either the simultaneous conversion of the
Excess Stock of each company back into paired HP Realty Common Stock and HP
Operating Company Common Stock (if the Excess Stock is transferred to a
Permitted Transferee) or the simultaneous repurchase by HP Realty and HP
Operating Company of their respective Excess Stock (if the companies exercise
their option to repurchase the Excess Stock). To permit proper allocation of
the consideration received in connection with the issuance of shares of Paired
Stock by HP Realty and HP Operating Company, the Pairing Agreement provides
that HP Realty and HP Operating Company shall, as desired from time to time,
jointly make arrangements to determine the fair market value of the stock of
each corporation.
The Pairing Agreement requires that each certificate issued for paired
shares of HP Realty or HP Operating Company must be issued "back-to-back" with
a certificate evidencing the same number of shares of the other company. The
certificates must bear a conspicuous legend on its face referring to the
restrictions on ownership and transfer under the Pairing Agreement. In
addition, neither HP Realty nor HP Operating Company may declare a stock
dividend, issue any rights or warrants or otherwise reclassify shares unless
the other company simultaneously takes the same or equivalent action.
The Pairing Agreement and the Pairing may be terminated by either HP Realty
or HP Operating Company upon thirty days' written notice provided that such
termination has been approved by the affirmative vote of the holders of a
majority of the outstanding shares of both HP Realty and HP Operating Company.
The Pairing Agreement may be amended by action of the Boards of Directors of
HP Realty and HP Operating Company unless the amendment would affect the
restriction requiring the stock subject to pairing to be transferred only in
combination, in which case stockholder approval as outlined in this paragraph
would be required.
CERTAIN PROVISIONS OF THE CHARTERS AND BY-LAWS
Restrictions on Ownership and Transfer
For HP Realty to qualify as a REIT under the Code, it must meet certain
requirements concerning the ownership of its outstanding shares of capital
stock and the nature of its gross income. See "The Reorganization--Federal
Income Tax Consequences."
To protect HP Realty's qualification as a REIT, the Charters provide that no
person or entity may Beneficially Own or Constructively Own (as those terms
are defined in the Charters) in excess of 9.8% (the "Ownership Limit") of the
outstanding shares of Common Stock of HP Realty or HP Operating Company. Any
transfer of Common Stock of HP Realty or HP Operating Company or other event
that would (i) result in any person or entity owning, directly or indirectly,
shares of Common Stock of HP Realty or HP Operating Company in excess of the
Ownership Limit, unless the Ownership Limit is waived by the Board of
Directors of the relevant corporation in accordance with the Charters, (ii)
result in the capital stock of HP Realty being beneficially owned
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(within the meaning of Section 856(a)(5) of the Code) by fewer than 100
persons within the meaning of Section 856(a)(5) of the Code, (iii) result in
HP Realty being "closely held" within the meaning of Section 856(h) of the
Code (i.e., more than 50% in value of HP Realty's outstanding stock being
owned, directly or indirectly, by five or fewer individuals (defined in the
Code to include certain entities)) or (iv) cause HP Realty to own, actually or
constructively, 10% or more of the ownership interests in a tenant of the real
property of HP Realty or a subsidiary of HP Realty within the meaning of
section 856(d)(2)(B) of the Code, shall be void ab initio, and the intended
transferee will acquire no right or interest in such shares of Common Stock.
Upon the occurrence of a purported transfer of shares or other event that
would result in a violation of any of the foregoing transfer restrictions, the
shares violating the transfer restrictions shall be automatically converted
into an equal number of shares of Excess Stock and transferred to a Trust for
the benefit of the Beneficiary, and the record holder of the shares of Common
Stock that are converted into shares of Excess Stock (a "Prohibited Owner")
shall submit certificates representing these shares to HP Realty or HP
Operating Company, as the case may be, for registration in the name of the
Trustee. In the case of Common Stock that is paired, upon the conversion of a
share of Common Stock into a share of Excess Stock, the corresponding paired
share of Common Stock of the other company shall simultaneously be converted
into a share of Excess Stock of the other company; and such shares of Excess
Stock shall be paired and shall be simultaneously transferred to a Trust. The
Excess Stock so transferred to a Trust shall be held in trust for the
exclusive benefit of the Beneficiary, and shall have the voting, dividend and
other rights described above. See "--Excess Stock." The Prohibited Owner must
repay to the Trust the amount of any dividends or distributions received by it
(i) that are attributable to any shares of Common Stock that have been
converted into shares of Excess Stock and (ii) the record date of which was on
or after the date that such shares were converted into shares of Excess Stock.
HP Realty and HP Operating Company shall take all measures that they determine
reasonably necessary to recover the amount of any such dividend or
distribution paid to a Prohibited Owner.
In the event of any voluntary or involuntary liquidation of, or winding up
of, or any distribution of the assets of, HP Realty or HP Operating Company,
each holder of shares of Excess Stock shall be entitled to receive, ratably
with each other holder of shares of Common Stock, that portion of the assets
of HP Realty or HP Operating Company, as the case may be, that is available
for distribution to the holders of Common Stock. The Trust shall distribute to
the Prohibited Owner the amounts received upon such event; provided that the
Prohibited Owner shall not be entitled to receive amounts in excess of, in the
case of a purported transfer in which the Prohibited Owner gave value for
shares of Common Stock and which transfer resulted in the conversion of the
shares into shares of Excess Stock, the price per share the Prohibited Owner
paid for the shares of Common Stock (which, in the case of Common Stock that
is paired, shall equal the price paid per share multiplied by the most recent
Valuation Percentage (as hereinafter defined)) and, in the case of a transfer
or other event in which the Prohibited Owner did not give value for such
shares (e.g., if the shares were received through a gift or devise) and which
transfer or other event resulted in the conversion of the shares into shares
of Excess Stock, the price per share equal to the Market Price (as hereinafter
defined) on the date of such transfer or other event. Any remaining amount in
such Trust shall be distributed to the Beneficiary. "Market Price" on any date
means the average of the closing sales prices of the Common Stock on the
principal securities exchange on which the Common Stock is then traded for the
five consecutive trading days ending on such date. In the case of Common Stock
that is paired, "Market Price" means the "Market Price" for the paired shares
multiplied by a fraction (expressed as a percentage) determined by dividing
the value for such Common Stock most recently determined under the Pairing
Agreement over the value of a paired share most recently determined under the
Pairing Agreement (the "Valuation Percentage").
Any vote taken by a Prohibited Owner prior to the discovery by HP Realty or
HP Operating Company that shares of Common Stock were exchanged for shares of
Excess Stock will be rescinded as void ab initio. The Trustee shall have the
exclusive and absolute right (subject to certain restrictions set forth in the
Charters) to designate a Permitted Transferee of any and all shares of Excess
Stock if HP Realty or HP Operating Company or both, in the case of paired
shares, fail to exercise its or their purchase option with respect to such
shares as described below. Upon the designation by the Trustee of a Permitted
Transferee, the Trustee shall cause to be transferred to the Permitted
Transferee that number of shares of Excess Stock of HP Realty or HP Operating
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Company, as the case may be, acquired by the Permitted Transferee. Upon such
transfer of the shares of Excess Stock to the Permitted Transferee, such
shares of Excess Stock shall be automatically converted into an equal number
of shares of Common Stock. In the case of Common Stock that is paired, upon
the conversion of a share of Excess Stock into a share of Common Stock, the
corresponding paired share of Excess Stock of the other company shall
simultaneously be converted into a share of Common Stock and such shares of
Common Stock shall be paired. A Prohibited Owner shall be entitled to receive
from the Trustee following the sale or other disposition of shares of Excess
Stock the lesser of (i) (a) in the case of a purported transfer in which the
Prohibited Owner gave value for shares of Common Stock and which transfer
resulted in the conversion of such shares into shares of Excess Stock, the
price per share such Prohibited Owner paid for the shares of Common Stock
(which, in the case of Excess Stock that is paired, shall be determined based
on the Valuation Percentage) and (b) in the case of a transfer or other event
in which the Prohibited Owner did not give value for such shares (e.g., if the
shares were received through a gift or devise) and which transfer or other
event resulted in the conversion of such shares into shares of Excess Stock,
the price per share equal to the Market Price on the date of such transfer or
other event and (ii) the price per share (which, in the case of Excess Stock
that is paired, shall be determined based on the Valuation Percentage)
received by the Trustee from the sale or other disposition of such shares of
Excess Stock. Any amounts received by the Trustee in respect of such shares of
Excess Stock and in excess of such amounts to be paid the Prohibited Owner
shall be distributed to the Beneficiary.
Shares of Excess Stock shall be deemed to have been offered for sale by a
Trust to HP Realty or HP Operating Company or both, in the case of paired
shares, or a designee of such company or companies, at a price per share equal
to the lesser of (i) the price per share (which, in the case of Excess Stock
that is paired, shall be determined based on the Valuation Percentage) in the
transaction that created such shares of Excess Stock (or, in the case of
devise, gift or other event, the Market Price at the time of such devise, gift
or other event) or (ii) the Market Price on the date either company or both
companies, in the case of paired shares, accept such offer. Either company or
both companies, in the case of paired shares, shall generally have the right
to accept such offer for a period of 90 days following the date of the event
which results in such shares of Excess Stock being issued. In the case of
shares of Excess Stock that are paired, neither HP Realty nor HP Operating
Company shall accept such an offer with respect to its shares of Excess Stock
without the agreement of the other company to accept such offer with respect
to the corresponding paired shares of its Excess Stock.
Any person or entity that acquires or attempts to acquire shares of Common
Stock in violation of the aforementioned transfer restrictions, or any person
or entity that owned shares of Common Stock that were transferred to a Trust,
shall immediately give written notice to HP Realty or HP Operating Company or
both, in the case of paired shares, of such event and shall provide such other
information as the appropriate company or both companies, as the case may be,
may request to determine the effect, if any, of such violation, on HP Realty's
status as a REIT. Each person or entity that is an owner, actually or
constructively, of shares of Common Stock and each person or entity that
(including the stockholder of record) is holding shares of Common Stock for
such an owner shall provide to HP Realty or HP Operating Company or both, in
the case of paired shares, a written statement or affidavit stating such
information as the appropriate company or both companies, as the case may be,
may request to determine HP Realty's status as a REIT and to ensure compliance
with the Ownership Limit. In addition, every person or entity that owns,
actually or constructively, more than 5%, or such lower percentages as
required by the provisions of the Code and IRS regulations, of the outstanding
shares of Common Stock of HP Realty or HP Operating Company shall, within 30
days after January 1 of each year, provide to HP Realty or HP Operating
Company or both, in the case of paired shares, a written statement or
affidavit stating the name and address of such owner, the number of shares of
Common Stock owned, actually or constructively, and a description of how such
shares are held.
All certificates representing shares of Common Stock shall bear a legend
referring to the aforementioned transfer restrictions. The transfer
restrictions will continue to apply until the Board of Directors of HP Realty
publicly announces its determination that it is no longer in the best
interests of HP Realty to attempt to qualify, or to continue to qualify, as a
REIT.
The restrictions on transfer contained in the Charters could have the effect
of discouraging a takeover or other transaction in which holders of some, or a
majority, of shares of Common Stock might receive a premium
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from their shares of Common Stock over the then prevailing Market Price or
which such holders might believe to be otherwise in their best interest.
Binding Effect of Certain Compromises, Arrangements and Reorganziations
Article VII of the Hollywood Park Charter (and, after the Reorganization,
the HP Realty Charter) provides that if three-fourths in value of the
Company's creditors (or a class of creditors) and/or stockholders (or class of
stockholders) agree to a compromise or arrangement between the Company and
such creditors and/or stockholders, and to any reorganization relating to such
compromise or arrangement, at a meeting called by a Delaware court of equity
upon proper application by certain eligible persons specified in Article VII,
the compromise or arrangement and the reorganization shall, if sanctioned by
the court, be binding on all of such creditors and/or stockholders and on the
Company. The HP Operating Company Charter will contain no such provision.
Gaming Approval; Redemption of Shares
Article XIV of the Hollywood Park Charter currently provides that so long as
Hollywood Park engages in, or intends to engage in, the operation of licensed
card clubs regulated under the California Gaming Registration Act or any other
applicable federal, state or local statutes, ordinances, rules or regulations,
all securities of Hollywood Park shall be held subject to the restriction that
if a person's continued ownership or control of securities would cause
Hollywood Park or any of its subsidiaries to lose, or prevent the
reinstatement of, any government-issued franchise or license that is necessary
for the operation of any such licensed card club and that is conditioned upon
some or all of the holders of Hollywood Park securities possessing prescribed
qualifications, such securities shall be redeemable by Hollywood Park to the
extent necessary to prevent the loss, or to secure the reinstatement of, such
franchise or license. The per share redemption price of such securities is
generally the closing sales price on the date the notice of redemption is
given by Hollywood Park. If the Gaming Amendment is approved, Article XIV of
the Hollywood Park Charter (which, after the Reorganization, will be the HP
Realty Charter) will be restated to expand the restrictions on ownership to
cover the gaming licenses of Hollywood Park (after the Reorganization, HP
Realty) and its subsidiaries in all jurisdictions in which they currently
conduct, or in the future may conduct, gaming operations, as more fully
described below under "The Gaming Amendment." Regardless of whether the Gaming
Amendment is approved, the HP Operating Company Charter will contain
provisions substantially identical to those of the Gaming Amendment.
Supermajority Vote Required for Certain Transactions
Article XII of the Hollywood Park Charter currently requires the affirmative
vote or written consent of the stockholders of 70% of all outstanding shares
of all classes of stock of HP Realty entitled to vote (i) for the adoption of
any agreement for the merger of Hollywood Park with or into any other
corporation or for the consolidation of Hollywood Park with any other
corporation (ii) to authorize any sale, lease, transfer or exchange of all or
substantially all of the assets of Hollywood Park to any other person (a
corporation, partnership, association or other business entity, trust, estate
or individual), (iii) to authorize the dissolution of Hollywood Park and (iv)
to alter, amend or repeal this provision. If the Supermajority Elimination
Amendment is approved, Article XII will be removed from the HP Realty Charter
and Delaware law (which generally requires the approval of a majority of the
outstanding shares of each class of stock) will govern mergers,
consolidations, sales of substantially all of HP Realty's assets and the
dissolution of HP Realty. Otherwise, the HP Realty Charter will contain
Article XII. Regardless of whether the Supermajority Elimination Amendment is
approved, the HP Operating Company Charter will not contain a supermajority
provision such as Article XII.
Required Quorum for Stockholder Meetings
The Hollywood Park By-Laws currently provide (and the HP Realty By-Laws and
HP Operating Company By-Laws will provide) that the holders of one-third of
the outstanding shares entitled to vote at any stockholders' meeting shall
constitute a quorum for the transaction of business.
Other Charter and By-Law Provisions
Except as discussed above, after the Reorganization the provisions of the HP
Realty and HP Operating Company Charters and By-Laws will be substantially the
same as the provisions of the Hollywood Park Charter and By-Laws prior to the
Reorganization.
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THE HOLLYWOOD PARK OPERATING COMPANY
1998 STOCK OPTION PLAN
(ITEM NO. 2 ON THE PROXY CARD)
BACKGROUND
Hollywood Park's 1993 Stock Option Plan was adopted by the Hollywood Park
Board and approved by the Hollywood Park stockholders in July 1993, and
provides for the issuance of up to 625,000 shares of Hollywood Park Common
Stock upon exercise of options granted thereunder. As of January 31, 1998, all
shares authorized for issuance under the 1993 Stock Option Plan had either
been issued or were subject to outstanding options. Hollywood Park's 1996
Stock Option Plan was adopted by the Hollywood Park Board and approved by the
Hollywood Park stockholders in October 1996, and provides for the issuance of
up to 900,000 shares of Hollywood Park Common Stock upon exercise of options
granted thereunder. As of January 31, 1998, 232,499 shares were subject to
outstanding options (net of cancellations) granted under the 1996 Stock Option
Plan.
Upon completion of the Boomtown Merger, Hollywood Park assumed outstanding
stock options granted before the Merger under Boomtown's 1990 Stock Option
Plan and 1992 Director Option Plan (collectively, the "Boomtown Plans"). Based
on the conversion ratio for Boomtown stock in the Boomtown Merger,
approximately 1,088,300 shares of Hollywood Park Common Stock were issuable
upon exercise of the assumed options.
PROPOSAL
Hollywood Park stockholders are being requested to approve the adoption of
the Hollywood Park Operating Company 1998 Stock Option Plan (the "1998 Option
Plan"), which provides for the issuance of options to purchase up to a number
of Paired Shares of HP Realty Common Stock and HP Operating Company Common
Stock equal to 900,000 less the aggregate number of shares covered by all
options granted and not cancelled (whether or not exercised) under the 1996
Stock Option Plan as of the date the 1998 Option Plan first becomes effective
(the "Maximum Option Shares"). The provisions of the 1998 Option Plan are
similar to the provisions of Hollywood Park's 1996 Stock Option Plan; the main
difference between the two plans is that the options granted under the 1998
Option Plan will cover Paired Shares. The adoption of the 1998 Option Plan is
necessary to reflect the status of HP Operating Company as a free-standing
corporation, and the pairing of HP Realty Common Stock and HP Operating
Company Common Stock, after the Reorganization. The Maximum Option Shares,
based on the number of options outstanding under the 1996 Stock Option Plan as
of January 31, 1998, are equivalent to 2.5% of the outstanding Hollywood Park
Common Stock at January 31, 1998, assuming the exercise of all options and
other rights to acquire Hollywood Park Common Stock outstanding at such date,
and would have a market value of approximately $10.3 million, based on
Hollywood Park's stock price as of that date.
After the Reorganization, no new options will be granted under Hollywood
Park's 1993 Stock Option Plan and 1996 Stock Option Plan and the Boomtown
Plans. Each outstanding stock option granted under such plans will be adjusted
so that, upon exercise, the option holder receives the number of Paired Shares
equal to the number of shares of Hollywood Park Common Stock covered by the
outstanding option, and will continue to have the same aggregate exercise
price and vesting schedule as before the Reorganization.
Hollywood Park believes that grants of stock options motivate high levels of
performance, will align the economic interests of HP Operating Company's
officers and executives with those of the stockholders, and provide an
effective method of recognizing employee contributions to the success of HP
Operating Company. Hollywood Park also believes that HP Operating Company's
ability to grant stock options will be critical to its success in attracting
and retaining experienced and qualified employees. Hollywood Park therefore
believes it is necessary and in the best interests of HP Operating Company and
its stockholders to adopt the 1998 Option Plan as described above.
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Effectiveness of the 1998 Option Plan is conditioned upon approval of the
Reorganization Amendments by Hollywood Park's stockholders.
REQUIRED VOTE; RECOMMENDATION OF THE BOARD OF DIRECTORS
Approval of the adoption of the 1998 Option Plan requires the affirmative
vote of a majority of the shares represented in person or by proxy and
entitled to vote at the Annual Meeting. Abstentions will be treated as votes
against the proposal, and broker non-votes will not be counted as represented
at the meeting, for purposes of calculating the votes for and against the
proposal.
THE BOARD OF DIRECTORS RECOMMENDS A VOTE "FOR" APPROVAL OF THE HOLLYWOOD
PARK OPERATING COMPANY 1998 STOCK OPTION PLAN.
Approval of the 1998 Option Plan is being sought to establish HP Realty's
and HP Operating Company's ability, as applicable, to deduct, for federal
income tax purposes, compensation paid pursuant to the exercise of stock
options and in respect of other stock awards. Under Section 162(m) of the
Code, stockholder approval of performance-based compensation plans is
necessary to qualify for the performance-based compensation exception to the
limitation on a company's ability to deduct compensation paid to certain
specified individuals in excess of $1 million.
SUMMARY OF THE 1998 OPTION PLAN
The essential features of the 1998 Option Plan are outlined below. A copy of
the 1998 Option Plan is attached as Appendix E to this Proxy Statement. The
following summary does not purport to be fully descriptive, and is subject in
its entirety to the full text of the 1998 Option Plan attached as Appendix E.
Shares Subject to the 1998 Option Plan
Up to an aggregate number of Paired Shares equal to the Maximum Option
Shares are authorized for issuance under the 1998 Option Plan. Shares which
are not issued before the expiration or termination of an option may
thereafter be available for future options under the 1998 Option Plan and will
not be deemed to count against the Maximum Option Shares. The aggregate number
of shares available under the 1998 Option Plan and the number of shares
subject to outstanding options will be adjusted to reflect any changes in the
outstanding Common Stock of HP Operating Company by reason of any
recapitalization, reclassification, stock dividend, stock split, reverse stock
split, merger, spin-off, combination, termination of the Pairing Agreement or
other similar transaction. Upon the exercise of an option, HP Operating
Company will issue the shares of HP Operating Company Common Stock covered by
the option to the optionholder, and will purchase from HP Realty, for delivery
to the optionholder, the number of shares of HP Realty Common Stock covered by
the option. HP Operating Company will pay HP Realty the fair market value (as
determined under the Pairing Agreement) of shares of HP Realty Common Stock
which it purchases for this purpose.
Type of Options
Each option granted under the 1998 Option Plan will consist of two
components: an option to purchase shares of HP Operating Company Common Stock,
and an option to purchase an equal number of shares of HP Realty Common Stock.
The two component options must be exercised together, so that, in effect, all
options granted under the Plan will be for the purchase of Paired Shares. The
Committee (as defined below) may designate certain component options to
purchase shares of HP Operating Company Common Stock as incentive stock
options under Section 422 of the Internal Revenue Code of 1986, as amended
(the "Code"). All other options (including all component options to purchase
shares of HP Realty Common Stock) shall constitute non-qualified stock
options. Each option shall be subject to a stock option agreement between the
optionholder and HP Operating Company. Such stock option agreements shall
contain such terms and conditions as the Committee may determine in its
discretion, and need not be uniform.
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Administration
The 1998 Option Plan is administered by the Compensation Committee of the
Board of Directors of HP Operating Company or another committee so designated
by the Board (the "Committee"). The members of the Committee will be (i) "non-
employee directors" within the meaning of Rule 16b-3 under the Exchange Act,
and (ii) "outside directors" within the meaning of Section 162(m) of the Code.
Subject to the provisions of the 1998 Option Plan, the Committee shall have,
among other powers, the full, absolute and unconditional discretion and
authority (i) to construe and interpret the 1998 Option Plan, (ii) to
determine the eligible individuals to whom and the time or times at which
options shall be granted, whether any option will include an incentive stock
option component, the number of paired shares to be subject to each option,
the option price, and the number of installments, if any, in which each option
may be exercised, (iii) to determine the circumstances under which
exercisability of any option may be accelerated, (iv) to determine the
duration of each option, and (v) to make all other determinations necessary or
advisable for the administration of the 1998 Option Plan. All determinations
and interpretations made by the Committee shall be made in good faith and
shall be binding and conclusive on all participants in the 1998 Option Plan
and their legal representatives and beneficiaries.
Eligibility and Participation
All key employees, directors (including members of the Compensation
Committee), consultants and advisors of HP Operating Company or of any
subsidiary corporation, or other persons who render services to HP Operating
Company or a subsidiary corporation (including employees of HP Realty who also
render services to HP Operating Company or a subsidiary corporation) shall be
eligible for selection to participate in the 1998 Option Plan, except that
only regular employees of HP Operating Company or a subsidiary shall be
eligible to receive incentive stock options under the 1998 Option Plan. Based
on Hollywood Park's historic policies, approximately 150 employees, 11
directors and 15 advisors and other service providers would receive option
grants under the 1998 Option Plan. Options are granted in consideration of
services rendered or to be rendered by the grantee. An individual who has been
granted an option may, if such individual is otherwise eligible, be granted an
additional option or options if the Committee shall so determine, subject to
the other provisions of the 1998 Option Plan. No participant may receive
option grants with respect to more than 90,000 Paired Shares (subject to
adjustment in the event of any recapitalization, reclassification, stock
split, stock dividend, reverse stock split, merger, spin-off, combination,
termination of the Pairing Agreement or other similar transactions) during any
fiscal year or portion thereof. Any cancelled option continues to be counted
against the maximum number of Paired Shares for which options may be granted
to a participant during any fiscal year or portion thereof.
Duration of Options
Each option shall be of a duration specified by the Committee in the option
agreement, but all options shall expire within 10 years of the date of grant.
Component options to purchase shares of HP Operating Company Common Stock
which are incentive stock options (and the corresponding component options to
purchase shares of HP Realty Common Stock) granted to employees owning in
excess of 10% of the voting securities of HP Operating Company shall expire
within five years of the date of grant. Upon completion of the Reorganization,
the HP Operating Company Charter will prohibit any person from owning more
than 9.8% of the Paired Shares; accordingly, the 1998 Option Plan's provisions
regarding 10% stockholders would not be operative unless the HP Operating
Company Charter is amended to delete such prohibition.
Rights as a Stockholder and Assignability
The recipient of an option will have no rights as a stockholder with respect
to shares covered by the recipient's option until the date such recipient
becomes the holder of record of such shares. An option which includes an
incentive stock option component shall, by its terms, be non-transferable by
the optionholder, either voluntarily or by operation of law, other than by
will or the laws of descent and distribution, and shall be exercisable during
the optionholder's lifetime only by him or her. An option which does not
include an incentive
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stock option component shall be non-transferable by the optionholder, either
voluntarily or by operation of law, other than by will or the laws of descent
and distribution, pursuant to a "qualified domestic relations order" as
defined in the Code, or, with the consent of the Committee, to a member of the
optionholder's immediate family or a trust exclusively for the benefit of one
or more of the optionholder's immediate family as part of the optionholder's
estate plan.
Purchase Price
The purchase price payable upon the exercise of an option to purchase Paired
Shares which contains an incentive stock option component must be at least
equal to the fair market value of the Paired Shares on the date the option is
granted. A grant of an option including an incentive stock option component to
an employee owning over 10% of the voting stock of HP Operating Company must
be at an exercise price of not less than 110% of the fair market value on the
date of grant of the Paired Shares covered by the option. The exercise price
of an option which does not include an incentive stock option component need
not be equal to the fair market value of the stock at the date of grant, but
may be granted with any exercise price determined by the Committee. Payment in
full for the number of shares purchased upon the exercise of stock options
shall be made at the same time the option is exercised in cash, or, subject to
the approval of the Committee, (i) by the delivery of Paired Shares already
owned by and in possession of the optionholder, (ii) by means of a promissory
note, (iii) through a "cashless exercise," or (iv) any combination thereof.
Exercisability of Options
The Committee shall determine when and under what conditions any option
shall vest or become exercisable. However, the aggregate fair market value of
the shares of HP Operating Company Common Stock (determined at the date of
grant) for which incentive stock option components and any other incentive
stock options granted by HP Operating Company (whenever granted) are
exercisable for the first time by an optionholder during any calendar year
shall not exceed $100,000. Options may be exercisable in one or more
installments, and, to the extent that an installment is not exercised when it
first becomes exercisable, it shall continue to be exercisable until the
option terminates or expires.
Termination of Employment; Death or Disability
If an optionholder ceases to be employed by the Company (or ceases to
provide services to the Company) or any of its subsidiaries for any reason
other than death or permanent disability, the optionholder's options shall be
exercisable for a period of three months (unless otherwise determined by the
Committee in the individual option agreement) after the termination of
employment (or the ceasing to provide services). If an optionholder dies or
becomes permanently disabled, the optionholder's options shall be exercisable
for a period of 12 months (unless otherwise determined by the Committee in the
individual option agreement) after the date of death or permanent disability.
After an optionholder's death, any options which remained exercisable on the
date of death may be exercised by the person or persons to whom the
optionholder's rights pass by will or the laws of descent and distribution.
Corporate Transactions
Upon a "Corporate Transaction," the 1998 Option Plan, and all unexercised
options granted thereunder, shall terminate, unless the Committee provides for
any or all of the following alternatives: (i) the options theretofore granted
will become immediately exercisable, (ii) the successor corporation will
assume the options, or substitute new options covering the stock of the
successor corporation, with the appropriate adjustments as to the number and
kind of shares and option prices, (iii) the successor corporation will
continue the 1998 Option Plan, or (iv) the options will be cashed out. Under
the 1998 Option Plan, a "Corporate Transaction" occurs when (a) any person or
group becomes the beneficial owner of securities of HP Operating Company, or
of any entity resulting from a merger or consolidation of HP Operating
Company, representing more than 50% of the combined voting power of HP
Operating Company or such entity, (b) the existing Directors of HP Operating
Company cease, for any reason, to constitute more than 50% of the number of
authorized Directors of HP
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Operating Company, except that any new Director shall be considered an
existing Director if his or her election or nomination was approved by a vote
of at least 50% of the then-existing Directors, or (c) the consummation of a
merger, consolidation, or reorganization to which HP Operating Company is a
party, or a sale of substantially all of the assets of HP Operating Company,
if persons who are not stockholders of HP Operating Company immediately before
the consummation of such transaction are the beneficial owners, immediately
following the consummation of such transaction, of more than 50% of the
combined voting power of the outstanding securities of HP Operating Company or
the entity resulting from such transaction.
Duration, Amendment and Termination of the 1998 Option Plan
The 1998 Option Plan shall become effective after its approval by the Board
and by the stockholders and the Pairing Agreement has become effective (i.e.,
upon completion of the Reorganization). It shall remain in effect until
terminated by the Board, until all shares subject to it shall have been
purchased pursuant to the exercise of options granted thereunder, or until all
options have expired. All options granted under the 1998 Option Plan shall be
granted within 10 years from the date of Board approval or stockholder
approval of the 1998 Option Plan, whichever is earlier. The Board may amend,
suspend, or terminate the 1998 Option Plan as it may deem advisable, except
that no amendment without appropriate stockholder approval shall increase the
Maximum Option Shares, change the minimum exercise price or increase the
maximum term of any option which includes an incentive stock option component,
permit the granting of options to anyone other than those eligible under the
terms of the 1998 Option Plan, or otherwise materially increase the benefits
accruing to participants under the 1998 Option Plan. No amendment, suspension,
or termination of the 1998 Option Plan shall affect options already granted,
and such options shall remain in full force and effect as if the 1998 Option
Plan had not been amended or terminated, unless mutually agreed otherwise in
writing between the optionee and the Committee. HP Operating Company's Board
of Directors or the Committee, however, may unilaterally amend the 1998 Option
Plan or any option, without the consent of the holder thereof, if such
amendment is necessary or desirable to comply with the Securities Act, state
blue sky laws, or applicable listing requirements of any principal securities
exchange on which shares of the same class of securities for which the options
are exercisable are listed, to preserve the status of options as incentive
stock options, or to preserve the tax deductibility to HP Operating Company of
any awards made under the 1998 Option Plan.
FEDERAL INCOME TAX MATTERS
The following discussion of federal income tax consequences does not purport
to be a complete analysis of all of the potential tax effects of the 1998
Option Plan. It is based upon laws, regulations, rulings and decisions now in
effect, all of which are subject to change. The recently-enacted Taxpayer
Relief Act of 1997 has changed various tax rules, including the rules
governing the taxation of capital gains, and there is some uncertainty
regarding the impact of the Taxpayer Relief Act of 1997 on the 1998 Option
Plan. No information is provided with respect to persons who are not citizens
or residents of the United States, or foreign, state or local tax laws, or
estate and gift tax considerations. In addition, the tax consequences to a
particular participant may be affected by matters not discussed above.
ACCORDINGLY, EACH PARTICIPANT IS URGED TO CONSULT HIS OR HER OWN TAX ADVISOR
CONCERNING THE TAX CONSEQUENCES TO HIM OR HER OF THE 1998 OPTION PLAN,
INCLUDING THE EFFECTS OF STATE, LOCAL, FOREIGN AND OTHER TAX LAWS AND OF
CHANGES IN THE TAX LAWS.
The 1998 Option Plan is not subject to any of the provisions of the Employee
Retirement Income Security Act of 1974 ("ERISA") and is not qualified under
Section 401(a) of the Code.
Non-Qualified Stock Options
Under current federal income tax law, the grant of a non-qualified stock
option has no tax effect on HP Operating Company or the optionee to whom it is
granted. The exercise of a non-qualified stock option will result in ordinary
income to the optionee equal to the excess of the fair market value of the
shares at the time of
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exercise over the option price. The optionee's tax basis in the shares will be
equal to the aggregate option price plus the amount of taxable income
recognized upon the exercise of the option. Upon any subsequent disposition of
the shares, any gain or loss recognized by the optionee will be treated as
capital gain or loss, and will be long-term capital gain or loss if the shares
are held for the applicable period after exercise. At the time of recognition
of ordinary income by the optionee upon exercise, HP Operating Company will
normally be allowed to take a deduction for federal income tax purposes in an
amount equal to such recognized income. These same principles apply if the
non-qualified stock option is not an entire option, but only a component
option to purchase shares of HP Realty Common Stock. In that case, the
"shares" would refer to shares of HP Realty Common Stock, and the "option
price" would refer to the portion of the option price of the entire option
allocable to the component option to purchase shares of HP Realty Common
Stock.
Incentive Stock Options
Under the 1998 Option Plan, HP Operating Company can grant incentive stock
options only in the form of component options to purchase shares of HP
Operating Company Common Stock. As used in this paragraph, therefore, the term
"shares" refers only to shares of HP Operating Company Common Stock, and the
term "option price" refers to the portion of the option price of the entire
option allocable to the component option to purchase shares of HP Operating
Company Common Stock. The federal income tax consequences associated with
incentive stock options are generally more favorable to the optionee and less
favorable to HP Operating Company than those associated with non-qualified
stock options. The grant of an incentive stock option does not result in
income to the optionee or in a deduction for HP Operating Company at the time
of the grant. Generally, the exercise of an incentive stock option will not
result in the recognition of income by the optionee if the optionee does not
dispose of the shares within two years after the date of grant or within one
year after the date of exercise. If these requirements are met, the basis of
the shares upon a later disposition will be the option price, any gain on the
later disposition will be taxed to the optionee as long-term capital gain, and
HP Operating Company will not be entitled to a deduction. The excess of the
fair market value on the exercise date over the option price is an adjustment
to regular taxable income in determining alternative minimum taxable income,
which could cause the optionee to be subject to the alternative minimum tax.
Under the Taxpayer Relief Act of 1997, the alternative minimum tax rate may be
higher than the rate on long-term capital gains. If the optionee disposes of
the shares before the expiration of either of the holding periods described
above (a "Disqualifying Disposition"), the optionee will have compensation
taxable as ordinary income, and HP Operating Company will normally be entitled
to a deduction, equal to the lesser of (a) the fair market value of the shares
on the exercise date minus the option price, or (b) the amount realized on the
disposition minus the option price. If the price realized in any such
Disqualifying Disposition of the shares exceeds the fair market value of the
shares on the exercise date, the excess will be treated as long-term or short-
term capital gain, depending on the optionee's holding period for the shares.
$1,000,000 Limit on Deductible Compensation
Section 162(m) of the Code provides that any publicly-traded corporation
will be denied a deduction for compensation paid to certain executive officers
to the extent that the compensation exceeds $1,000,000 per officer per year.
However, the deduction limit does not apply to "performance-based
compensation," as defined in Section 162(m). Compensation is performance-based
compensation if (i) the compensation is payable on account of the attainment
of one or more performance goals; (ii) the performance goals are established
by a compensation committee of the board of directors consisting of "outside
directors"; (iii) the material terms of the compensation and the performance
goals are disclosed to and approved by the stockholders in a separate vote;
and (iv) the compensation committee certifies that the performance goals have
been satisfied. Hollywood Park believes that, if the stockholders approve the
1998 Option Plan, the stock options granted thereunder (unless granted for
purchase prices below the fair market value of the stock subject to the
options) will satisfy the requirements to be treated as performance-based
compensation, and accordingly will not be subject to the deduction limit of
Section 162(m) of the Code.
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Excess Parachute Payments
Under Section 4999 of the Code, certain officers, stockholders, or highly-
compensated individuals ("Disqualified Individuals") will be subject to an
excise tax (in addition to federal income taxes) of 20% of the amount of
certain "excess parachute payments" which they receive as a result of a change
in control of HP Operating Company. Furthermore, Section 280G of the Code
prevents HP Operating Company from taking a deduction for any "excess
parachute payments." The cash out or acceleration of the vesting of stock
options upon a Corporate Transaction may cause the holders of such stock
options who are Disqualified Individuals to recognize certain amounts as
"excess parachute payments" on which they must pay the 20% excise tax, and for
which HP Operating Company will be denied a tax deduction.
Special Rules; Withholding of Taxes
Special tax rules may apply (i) to a participant who is subject to Section
16 of the Exchange Act, (ii) if a participant exercises a stock option by
delivering Paired Shares which he or she already owns, or through a "cashless
exercise," or (iii) if shares purchased on the exercise of an option are
subject to transfer restrictions or to a substantial risk of forfeiture.
HP Operating Company may take whatever steps the Committee deems appropriate
to comply with any applicable withholding tax obligation, including requiring
any participant to pay the amount of any applicable withholding tax to HP
Operating Company in cash.
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THE HOLLYWOOD PARK OPERATING COMPANY DIRECTORS PLAN
(ITEM NO. 3 ON PROXY CARD)
BACKGROUND
Hollywood Park's Directors Deferred Compensation Plan (the "Hollywood Park
Directors Plan") was adopted by the Hollywood Park Board and approved by the
Hollywood Park stockholders in September, 1991. The Hollywood Park Directors
Plan permits each director of Hollywood Park to elect to defer receipt of all
or a portion of his compensation in his capacity as a director, and to receive
such deferred compensation either in the form of cash or in the form of shares
of Hollywood Park Common Stock. The Hollywood Park Directors Plan provides for
the issuance of up to 125,000 shares of Hollywood Park Common Stock to
directors of Hollywood Park. As of January 31, 1998, 98,063 shares of
Hollywood Park Common Stock had been allocated to the directors' accounts
under the Hollywood Park Directors Plan.
PROPOSAL
Hollywood Park stockholders are being asked to approve the adoption of the
Hollywood Park Operating Company 1998 Directors Deferred Compensation Plan
(the "HP Operating Company Directors Plan"), which will give directors of
Hollywood Park Operating Company the opportunity to elect to defer all or a
portion of the compensation they receive in their capacities as directors. The
maximum number of Paired Shares which may be issued under the HP Operating
Company Directors Plan is 125,000. The terms of the HP Operating Company
Directors Plan are substantially similar to the terms of the Hollywood Park
Directors Plan.
After the Reorganization, HP Realty will continue to maintain the Hollywood
Park Directors Plan for the benefit of directors of Hollywood Park Realty, but
will amend it to change its name to the "Hollywood Park Realty Enterprises,
Inc. Directors Deferred Compensation Plan" (the "HP Realty Directors Plan").
The rights of directors to receive shares of Hollywood Park Common Stock under
the Hollywood Park Directors Plan will be automatically converted under the
terms of the Plan after the Reorganization to rights to receive Paired Shares.
Hollywood Park believes that the adoption of the HP Operating Company
Directors Plan will enable HP Operating Company to attract and retain persons
of outstanding competence to serve as directors by paying such persons all or
a portion of their compensation in the form of Paired Shares and by giving
them an increased stake in the HP Operating Company and its future.
REQUIRED VOTE; RECOMMENDATION OF THE BOARD OF DIRECTORS
Approval of the adoption of the HP Operating Company Directors Plan requires
the affirmative vote of a majority of the shares represented in person or by
proxy and entitled to vote at the Annual Meeting. Abstentions will be treated
as votes against the proposal, and broker non-votes will not be counted as
represented at the meeting, for purposes of calculating the votes for and
against the proposal.
Under NYSE rules, the HP Operating Company Directors Plan must be submitted
for stockholder approval because it provides for the issuance of stock to
directors. If the majority of the shares of Hollywood Park do not approve the
adoption of the HP Operating Company Directors Plan, the HP Operating Company
Directors Plan will nevertheless go into effect, but will only permit payment
of deferred compensation in cash.
THE BOARD OF DIRECTORS RECOMMENDS A VOTE "FOR" APPROVAL OF THE HP OPERATING
COMPANY DIRECTORS PLAN.
Approval of the HP Operating Company Directors Plan is being sought to
satisfy the requirements for listing on the New York Stock Exchange.
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SUMMARY OF THE HP OPERATING COMPANY DIRECTORS PLAN
The essential features of the HP Operating Company Directors Plan are
outlined below. A copy of the HP Operating Company Directors Plan is attached
as Appendix F to this Proxy Statement. The following summary does not purport
to be fully descriptive, and is subject in its entirety to the full text of
the HP Operating Company Directors Plan attached as Appendix F.
Term of the HP Operating Company Directors Plan
The HP Operating Company Directors Plan shall become effective upon the
approval of the Board of Directors of HP Operating Company and the completion
of the Reorganization, and will remain in effect until terminated by the Board
of Directors of HP Operating Company. The portions of the HP Operating Company
Directors Plan permitting the allocation of all or a portion of a director's
deferred compensation to Paired Shares and the distribution of Paired Shares,
however, will go into effect only if a majority of the shares of Hollywood
Park represented and entitled to vote at the Annual Meeting approve the
adoption of the HP Operating Company Directors Plan.
Share Authorization
HP Operating Company shall not be required to reserve or set aside funds or
Paired Shares for the payment of its obligations under the HP Operating
Company Directors Plan. HP Operating Company shall make available as and when
required a sufficient number of Paired Shares to meet the needs of the HP
Operating Company Directors Plan. The Paired Shares to be issued under the HP
Operating Company Directors Plan may be either authorized and unissued shares
of HP Operating Company Common Stock coupled with the purchase of shares of HP
Realty Common Stock under the Pairing Agreement, or Paired Shares which have
been purchased on the open market or privately.
Shares Issuable
The maximum number of Paired Shares that can be issued pursuant to the HP
Operating Company Directors Plan is 125,000 shares.
Administration
The HP Operating Company Directors Plan shall be administered by the Board
of Directors (the "HP Operating Company Board") of HP Operating Company. The
HP Operating Company Board shall have the discretion and power to interpret
provisions of the HP Operating Company Directors Plan, to compute amounts to
be credited to and distributed from directors' accounts under the HP Operating
Company Directors Plan, to prescribe, amend and rescind rules and regulations
relating to the HP Operating Company Directors Plan, and to make all
determinations necessary to administer the HP Operating Company Directors
Plan.
Participants
Participation in the HP Operating Company Directors Plan is limited to
directors of HP Operating Company. All such directors are eligible to
participate. It is anticipated that HP Operating Company will have 11
directors on the effective date of the HP Operating Company Directors Plan.
Deferred Compensation
Each director of HP Operating Company may elect to defer all or a portion of
his or her compensation received his or her capacity as a director. Any such
deferred compensation will be credited to a director's account, either in cash
or in Paired Shares, 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 account will be credited with either (a)
cash, (b) the number of full and/or fractional Paired Shares obtained by
dividing the amount of
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the director's compensation which he or she elected to defer and to have
allocated to Paired Shares by the average of the closing price of the Paired
Shares on the principal stock exchange on which the Paired Shares are listed
(or, if the Paired 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 (c) a combination of (a)
and (b).
All cash amounts credited to the director's account shall bear interest at
an amount to be determined from time to time by the HP Operating Company
Board.
If a director has elected to allocate his or her deferred compensation to
Paired Shares, such director's account shall be credited at the end of each
calendar quarter with the number of full and/or fractional Paired Shares
obtained by dividing the dividends which would have been paid on the Paired
Shares credited to the director's account as of the dividend record date, if
any, occurring during such calendar quarter if such Paired Shares had been
issued and outstanding Paired Shares on such date, by the closing price of the
Paired Shares on the principal stock exchange on which the Paired Shares are
listed (or, if the Paired Shares are not listed on any stock exchange, the
NASDAQ National Market System) on the date such dividend(s) was paid. In
addition, if HP Operating Company declares a stock dividend payable in Paired
Shares, the director's account shall be credited at the end of each calendar
quarter with the number of full and/or fractional Paired Shares which such
Paired Shares would have been entitled to if such Paired Shares had been
issued and outstanding Paired Shares on the record date for such stock
dividend(s).
However, the directors shall not have any interest in the cash and/or Paired
Shares credited to their accounts until distributed in accordance with the HP
Operating Company Directors Plan, and shall not have any voting rights until
Paired Shares credited to their accounts are distributed. The rights of a
director to receive payments under the HP Operating Company Directors Plan
shall be no greater than the rights of an unsecured general creditor of HP
Operating Company.
Distributions
Each participating director may elect to have the aggregate amount of cash
and Paired Shares credited to his account distributed to him in one lump-sum
payment or in a number of approximately equal quarterly 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
HP Operating Company. Prior to the beginning of any calendar year, a director
may elect to change the method of distribution, but amounts credited to a
director's account prior to the effective date of such change shall not be
affected and shall be distributed in accordance with the election in effect at
the time such amounts were credited to the director's account. No fractional
Paired Shares will be distributed; the value of any fractional Paired Shares
will be paid in cash.
The maximum number of Paired Shares which can be issued under the HP
Operating Company Directors Plan and the HP Realty Directors Plan in any
fiscal year is one percent of the outstanding number of Paired Shares at the
beginning of such fiscal year, except to the extent that the HP Operating
Company Board authorizes a larger distribution. If distributions in a fiscal
year would exceed this limit, distributions to each director in such fiscal
year shall be reduced on a pro rata basis, and excess distributions will be
distributed as soon as possible in later fiscal years.
Amendment or Termination of the HP Operating Company Directors Plan
HP Operating Company reserves the right to amend or terminate the HP
Operating Company Directors Plan at any time by action of the HP Operating
Company Board, provided that (i) no such amendment or termination adversely
affect any eligible director's rights with respect to amounts then credited to
his account, and (ii) no amendment (other than a termination) shall accelerate
any payments or distributions under the HP Operating Company Directors Plan
(except with regard to bona fide financial hardships).
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FEDERAL INCOME TAX MATTERS
Any compensation that a director elects to defer under the HP Operating
Company Directors Plan will not be subject to federal income tax for the year
in which the director actually earns the compensation. Instead, the director
will pay federal income tax on the deferred compensation, and any interest
which is deemed to be earned on the deferred compensation, only when it is
actually distributed to him. For this purpose, the director will be taxed at
ordinary income tax rates on the fair market value of Paired Shares when they
are distributed to him. When the director is taxed on the deferred
compensation and deemed earnings, HP Operating Company will be entitled to a
tax deduction equal to the amount on which the director is taxed.
A director's tax basis in any Paired Shares which are distributed to him
under the HP Operating Company Directors Plan will equal their fair market
value on the date of distribution, and his holding period in them will begin
on the date of distribution. Any gain or loss which he recognizes on any later
sale of the Paired Shares will be capital gain or loss, and will be long-term
capital gain or loss if he holds them for the applicable period after they are
distributed to him.
This discussion of federal income tax matters does not purport to be a
complete analysis of all of the potential tax effects of the HP Operating
Company Directors Plan. It is based upon laws, regulations, rulings and
decisions now in effect, all of which are subject to change. No information is
provided with respect to foreign, state or local tax laws, or estate and gift
tax considerations. In addition, the tax consequences to a particular director
may be affected by matters not discussed above. Accordingly, each director is
urged to consult his or her own tax advisor concerning the tax consequences to
him or her of the HP Operating Company Directors Plan, including the effects
of state, local, foreign and other tax laws and of changes in the tax laws.
The HP Operating Company Directors Plan is not subject to any of the
provisions of the Employee Retirement Income Security Act of 1974, as amended,
and is not qualified under Section 401(a) of the Code.
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THE SUPERMAJORITY ELIMINATION AMENDMENT
(ITEM NO. 4 ON PROXY CARD)
BACKGROUND
On September 16, 1997, the Board approved the Supermajority Elimination
Amendment, which would amend the Hollywood Park Charter to remove Article XII
("Article XII") from the Hollywood Park Charter, and directed the
Supermajority Elimination Amendment to be submitted to the stockholders for
their approval at the Annual Meeting.
DESCRIPTION OF THE PROPOSED SUPERMAJORITY ELIMINATION AMENDMENT
Article XII reads as follows:
"The affirmative vote or written consent of the holders of 70% of all
outstanding shares of all classes of stock of the Corporation entitled to
vote thereon, considered for the purposes of this Article TWELFTH as one
class, shall be required:
(a) for the adoption of any agreement for the merger of the
Corporation with or into any other corporation or for the consolidation
of the Corporation with any other corporation;
(b) to authorize any sale, lease, transfer or exchange of all or
substantially all of the assets of the Corporation to any other person
(as hereinafter defined);
(c) to authorize the dissolution of the Corporation;
(d) to alter, amend or repeal this Article TWELFTH.
For the purposes of this Article TWELFTH, the term person shall mean any
corporation, partnership, association, or any other business entity, trust,
estate or individual.
This Article TWELFTH shall not apply to a merger if no vote of
stockholders of the Corporation is necessary under Delaware law to
authorize it."
If Article XII is removed, stockholder approval of the actions that Article
XII covers would be required only to the extent required by the Delaware
General Corporation Law which, in the cases where a vote is required at all,
would generally be the approval of holders of a majority of the outstanding
stock entitled to vote. In the case of certain mergers and certain transfers
of substantially all of Hollywood Park's assets (not otherwise constituting a
sale, lease or exchange), in the absence of Article XII Delaware law would not
require any stockholder approval. Therefore, removal of Article XII will
enhance management's ability to effect various corporate transactions by
reducing the percentage vote of Hollywood Park's stockholders that is required
to approve these transactions.
Article XII was placed in the Hollywood Park Charter when Hollywood Park was
incorporated as an anti-takeover or defensive measure against an unwanted or
coercive attempt to acquire the Company. In particular, Article XII was
designed to discourage in advance hostile tender offers by persons attempting
to acquire, with a view towards a subsequent business combination, only that
portion of Hollywood Park's stock necessary to obtain control and force the
business combination. However, Article XII may have the negative effect of
discouraging non-coercive acquisition proposals and tender offers. In
addition, such provision arguably has the additional negative effect of
disproportionately benefitting a minority of the Company's stockholders by
giving them effective veto power over combinations and other transactions
regardless of whether the transaction is desired by or beneficial to the
holders of a majority of the Company's shares and the management of the
Company.
The Board has concluded that, in the case of transactions that Article XII
governs, it is no longer in the best interests of the Company or its
stockholders to require a 70% vote of all outstanding shares of the Company,
but to have in place the less onerous requirements that would exist under the
Delaware General Corporation Law in the absence of Article XII., This less
onerous requirement would facilitate management's ability to pursue
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beneficial corporate combinations and other transactions, and would prevent a
minority of the shares, i.e., 30% of the shares, from blocking a corporate
opportunity that the Board and the holders of a majority of the outstanding
shares might consider desirable and beneficial to the long-term prospects of
the Company. The Board also believes that Section 203 of the Delaware General
Corporation Law, which was enacted after Article XII's adoption and which
discourages unwanted and coercive acquisition proposals, provides the Company
and its stockholders with sufficient protection and makes Article XII
unnecessary and, in light of its potential negative effects, overly
burdensome. Further, if the Reorganization is completed, the 9.8% ownership
limitation on the Paired Shares will effectively preclude hostile and coercive
takeover attempts.
If the Reorganization is completed, the Hollywood Park Charter will be the
HP Realty Charter. Therefore, approval of the Supermajority Elimination
Amendment by Hollywood Park stockholders means that Article XII will be
removed from both the Hollywood Park Charter and the HP Realty Charter. On the
other hand, if Hollywood Park stockholders do not approve the Supermajority
Elimination Amendment, Article XII will continue to be contained in the
Hollywood Park Charter and, following the Reorganization, the HP Realty
Charter. Regardless of whether the Supermajority Elimination Amendment is
approved, the HP Operating Company Charter will not contain a supermajority
voting provision analogous to Article XII.
As discussed above, Hollywood Park has retained Morgan Stanley & Co.
Incorporated to advise it in connection with matters relating to the
Reorganization, including assisting the Board in evaluating proposals from
potential strategic partners. Although no transaction with a strategic partner
is currently pending or under negotiation, it is possible that such a
transaction would be of a type requiring the approval of 70% of Hollywood
Park's outstanding shares under Article XII. However, if the Supermajority
Elimination Amendment is approved, the less onerous stockholder approval
requirements of Delaware law would govern the transaction.
REQUIRED VOTE; RECOMMENDATION OF THE BOARD OF DIRECTORS
Approval of the Supermajority Elimination Amendment requires the affirmative
vote of 70% of the outstanding shares of Hollywood Park Common Stock. For
purposes of calculating the votes for and against the proposals, abstentions
and broker non-votes will be treated as votes against the proposal.
THE BOARD OF DIRECTORS RECOMMENDS A VOTE "FOR" APPROVAL OF THE SUPERMAJORITY
ELIMINATION AMENDMENT.
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THE GAMING AMENDMENT
(ITEM NO. 5 ON PROXY CARD)
BACKGROUND
On September 16, 1997, the Board approved the Gaming Amendment, which would
restate Article XIV of the Hollywood Park Charter, and directed the Gaming
Amendment to be submitted to the stockholders for their approval at the Annual
Meeting.
DESCRIPTION OF THE PROPOSED GAMING AMENDMENT
Article XIV of the Hollywood Park Charter ("Article XIV") currently provides
that so long as Hollywood Park engages in, or intends to engage in, the
operation of licensed card clubs regulated under the California Gaming
Registration Act or any other applicable federal, state or local statutes,
ordinances, rules or regulations, all securities of Hollywood Park shall be
held subject to the restriction that if a person's continued ownership or
control of securities would cause Hollywood Park or any of its subsidiaries to
lose, or prevent the reinstatement of, any government-issued franchise or
license that is necessary for the operation of any such licensed card club and
that is conditioned upon some or all of the holders of Hollywood Park
securities possessing prescribed qualifications, such securities shall be
redeemable by Hollywood Park to the extent necessary to prevent the loss, or
to secure the reinstatement of, such franchise or license. The per share
redemption price of such securities is generally the closing sales price on
the date the notice of redemption is given by Hollywood Park. Article XIV was
added to the Hollywood Park Charter in 1994, after approval by Hollywood Park
stockholders at Hollywood Park's 1994 Annual Meeting, in connection with
Hollywood Park's entry into the licensed card club business in 1994 when it
opened the Hollywood Park-Casino, a California card club casino located on the
same property as the Hollywood Park Race Track. Article XIV is intended to
facilitate Hollywood Park's compliance with all laws that are applicable to
the California card club operations and to protect all franchises and licenses
that are required to conduct these operations.
As a result of the Boomtown Merger, which was completed on June 30, 1997,
Hollywood Park (through Boomtown) now owns and operates casinos in Louisiana,
Mississippi and Nevada, in addition to its existing card clubs in California.
Accordingly, Hollywood Park, its subsidiaries and its stockholders are now
subject to all applicable laws regulating gaming operations in all of those
states, not just California. The Gaming Amendment would restate Article XIV to
provide, among other things, that (i) Hollywood Park and all persons owning or
controlling Hollywood Park securities or securities of Hollywood Park's
affiliated companies will be required to comply with the gaming laws of all
jurisdictions in which Hollywood Park and its affiliated companies conduct
gaming activities, and that all securities of Hollywood Park shall be held
subject to the requirements of those gaming laws, (ii) Hollywood Park
securities owned or controlled by an Unsuitable Person (as defined below) or
an Unsuitable Person's affiliate shall be redeemable by Hollywood Park (or, at
Hollywood Park's option, convertible into Excess Stock to be held in a Trust
until transferred to a Permitted Transferee) to the extent required by the
relevant gaming authority or to the extent deemed necessary or advisable by
Hollywood Park, and (iii) it shall be unlawful for an Unsuitable Person to
receive any dividends or interest with regard to Hollywood Park securities, to
exercise any voting rights conferred by Hollywood Park securities, or to
receive any remuneration from Hollywood Park or any of its affiliated
companies for services rendered or otherwise. The per share redemption price
of any Hollywood Park securities would be the price (if any) required to be
paid by the relevant gaming authority, or if not specified by the gaming
authority, the price deemed reasonable by Hollywood Park, which in no event
may exceed the closing sales price on the date the notice of redemption is
given by Hollywood Park. An "Unsuitable Person" is generally defined in the
Gaming Amendment as a person who owns or controls Hollywood Park securities or
securities of Hollywood Park's affiliated companies (a) who is determined by a
gaming authority to be unsuitable to own or control such securities or
unsuitable to be connected with an entity engaged in gaming activities in the
relevant jurisdiction, or (b) who causes Hollywood Park or any of its
affiliated companies to lose or to be threatened with the loss of, or who, in
the sole discretion of the Board, is deemed likely to jeopardize Hollywood
Park's right to use or be entitled to, any necessary gaming license. The full
text of Article XIV, as restated by the Gaming Amendment, is set forth in
Article XII
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of the HP Realty Charter and HP Operating Company Charter attached hereto as
Appendices A and B, and the foregoing discussion is qualified in its entirety
by the appendices.
The Board believes that the restatement or Article XIV pursuant to the
Gaming Amendment is necessary to enable Hollywood Park and its subsidiaries to
obtain or maintain required gaming licenses in all jurisdictions in which they
currently conduct gaming activities (California, Louisiana, Mississippi and
Nevada) and in which they may conduct gaming activities in the future, and to
ensure compliance with the gaming laws of such jurisdictions by Hollywood
Park, its subsidiaries and its stockholders. The Gaming Amendment is being
submitted for approval by Hollywood Park's stockholders at the Annual Meeting
because it is the first stockholder meeting since the Boomtown Merger.
If the Reorganization is completed, the Hollywood Park Charter will be the
HP Realty Charter. Therefore, approval of the Gaming Amendment by Hollywood
Park stockholders means that Article XIV will be restated in both the
Hollywood Park Charter and the HP Realty Charter. On the other hand, if
Hollywood Park stockholders do not approve the Gaming Amendment, Article XIV
in its current form will continue to be contained in the Hollywood Park
Charter and, following the Reorganization, the HP Realty Charter. Regardless
of whether the Gaming Amendment is approved, the HP Operating Company Charter
will contain the provisions set forth in the Gaming Amendment.
REQUIRED VOTE; RECOMMENDATION OF THE BOARD OF DIRECTORS
Approval of the Gaming Amendment requires the affirmative vote of a majority
of the outstanding shares of Hollywood Park Common Stock. For purposes of
calculating the votes for and against the proposals, abstentions and broker
non-votes will be treated as votes against the proposal.
THE BOARD OF DIRECTORS RECOMMENDS A VOTE "FOR" APPROVAL OF THE GAMING
AMENDMENT.
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ELECTION OF DIRECTORS
(ITEM NO. 6 ON PROXY CARD)
At the Annual Meeting, holders of Hollywood Park Common Stock will be asked
to vote on the election of 11 directors who will constitute the full Board of
Directors of Hollywood Park. If the Reorganization is completed, it is
expected that each of the 11 individuals elected at the Annual Meeting will
serve on the Board of Directors of HP Operating Company or HP Realty. The 11
nominees receiving the highest number of votes from holders of shares of
Hollywood Park Common Stock represented and voting at the Annual Meeting will
be elected to the Board. Unless a nominee other than the nominees listed below
is properly nominated, abstentions and broker non-votes will not be counted as
represented or voting at the meeting and therefore will not have an effect on
the election of the nominees listed below. Each director so elected will hold
office until the next annual meeting of Hollywood Park (or, if the
Reorganization is completed, HP Realty and HP Operating Company) and until his
successor is elected and qualified.
GENERAL
Each proxy received will be voted for the election of the persons named
below, unless the stockholder signing such proxy withholds authority to vote
for one or more of these nominees in the manner described on the proxy.
Although it is not contemplated that any nominee named below will decline or
be unable to serve as a director, in the event any nominee declines or is
unable to serve as a director, the proxies will be voted by the proxy holders
as directed by the Board.
There are no family relationships between any director, nominee or executive
officer and any other director, nominee or executive officer of Hollywood
Park. Except as described below, there are no arrangements or understandings
between any director, nominee or executive officer and any other person
pursuant to which he has been or will be selected as a director and/or
executive officer of Hollywood Park. See "--Information Regarding the
Directors of Hollywood Park" and "--Board Committees."
THE BOARD OF DIRECTORS RECOMMENDS A VOTE "FOR" ELECTION OF ALL OF THE
NOMINEES LISTED BELOW.
INFORMATION REGARDING THE DIRECTORS OF HOLLYWOOD PARK
The following table lists the persons nominated by the Board for election as
directors of Hollywood Park, and also provides their ages and current
positions with Hollywood Park. Biographical information for each nominee is
provided below. All of the following nominees are currently directors of
Hollywood Park.
<TABLE>
<CAPTION>
NAME AGE CURRENT POSITION
- ---- --- ----------------
<S> <C> <C>
R.D. Hubbard................. 62 Chairman of the Board, Chief Executive Officer
and Member of the Office of the Chairman
Harry Ornest................. 74 Vice Chairman of the Board
J.R. Johnson................. 77 Director
Timothy J. Parrott........... 50 Director and Member of the Office of the
Chairman for Administration of Boomtown
Richard Goeglein............. 63 Director
Peter L. Harris.............. 54 Director
Robert T. Manfuso............ 60 Director
Lynn P. Reitnouer............ 65 Director
Herman Sarkowsky............. 72 Director
Warren B. Williamson......... 69 Director
Delbert W. Yocam............. 53 Director
</TABLE>
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Mr. Hubbard has been a Director of Hollywood Park since 1990; Chairman of
the Board and Chief Executive Officer of Hollywood Park since September 1991;
Member of the Hollywood Park Office of the Chairman since June 1997; Chairman
of the Board and Chief Executive Officer of HP Operating Company since
February 1991; President of HP 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) of Sunflower (Woodlands Race Tracks--greyhound racing and horse racing)
from 1988; President, Director, and owner of Ruidoso Downs Racing, Inc. (horse
racing) since 1988; Chairman of the Board, Chief Executive Officer and sole
stockholder, Multnomah Kennel Club, Inc. (greyhound racing) since December
1991; Owner and breeder of numerous thoroughbreds and quarter horses since
1962. Sunflower, a wholly-owned subsidiary of Hollywood Park, filed for
reorganization under Chapter 11 of the U.S. Bankruptcy Code on May 17, 1996.
Mr. Ornest has been a Director of Hollywood Park since 1991; Vice Chairman
of the Board of Hollywood Park since September 1991; Director, HP Operating
Company since 1988; Vice Chairman of the Board, HP Operating Company since
February 1991; Owner and Chairman, Toronto Argonauts Football Club (Canadian
Football League club) from 1988 to May 1991; Owner, St. Louis Blues (National
Hockey League club) 1983 to 1987; Owner, St. Louis Arena, 1983 to 1987; Owner
and Founder, Vancouver Canadians (Pacific Coast Baseball League club), 1977 to
1981; Hollywood Park stockholder, 1962 to present.
Mr. Johnson has been a Director of Hollywood Park since 1991; Director, HP
Operating Company from February 1991 to January 1992; Chairman, President and
Chief Executive Officer, NEWMAR (marine electronics manufacturing) since 1980;
Trustee, Westminster College.
Mr. Parrott has been a Director and member of the Office of the Chairman
since June 1997; Chairman of the Board and Chief Executive Officer of
Boomtown, Inc. since September 1992; President and Treasurer of Boomtown, Inc.
from June 1987 to September 1992; Director of Boomtown, Inc. since 1987;
Chairman of the Board and Chief Executive Officer of Boomtown Hotel & Casino,
Inc. since May 1988; Chief Executive Officer of Parrott Investment Company (a
family-held investment company with agricultural interests in California)
since April 1995; Director of The Chronicle Publishing Company since April
1995.
Mr. Goeglein has been a Director of Hollywood Park since June 1997;
President of Aladdin Gaming LLC since January 1997; Director of Boomtown, Inc.
from October 1992 to June 1997; Director of AST Research, Inc. since May 1987;
Director of Platinum Software Corp. since October 1994; President and
principal shareholder of Gaming Associates, Inc. since 1990; President and
Chief Operating Officer of Holiday Corporation (parent corporation of Holiday
Inns and Harrah's Hotels and Casinos) from 1984 to 1987; private investor
since 1987.
Mr. Harris has been a Director of Hollywood Park since June 1997; Director
of Boomtown, Inc. from April 1994 to June 1997; Director of Onsale Inc. since
1996; Director of Natural Wonders Inc. since 1996; Director of Pacific Sunwear
of California, Inc. since 1994; President and Chief Executive Officer of
Expressly Portraits, Inc. (a retail chain of portrait photography studios)
since August 1995; Reorganization Administrator of American Fashion Jewels (a
retail company) and then as Chief Executive Officer of Accolade, Inc. (a video
and personal computer games company) from 1993 to 1995; President and Chief
Executive Officer of F.A.O. Schwarz from 1985 to 1992.
Mr. Manfuso has been a Director of Hollywood Park since 1991; Director, HP
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 since 1993; Member, Executive Committee,
Maryland Million since 1991.
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Mr. Reitnouer has been a Director of Hollywood Park since 1991; Director, HP
Operating Company from September 1991 to January 1992; Partner, Crowell Weedon
& Co. (stock brokerage) since 1969; Director of COHR, Inc., since 1986 and
former Chairman of the Board of COHR, Inc.; Director, President and Regent,
Forest Lawn Memorial Parks Association since 1975; Trustee, University of
California Santa Barbara Foundation since 1992.
Mr. Sarkowsky has been a Director of Hollywood Park since 1991; Director, HP
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); Director, Seafirst
Corporation (banking); Director, Eagle Hardware & Garden, since 1990.
Mr. Williamson has been a Director of Hollywood Park since 1991; Vice
President and Secretary of Hollywood Park from September 1991 to August 1996;
Chairman of the Board and Chief Executive Officer of Hollywood Park from 1989
to September 1991; Director, HP Operating Company since 1985; Vice President
and Secretary, HP Operating Company from February 1991 to August 1996;
Secretary and Treasurer, HP Operating Company from 1985 to November 1990;
Chairman and Chief Executive Officer, Chandis Securities Co. (holding company)
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. Yocam has been a Director of Hollywood Park since June 1997; Director of
Boomtown, Inc. from December 1995 to June 1997; Chairman and Chief Executive
Officer of Borland International since December 1996; Director of Adobe
Systems, Inc., since February 1991; Independent consultant from November 1994
to December 1996; Director of Oracle Corporation since March 1992; President,
Chief Operating Officer and a Director of Tektronix, Inc from September 1992
to November 1994; Independent consultant from November 1989 to September 1992.
During 1997, the Hollywood Park Board held three meetings and acted by
unanimous written consent on two occasions.
In accordance with the requirements of the Agreement and Plan of Merger
dated as of April 23, 1996 (the "Merger Agreement") governing the Boomtown
Merger, the Hollywood Park Board was expanded upon completion of the Boomtown
Merger to eleven directors, seven of whom (Messrs. Hubbard, Ornest, Johnson,
Manfuso, Reitnouer, Sarkowsky and Williamson) had been serving as members of
the Hollywood Park Board (the "Hollywood Park Directors") and four of whom
(Messrs. Parrott, Goeglein, Harris and Yocam) had been members of the Boomtown
Board of Directors (the "Boomtown Directors"). The Merger Agreement provides
that, during the three-year period ending June 30, 2000, any increase in the
size of the Hollywood Park Board must be approved by a majority of the
Boomtown Directors then on the Hollywood Park Board, except that the number of
persons serving on the Hollywood Park Board may be increased without such
consent if the increase is divisible by three and one Boomtown Director (to be
selected by a majority of the Boomtown Directors then on the Hollywood Park
Board) is added for every two Hollywood Park Directors added. Hollywood Park
has agreed to cause its Board of Directors and any nominating committee
thereof to take the necessary steps to nominate the initial Boomtown Directors
or their replacements (selected by a majority of the Boomtown Directors) for
re-election at the first three annual stockholders meetings following June 30,
1997, including the current Annual Meeting.
BOARD COMMITTEES AND DIRECTOR COMPENSATION
Hollywood Park has a standing Executive Committee which is chaired by Mr.
Ornest and currently consists of Messrs. Hubbard, Ornest, Reitnouer, Parrott
and Goeglein. 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 four formal meetings in 1997 and acted by
unanimous written consent on five occasions.
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Hollywood Park has a standing Audit Committee which is chaired by Mr.
Williamson and currently consists of Messrs. Sarkowsky and Williamson and,
since the Boomtown Merger, Mr. Yocam. 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 twice in 1997.
Hollywood Park has a standing Compensation Committee, which currently
consists of Messrs. Johnson and Reitnouer. 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 once in 1997.
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 Merger Agreement provides that during the three-year period ending June
30, 2000, the Executive Committee (after the Reorganization, of HP Operating
Company rather than HP Realty) will consist of five members. Three of such
members shall be Hollywood Park representatives (currently Messrs. Hubbard,
Ornest and Reitnouer) and two shall be Boomtown representatives (currently
Messrs. Parrott and Goeglein). The number of members of the Executive
Committee may not be increased beyond five members at any time during such
three-year period without the consent of the majority of the Boomtown
representatives on the committee.
During 1997, each incumbent director of Hollywood Park attended at least 75%
of the aggregate of (i) the three meetings of the Board of Directors and (ii)
the total number of meetings of the committees on which he served (during the
periods that he served).
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 1997 received, an annual retainer fee at the rate of
$25,000 per year plus a $1,000 fee for each Board meeting attended, which they
may take in cash or in deferred compensation under Hollywood Park's Directors
Deferred Compensation Plan (the "Directors Plan") as outlined below. In
addition, members of the Executive Committee, Audit Committee and Compensation
Committee receive $1,000 for each committee meeting attended, and such amounts
are also eligible for the Directors Plan. Furthermore, directors and their
guests are entitled, without charge, to use the Directors' Room at Hollywood
Park, which is open on weekends and holidays during the racing season.
On July 18, 1997, each of Messrs. Johnson, Manfuso, Ornest, Reitnouer,
Sarkowsky and Williamson (constituting all of the non-executive directors of
Hollywood Park, excluding the Boomtown Directors) was granted a non-qualified
stock option to purchase 2,000 shares of Hollywood Park Common Stock at an
exercise price of $14.75 per share. One-third of the shares purchasable upon
exercise of these options was vested on the grant date, with an additional
one-third to vest on each of the first and second anniversary of the grant
date. All of these options expire on the tenth anniversary of the grant date
and (except for the options granted to Messrs. Johnson and Reitnouer) 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. Pursuant to the Directors Plan, 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
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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 Paired Shares are listed (or, if the
Paired 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 NASDAQ 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 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 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 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 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 of Hollywood Park Common Stock to be issued under the
Directors Plan may be either authorized and unissued shares or reacquired
shares.
Amendment, modification or termination of the Directors Plan may not (i)
adversely affect any eligible director's rights with respect to amounts then
credited to his account or (ii) accelerate any payments or distributions under
the Directors Plan (except with regard to bona fide financial hardships).
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
The members of the Compensation Committee for the period January 1, 1997, to
December 31, 1997 were J.R. Johnson and Lynn P. Reitnouer. None of the members
of the Compensation Committee were officers or employees or former officers or
employees of Hollywood Park or its subsidiaries.
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EXECUTIVE OFFICERS
Each of the executive officers of Hollywood Park holds office at the
pleasure of the Board of Directors. The current executive officers of
Hollywood Park are as follows:
<TABLE>
<CAPTION>
NAME AGE POSITION
---- --- --------
<S> <C> <C>
R.D. Hubbard............... 62 Chairman of the Board, Chief Executive Officer
and Member of the Office of the Chairman
Harry Ornest............... 74 Vice Chairman of the Board
Donald M. Robbins.......... 50 President of Hollywood Park, Inc., President of
Racing and Secretary
G. Michael Finnigan........ 49 President, Sports and Entertainment, Executive
Vice President, Treasurer, Chief Financial
Officer and Member of the Office of the Chairman
</TABLE>
In addition, upon the consummation of the Boomtown Merger, the Company
established an Office of the Chairman comprised of Hollywood Park's Chief
Executive Officer, Hollywood Park's President of Sports and Entertainment and
the Chief Executive Officer of Boomtown. 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. An Office of the Chairman will
also be established by HP Operating Company in connection with the
Reorganization.
Officers serve at the discretion of the Board of Directors, subject to
rights, if any, under contracts of employment. See "--Executive Compensation."
Background information for Messrs. Hubbard and Ornest is provided above. See
"--Information Regarding the Directors of Hollywood Park".
Mr. Robbins has been Hollywood Park's President of Racing since February
1994; President of Hollywood Park since September 1991; Secretary of Hollywood
Park since 1996 (formerly Assistant Secretary since September 1991); General
Manager of HP Operating Company from 1986 to February 1994; Executive Vice
President of HP Operating Company since 1988, and President and Secretary of
HP Operating Company since July 1991.
Mr. Finnigan has been Hollywood Park's President, Sports and Entertainment,
since January 1996 and a member of the Office of the Chairman since June 1997;
President, Gaming and Entertainment, from February 1994 to January 1996;
Executive Vice President and Chief Financial Officer of Hollywood Park and of
HP Operating Company since March 1989; and Treasurer of Hollywood Park and of
HP Operating Company since March 1992; Chairman of the Board of Southern
California Special Olympics since 1996; Chairman of the Board of Centinela
Hospital since 1996; and Director of the Shoemaker Foundation since 1993. Mr.
Finnigan also serves as Secretary and Treasurer of Sunflower Racing, Inc., a
wholly-owned subsidiary of Hollywood Park, which filed for reorganization
under Chapter 11 of the U.S. Bankruptcy Code on May 17, 1996.
130
<PAGE>
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 $100,000 in total during the fiscal year ended December
31, 1997 (collectively, the "Named Officers").
Summary Compensation Table
<TABLE>
<CAPTION>
OTHER SECURITIES
NAME AND ANNUAL COMPENSATION ANNUAL UNDERLYING ALL OTHER
PRINCIPAL ----------------------- COMPEN- OPTIONS/ COMPENSA-
POSITION YEAR SALARY($) BONUS($) SATION($) SARS(#) TION($)
---------- ---- --------- -------- --------- ---------- ---------
<S> <C> <C> <C> <C> <C> <C>
R.D. Hubbard............ 1997 $400,000 $40,235 0 45,000 $4,740(1)
Chairman of the Board
and 1996 400,000 0 0 85,000 0
Chief Executive Officer 1995 400,000 0 0 0 0
G. Michael Finnigan..... 1997 $307,608 $ 0 0 25,000 $3,555(1)
President, Sports and 1996 262,608 25,000 0 40,000 0
Entertainment,
Executive 1995 262,608 0 0 0 0
Vice President,
Treasurer
and Chief Financial
Officer
Donald M. Robbins....... 1997 $295,008 $ 0 0 25,000 $3,373(1)
President of Hollywood 1996 250,008 25,000 0 20,000 0
Park, Inc., President
of 1995 255,501 0 0 0 0
Racing and Secretary
</TABLE>
- --------
(1) Reflects matching contributions under Hollywood Park's 401(k) Plan.
Stock Option Plans
In 1993, the stockholders of Hollywood Park adopted the Hollywood Park 1993
Stock Option Plan (the "1993 Plan"), which provides for the issuance of up to
625,000 shares of Hollywood Park Common Stock upon exercise of options granted
thereunder. In 1996, the stockholders of Hollywood Park adopted the Hollywood
Park 1996 Stock Option Plan (the "1996 Plan"), which provides for the issuance
of up to 900,000 shares of Hollywood Park Common Stock upon exercise of
options granted thereunder. 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 1993 Plan and the
1996 Plan (collectively, the "Hollywood Park Plans") are substantially
similar. The Hollywood Park Plans are administered and terms of option grants
are established by the Compensation Committee of the Board of Directors. Under
the Hollywood Park 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 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 January 31, 1998, all of the 625,000 shares eligible for issuance
under the 1993 Plan had either been issued or were subject to outstanding
options. As of January 31, 1998, of the 900,000 shares eligible for issuance
under the 1996 Plan, 232,499 were subject to outstanding options (net of
cancellations). In addition, 1,008,460 shares of Hollywood Park Common Stock
are issuable upon exercise of options granted before the Boomtown Merger under
Boomtown's 1990 Stock Option Plan and 1992 Director Option Plan (collectively,
the
131
<PAGE>
"Boomtown Plans"), which options were assumed by Hollywood Park in the
Boomtown Merger. Hollywood Park has filed registration statements with the
Securities and Exchange Commission covering an aggregate of 2,613,308 shares
of Hollywood Park Common Stock issuable upon exercise of options granted under
the Hollywood Park Plans and the Boomtown Plans.
Options/SAR Grants in Last Fiscal Year
The following summarizes the option grants to Named Officers during 1997:
<TABLE>
<CAPTION>
INDIVIDUAL GRANTS
- -----------------------------------------------------------------------------
PERCENT OF
TOTAL
NUMBER OF OPTIONS/ POTENTIAL REALIZABLE VALUE
SECURITIES SARS AT ASSUMED ANNUAL RATES
UNDERLYING GRANTED TO OF STOCK PRICE APPRECIATION
OPTIONS/SARS EMPLOYEES PER SHARE FOR OPTION TERM
GRANTED IN FISCAL EXERCISE PRICE EXPIRATION ---------------------------
NAME (#) YEAR ($) DATE 5%($) 10%($)
---- ------------ ---------- -------------- ------------- ---------------------------
<S> <C> <C> <C> <C> <C> <C>
R.D. Hubbard............ 45,000 17% $14.75 July 18, 2007 $ 417,429 $ 1,057,847
G. Michael Finnigan..... 25,000 9% $14.75 July 18, 2007 $ 231,905 $ 587,693
Donald M. Robbins....... 25,000 9% $14.75 July 18, 2007 $ 231,905 $ 587,693
</TABLE>
Aggregated Option/SAR Exercises in Last Fiscal Year and Fiscal Year-End
Option/SAR Values
The following table sets forth information with respect to the exercise of
stock options during the fiscal year ended December 31, 1997 and the final
year-end value of unexercised options. None of the Named Officers exercised
stock appreciation rights during the fiscal year ended December 31, 1997 or
held any such rights at the end of such fiscal year.
<TABLE>
<CAPTION>
NUMBER OF SHARES
UNDERLYING UNEXERCISED VALUE OF UNEXERCISED
SHARES OPTIONS/SARS AT IN-THE-MONEY OPTIONS/SARS
ACQUIRED VALUE FISCAL YEAR-END (#) AT FISCAL YEAR-END ($)(1)
ON EXERCISE REALIZED ------------------------- -------------------------
NAME (#) ($) EXERCISABLE/UNEXERCISABLE EXERCISABLE/UNEXERCISABLE
---- ----------- -------- ------------------------- -------------------------
<S> <C> <C> <C> <C>
R.D. Hubbard............ -- -- 28,334/101,666 $340,008/$1,219,992
G. Michael Finnigan..... 25,000 $204,063 38,334/ 51,666 $460,008/$ 619,992
Donald M. Robbins....... 25,000 $175,000 38,334/ 51,666 $460,008/$ 619,992
</TABLE>
- --------
(1) Represents the difference between the market price of Hollywood Park
Common Stock on December 31, 1997 ($22.00 per share) and the exercise
price of the options ($10.00 per share).
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.
132
<PAGE>
The Pension Plan was a non-contributory, defined benefit plan covering
employees of Hollywood Park, Inc., and all employees of HP Operating Company,
not eligible for participation in a multi-employer defined benefit plan, who
meet the Pension Plan's service requirement. R.D. Hubbard, G. Michael
Finnigan, and Donald M. Robbins are the only officers or directors of
Hollywood Park who participated in the Pension Plan. At the time their Pension
Plan benefits were frozen (September 1, 1996), Messrs. Hubbard, Finnigan and
Robbins had two, six and ten years, respectively, of qualified years of
service. Only amounts earned by Messrs. 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 on survivor benefits)
at a normal retirement age of 65 in 1996, after various years of qualified
service, at selected average annual compensation levels. The amounts listed in
the table are not subject to any deduction for Social Security or other offset
amounts. Due to the freezing of Pension Plan benefits as of September 1, 1996,
and based on their actual years of qualified service and annual compensation
levels, the annual retirement benefits under the Pension Plan for Messrs.
Hubbard, Finnigan and Robbins, expressed as a joint 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. Hollywood Park has no further obligation to fund
the Pension Plan because the plan's assets were sufficient to meet its benefit
obligations upon termination.
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. Messrs.
Hubbard, Finnigan and Robbins participated in the SERP, prior to its
termination.
COMPENSATION COMMITTEE REPORT ON EXECUTIVE COMPENSATION
The Compensation Committee of the Board of Directors (the "Compensation
Committee"), 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 and card clubs in Southern California, and horse and dog racing
tracks in Kansas and Arizona. 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
133
<PAGE>
objectives, Hollywood Park adopted the 1993 Plan and the 1996 Plan, 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
July 1997, options aggregating 45,000, 25,000 and 25,000 shares were granted
to Messrs. Hubbard, Robbins and Finnigan, respectively, at an exercise price
of $14.75 per share.
From 1993 through the end of 1997, Mr. Hubbard was paid a base salary of
$400,000 per annum. This payment was fixed in 1992 based upon an analysis of
(i) the annual compensation received by the Chief Executive Officer of Santa
Anita Race Track, (ii) the annual base salaries currently being paid to
Messrs. Robbins and Finnigan, (iii) the prominence of Mr. Hubbard in the
business community in general and the horse racing community in particular,
(iv) the level and value of the contribution that the Compensation Committee
believes Mr. Hubbard has made, and can make in the future, to Hollywood Park
and (v) the fact that Mr. Hubbard was willing to accept this amount even
though the Compensation Committee believes that he could command a much higher
compensation level based upon his business experience and expertise.
Commencing January 1, 1998, Mr. Hubbard's base salary was increased to
$500,000 per annum, based upon the above-mentioned factors, and also Hollywood
Park's expansion into the card club and gaming business, where executive
salaries tend to be substantially higher than those in the thoroughbred horse
racing business. While Mr. Hubbard's base salary is not dependent upon
Hollywood Park's performance, it is anticipated that any bonuses he may
receive, based upon the recommendation of the Compensation Committee and the
approval of the Board of Directors, would be, at least in part, so dependent.
January 26, 1998
COMPENSATION COMMITTEE
J.R. Johnson (Chairman)
Lynn P. Reitnouer
134
<PAGE>
PERFORMANCE GRAPH
Set forth below is a graph comparing the cumulative total stockholder return
for Hollywood Park Common Stock with the cumulative total returns for a
designated Peer Group Index and the Nasdaq Market Index. Also included in the
graph is the cumulative total return for the Media General Standard Industrial
Code Index 7999--Amusement and Recreation Services (the "SIC Code Index"),
which Hollywood Park historically included in the performance graph in its
proxy statement but which Hollywood Park intends to replace with the Peer
Group Index. The total cumulative return calculations are for the period
commencing December 31, 1992 and ending December 31, 1997, and include the
reinvestment of dividends.
As a result of the Boomtown Merger, which was completed June 30, 1997,
Hollywood Park now owns and operates land-based, dockside and riverboat
casinos in Nevada, Mississippi and Louisiana, in addition to its historical
race track and California card club operations. The Peer Group Index consists
of publicly-traded multi-jurisdictional gaming companies with small or mid-
sized stock market capitalizations. In addition, like Hollywood Park, none of
the companies in the Peer Group Index currently operates in the Las Vegas or
Atlantic City markets. Hollywood Park believes that, as a result of the
Boomtown Merger, the Peer Group Index will provide a more appropriate
benchmark against which to measure its stock return performance than the SIC
Code Index.
The Peer Group Index is comprised of the following publicly-traded gaming
companies: Ameristar Casinos, Inc. (included in the index since it commenced
trading in November 1993); Argosy Gaming Company (included in the index since
it commenced trading in February 1993); Casino America, Inc. (included in the
index since it commenced trading in August 1992); Harveys Casino Resorts; Lady
Luck Gaming Corporation (included in the index since it commenced trading in
September 1993); Players International, Inc.; and President Casinos, Inc.
COMPARISON OF CUMULATIVE TOTAL RETURN*
AMONG HOLLYWOOD PARK, PEER GROUP INDEX,
SIC CODE INDEX & NASDAQ MARKET INDEX
PERFORMANCE GRAPH APPEARS HERE
<TABLE>
<CAPTION>
Measurement Period HOLLYWOOD PEER GROUP SIC CODE NASDAQ
(Fiscal Year Covered) PARK, INC. INDEX INDEX MARKET INDEX
- --------------------- ---------- ---------- -------- ------------
<S> <C> <C> <C> <C>
Measurement Pt- 1992 $100.00 $100.00 $100.00 $100.00
FYE 1993 $319.15 $220.31 $162.12 $119.95
FYE 1994 $117.02 $108.14 $128.62 $125.94
FYE 1995 $107.05 $ 76.02 $185.49 $163.35
FYE 1996 $159.57 $ 53.66 $194.3 $202.99
FYE 1997 $234.04 $ 46.14 $202.79 $248.3
</TABLE>
- -------
* ASSUMES $100 INVESTED ON DECEMBER 31, 1992 IN HOLLYWOOD PARK COMMON STOCK,
PEER GROUP INDEX, MEDIA GENERAL STANDARD INDUSTRIAL CODE 7999 INDEX--
AMUSEMENT AND RECREATION SERVICES & THE NASDAQ MARKET INDEX. TOTAL RETURN
ASSUMES REINVESTMENT OF DIVIDENDS. VALUES ARE AS OF DECEMBER 31 OF EACH
YEAR.
The above graph shows historical stock price performance (including
reinvestment of dividends) and is not necessarily indicative of future
performance.
135
<PAGE>
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Except as set forth below regarding the interest rate under the Parrott
Promissory Note, Hollywood Park believes that the terms of the following
transactions were at least as favorable as could have been obtained by
Hollywood Park from third parties in arms length transactions.
Since November 1993, Hollywood Park has had an aircraft time sharing
agreement with R.D. Hubbard Enterprises, Inc. ("Hubbard Enterprises"), which
is wholly owned by Mr. Hubbard. The agreement 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 $106,000 in 1997, $120,000 in 1996, and $126,000 in
1995.
In May 1988, Boomtown acquired all of the outstanding stock of Boomtown
Hotel and Casino, Inc. ("Boomtown Casino") for $16.7 million in cash (the
"1988 Acquisition"). In order to finance the 1988 Acquisition, including the
retirement of existing debt, Boomtown sold equity securities to Kenneth Rainin
and Timothy J. Parrott, and Boomtown Casino entered into various loan
documents with Merrill Lynch Interfunding Inc. Pursuant to a stock purchase
agreement, Mr. Rainin purchased 2,000 shares of Boomtown preferred stock and
3,042,000 shares of Boomtown common stock for an aggregate purchase price of
approximately $4 million in cash, and Mr. Parrott purchased 270,738 shares of
Boomtown common stock for an aggregate purchase price of $222,000, of which
$1,000 was paid in cash and $221,000 by a promissory note (the "Promissory
Note") secured by a pledge to Boomtown of all of the shares owned by Mr.
Parrott. The Promissory Note, as amended in April 1997, provides that (i)
interest on the Promissory Note, which accrues at a rate of 6.0% per annum,
compounded annually, is payable in arrears on April 7th of each year,
commencing April 7, 1998, and (ii) principal is payable in four annual
installments beginning April 7, 1998. The Promissory Note was previously
amended in November 1994 to provide that the shares owned by Mr. Parrott would
be released from the pledge and would no longer secure the amounts outstanding
under the Promissory Note. Hollywood Park notes that the interest rate of 6%
under the amended Promissory Note is less than Hollywood Park's current
borrowing rate. However, this interest rate was in effect under the original
version of the Promissory Note executed in 1988 prior to Boomtown's public
offering and Hollywood Park's subsequent acquisition of Boomtown.
On July 1, 1997, Hollywood Park completed a swap pursuant to the Blue
Diamond Swap Agreement entered into on August 12, 1996, by and between
Boomtown, Blue Diamond Hotel and Casino, Inc. ("Blue Diamond"), Hollywood
Park, Edward P. Roski, Jr., IVAC, a California general partnership ("IVAC"),
and Majestic Realty Co., as amended (the "Swap Agreement"). Under the Swap
Agreement, immediately following the consummation on June 30, 1997 of the
Boomtown Merger, Boomtown and its subsidiaries transferred their interests in
the Blue Diamond hotel/casino facilities in Las Vegas (including Boomtown's
leasehold interest in the land and certain IVAC Loans (as defined below) which
were transferred to IVAC) (collectively, the "Las Vegas Resort") to Majestic
Resorts, LLC, an affiliate of Mr. Roski ("Majestic"), in exchange for cash,
two unsecured promissory notes aggregating $8.5 million in principal amount by
IVAC and assumption by Mr. Roski and Majestic of certain liabilities (the
"Blue Diamond Swap"). In accordance with the terms of the Swap Agreement, Mr.
Roski resigned from Boomtown's Board of Directors, effective as of the
effective date of the Boomtown Merger.
On July 1, 1997, concurrently with the Blue Diamond Swap, Hollywood Park and
Mr. Roski consummated a Stock Purchase Agreement dated August 12, 1996 (the
"Stock Purchase Agreement") pursuant to which Hollywood Park repurchased from
Mr. Roski 446,491 shares of Hollywood Park Common Stock receivable by him in
the Boomtown Merger. The purchase price of approximately $3.5 million was paid
for by an unsecured promissory note having an interest rate equal to the prime
rate plus one percent (1%) per annum and providing for four equal annual
principal payments plus accrued interest and maturing on the date that is four
years after the closing.
Prior to the opening of the Las Vegas Resort, Boomtown owned a 50% interest
in Blue Diamond, the operating company leasing the hotel/casino facility and
the land in Las Vegas, and was primarily responsible for
136
<PAGE>
the development and management of the Las Vegas Resort. In June 1994, Boomtown
exercised its right to acquire the remaining 50% of Blue Diamond from Mr.
Roski in exchange for 714,286 shares of Boomtown Common Stock. Mr. Roski was a
member of the Board of Directors of Boomtown and an affiliate of IVAC, which
owns the land and building leased by Boomtown for the Las Vegas Resort.
Boomtown loaned IVAC $27.3 million (the "IVAC Loans") which was used to help
construct the Las Vegas Resort. The IVAC Loans were secured by separate deeds
of trust on the Las Vegas Resort, which deeds of trusts are subordinate to
separate deeds of trust securing Blue Diamond's and Boomtown's obligations in
connection with an indenture relating to a debt offering. Boomtown received
interest income of $2.7 million annually from IVAC as a result of these loans.
In turn, Blue Diamond paid rent to IVAC in the amount of $5.4 million annually
to lease the facility.
Blue Diamond further had the right to purchase the Las Vegas Resort from
IVAC in accordance with terms of an option which expired in November 1996. As
discussed above, on July 1, 1997, Hollywood Park divested all interests in the
Las Vegas Resort by completing a swap pursuant to the Swap Agreement.
Mr. Parrott is employed as Chairman of the Board and Chief Executive Officer
of Boomtown pursuant to an Employment Agreement entered into as of October 8,
1995 and amended as of April 7, 1997 (the "Employment Agreement"). The
Employment Agreement provides for a term expiring on May 30, 2000 and a base
salary of at least $375,000 per annum, and entitles Mr. Parrott to participate
in Boomtown's cash bonus plan. During 1997, Mr. Parrott's base salary and cash
bonus totaled $375,000 and $102,442, respectively. In addition, the Employment
Agreement provides that in the event of a change of control of Boomtown, all
options granted to Mr. Parrott prior to such change of control shall become
fully vested and exercisable. The Boomtown Merger constituted such a change of
control. The Employment Agreement also provides that in the event of
termination of employment without cause, Mr. Parrott shall receive severance
payments consisting of, among other things, base salary for three years after
termination, subject to mitigation in the event Mr. Parrott obtains
alternative employment during the applicable severance payment period, as well
as accelerated vesting of Mr. Parrott's stock options. Under the Employment
Agreement, Mr. Parrott is also entitled to receive such fringe benefits and
perquisites as may be granted or established by Boomtown from time to time,
including an automobile allowance.
Effective May 7, 1997, Mark A. Sterbens resigned as Hollywood Park's
President and Chief Operating Officer of Gaming. During 1997, Hollywood Park
paid Mr. Sterbens approximately $88,000 in base salary prior to his
termination, and approximately $162,000 in severance after his termination.
SECTION 16(a) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
Based solely upon a review of reports received by Hollywood Park during or
with respect to the year ended December 31, 1997 pursuant to Rule 16a-3(e) of
the Exchange Act, all required reports on Form 3, Form 4 and Form 5 were
timely filed by Hollywood Park's directors, officers, and 10% stockholders,
except that Mr. Ornest failed to file on a timely basis one Form 4 with
respect to one disposition of Hollywood Park Common Stock.
137
<PAGE>
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) and number of shares and percent of the outstanding
Hollywood Park Common Stock beneficially owned as of January 31, 1998, 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. Each individual who is currently expected to be a
director or executive officer of HP Realty or HP Operating Company after the
Reorganization is included in this table.
<TABLE>
<CAPTION>
SHARES PERCENT OF
BENEFICIALLY SHARES
NAME AND ADDRESS OF BENEFICIAL OWNER OWNED(A) OUTSTANDING(B)
- ------------------------------------ ------------ --------------
<S> <C> <C>
R.D. Hubbard............ 2,648,174(c) 10.1%
Hollywood Park, Inc.
1050 South Prairie
Avenue
Inglewood, California
90301
Legg Mason, Inc. ....... 2,474,450(d) 9.4%
111 South Calvert
Street
Baltimore, Maryland
21202
State of Wisconsin
Investment Board....... 1,780,000(e) 6.8%
P.O. Box 7842
Madison, Wisconsin
53707
Timothy J. Parrott...... 484,653(f) 1.9%
J.R. Johnson............ 376,094(g) 1.4%
Harry Ornest............ 164,259(h) *
Warren B. Williamson.... 155,251(i) *
Lynn P. Reitnouer....... 57,334(j) *
Herman Sarkowsky........ 53,272(k) *
Robert T. Manfuso....... 35,667(l) *
Richard J. Goeglein..... 6,125(m) *
Peter L. Harris......... 3,250(n) *
Delbert W. Yocam........ 1,896(o) *
G. Michael Finnigan..... 53,748(p) *
Donald M. Robbins....... 40,672(q) *
Current Directors and
Executive
Officers as a group (13
persons)............... 4,080,395(r) 15.3%
</TABLE>
- --------
* Less than one percent (1%) of the outstanding common shares.
(a) Reflects the conversion of each of Hollywood Park's outstanding Depositary
Shares into 0.8333 shares of Hollywood Park Common Stock effective August
28, 1997.
(b) Assumes exercise of stock options beneficially owned by the named
individual or entity into shares of Hollywood Park Common Stock. Based on
26,284,138 shares outstanding as of January 31, 1998.
(c) Includes 28,333 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 January 31, 1998.
(d) Includes 562,500 shares of Hollywood Park Common Stock received by Legg
Mason Special Investment Trust, Inc. (an affiliate of Legg Mason, Inc.) in
connection with the Boomtown Merger. The Company has assumed that Legg
Mason, Inc. is a beneficial owner of such shares. Based upon information
provided by the stockholder in Schedule 13G filed with the Commission on
February 10, 1997 and upon information received from Legg Mason Special
Investment Trust, Inc. as of August 1996.
138
<PAGE>
(e) Based upon information provided by the stockholder in Schedules 13G filed
with the Commission on January 22, 1998.
(f) Includes 270,278 shares of Hollywood Park Common Stock which Mr. Parrott
has the right to acquire pursuant to options assumed by the Company in
connection with the Boomtown Merger which are exercisable within sixty
days of January 31, 1998.
(g) Includes 7,334 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 January 31, 1998.
(h) Includes 70,000 shares of Hollywood Park Common Stock held by The Ornest
Family Foundation, for which Mr. Ornest and his wife Ruth Ornest act as
trustees. (Mr. Ornest disclaims any pecuniary interest in these shares.)
In addition, as trustees of the Harry and Ruth Ornest Trust, Mr. Ornest
and his wife share the power to vote 60% of the interest in the Ornest
Family Partnership (the "Partnership"), which in turn has the power to
dispose of the 76,300 shares of Hollywood Park Common Stock held in the
name of the Partnership. Also includes 7,334 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 January 31, 1998.
(i) Includes 7,334 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 January 31, 1998.
(j) Includes 7,334 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 January 31, 1998.
(k) Includes 7,334 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 January 31, 1998.
(l) Includes 7,334 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 January 31, 1998.
(m) Includes 4,875 shares of Hollywood Park Common Stock which Mr. Goeglein
has the right to acquire pursuant to options assumed by the Company in
connection with the Boomtown Merger which are exercisable within sixty
days of January 31, 1998.
(n) Includes 3,250 shares of Hollywood Park Common Stock which Mr. Harris has
the right to acquire pursuant to options assumed by the Company in
connection with the Boomtown Merger which are exercisable within sixty
days of January 31, 1998.
(o) Includes 1,896 shares of Hollywood Park Common Stock which Mr. Yocam has
the right to acquire pursuant to options assumed by the Company in
connection with the Boomtown Merger which are exercisable within sixty
days of January 31, 1998.
(p) Includes 38,334 shares of Hollywood Park Common Stock which Mr. Finnigan
has the right to acquire pursuant to options which are exercisable within
sixty days of January 31, 1998.
(q) Includes 38,334 shares of Hollywood Park Common Stock which Mr. Robbins
has the right to acquire pursuant to options which are exercisable within
sixty days of January 31, 1998.
(r) Includes 429,304 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 sixty days of January 31, 1998.
Excluding such shares, the Directors and Executive Officers of Hollywood
Park have beneficial ownership of 3,651,091 shares of Hollywood Park
Common Stock, which represents 13.9% of the shares of Hollywood Park
Common Stock outstanding as of January 31, 1998
139
<PAGE>
ADDITIONAL INFORMATION REGARDING THE ANNUAL MEETING
GENERAL
This Proxy Statement is being furnished to holders of Hollywood Park Common
Stock as part of the solicitation of proxies by the Board for use at the
Annual Meeting to be held on Monday, April 13, 1998 at 9:00 a.m., local time,
at the New York Palace, 455 Madison Avenue, New York, New York, and at any
adjournments or postponements thereof. This Proxy Statement, and the
accompanying Proxy Card, are first being mailed to holders of Hollywood Park
Common Stock on or about February 13, 1998.
RECORD DATE AND OUTSTANDING SHARES
Only holders of record of Hollywood Park Common Stock at the close of
business on February 18, 1998 (the "Record Date") are entitled to notice of
and to vote at the Annual Meeting. As of the close of business on February 9,
1998, there were 26,284,138 shares of Hollywood Park Common Stock outstanding
and entitled to vote, held of record by 3,759 stockholders. Pursuant to NYSE
requirements, a majority, or 13,142,070 of these shares, present in person or
represented by proxy, will constitute a quorum for the transaction of
business. Each Hollywood Park stockholder is entitled to one vote for each
share of Hollywood Park Common Stock held as of the Record Date. A list of
such stockholders entitled to vote will be available for inspection at the
Annual Meeting by any stockholder and, for 10 days prior to the Annual
Meeting, at ChaseMellon Shareholder Services, L.L.C., 450 West 33rd Street,
15th Floor, N.Y., N.Y., 10001.
VOTING OF PROXIES
The accompanying Proxy Card is solicited on behalf of the Board.
Stockholders are requested to complete, date, sign and return the proxy in the
accompanying envelope. All properly executed, returned, and unrevoked proxies
will be voted in accordance with the instructions indicated thereon. EXECUTED
BUT UNMARKED PROXIES WILL BE VOTED FOR THE APPROVAL OF THE REORGANIZATION
AMENDMENTS, THE 1998 OPTION PLAN, THE HP OPERATING COMPANY DIRECTORS PLAN, THE
SUPERMAJORITY ELIMINATION AMENDMENT AND THE GAMING AMENDMENT, AND FOR THE
ELECTION OF EACH DIRECTOR NOMINEE LISTED HEREIN. The Board does not presently
intend to bring any business before the Annual Meeting other than the specific
proposals referred to in this Proxy Statement and specified in the notice of
the Annual Meeting. As to any business that may properly come before the
Annual Meeting, including any motion made for adjournment of the Annual
Meeting (including for purposes of soliciting additional votes for approval of
the proposals described in this Proxy Statement and for election of
directors), the proxies will vote in their discretion. Any Hollywood Park
stockholder who has given a proxy may revoke it at any time before it is
exercised at the Annual Meeting, by (i) filing a written notice of revocation
with, or delivering a duly executed proxy bearing a later date to, Secretary,
Hollywood Park, Inc., 1050 South Prairie Avenue, Inglewood, California 90301,
or (ii) attending the Annual Meeting and voting in person (although attendance
at the Annual Meeting will not, by itself, revoke a proxy).
Messrs. Hubbard and Ornest have indicated that they intend to vote in favor
of the Reorganization Amendments, the other proposals and the director
nominees described in this Proxy Statement. Although Hollywood Park's other
directors and executive officers have not indicated their voting intentions,
Hollywood Park believes that each of them will also vote in favor of such
proposals and director nominees.
ABSTENTIONS; BROKER NON-VOTES
If an executed proxy is returned and the stockholder has specifically
abstained from voting on any matter, the shares represented by such proxy will
be considered present at the Annual Meeting for purposes of determining a
quorum and for purposes of calculating the vote, but will not be considered to
have been voted in favor of such matter. If an executed proxy is returned by a
broker holding shares in street name that indicates that the broker does not
have discretionary authority as to certain shares to vote on one or more
matters, such shares will be considered present at the meeting for purposes of
determining a quorum, but will not be considered to be represented at the
meeting for purposes of calculating the votes cast with respect to such
matter. Thus, for
140
<PAGE>
purposes of determining whether the Reorganization Amendments, the
Supermajority Elimination Amendment and the Gaming Amendment have been
approved, abstentions and broker non-votes will be treated as votes against
the proposal. For purposes of determining whether the 1998 Option Plan and the
HP Operating Company Directors Plan have been approved, abstentions will be
treated as votes against the proposal and broker non-votes will not be counted
as represented or voting at the meeting. With respect to the election of
directors, abstentions and broker non-votes will have no effect on the outcome
of the vote.
SOLICITATION OF PROXIES AND EXPENSES
Hollywood Park will bear the cost of the solicitation of proxies in the
enclosed form from its stockholders. In addition to solicitation by mail, the
directors, officers and employees of Hollywood Park may solicit proxies from
stockholders by telephone, telegram, letter, facsimile or in person. Following
the original mailing of the proxies and other soliciting materials, Hollywood
Park will request that brokers, custodians, nominees and other record holders
forward copies of the proxy and other soliciting materials to persons for whom
they hold shares of Hollywood Park Common Stock and request authority for the
exercise of proxies. In such cases, Hollywood Park will reimburse such record
holders for their reasonable expenses. Hollywood Park has retained D.F. King &
Co., Inc. to assist in the solicitation of proxies at a cost (including
brokers' expenses) of approximately $20,000 plus certain out-of-pocket
expenses.
NO DISSENTERS' RIGHTS
Stockholders of Hollywood Park will not be entitled to appraisal rights
under Delaware law in connection with the Reorganization or any of the
proposals set forth in this Proxy Statement.
STOCKHOLDER PROPOSALS FOR THE NEXT ANNUAL MEETING
Under Hollywood Park's By-Laws, stockholders who wish to present proposals
for action, or to nominate directors, at the next annual meeting of
stockholders of Hollywood Park (that is, the next annual meeting following the
Annual Meeting to which this Proxy Statement relates) must give written notice
thereof to the Secretary of Hollywood Park at the address set forth on the
cover page of this Proxy Statement in accordance with the then current
provisions of Hollywood Park's By-Laws. The By-Laws currently require that
such notice be given not later than 90 days in advance of such meeting or, if
later, the seventh day following the first public announcement of such meeting
and must contain the information required by Section 2.13 of Article II of
Hollywood Park's By-Laws.
In order to be eligible for inclusion in Hollywood Park's proxy statement
and proxy card for the next annual meeting pursuant to Rule 14a-8 under the
Exchange Act, stockholder proposals would have to be received by the Secretary
of Hollywood Park no later than October 16, 1998 if the next annual meeting
were held in April 1999. However, Hollywood Park may elect to hold its next
annual meeting at a different time of year than the time of year of this
Annual Meeting, in which event such stockholder proposals would have to be
received by Hollywood Park a reasonable time before Hollywood Park's
solicitation is made. Further, in order for such stockholder proposals to be
eligible to be brought before the stockholders at the next annual meeting, the
stockholder submitting such proposals must also comply with the procedures,
including the deadlines, required by Hollywood Park's then current By-Laws, as
referenced in the preceding paragraph. Stockholder nominations of directors
are not stockholder proposals within the meaning of Rule 14a-8 and are not
eligible for inclusion in Hollywood Park's proxy statement.
If the Reorganization is completed, notice of director nominations and
stockholder proposals relating to the 1999 annual meetings of HP Realty and HP
Operating Company (which are expected to be held on the same date) will be
subject to the same notice requirements and deadlines as those described above
for Hollywood Park.
141
<PAGE>
INDEPENDENT PUBLIC ACCOUNTANTS
The firm of Arthur Andersen LLP served as Hollywood Park's independent
public accountants for the fiscal years ended December 31, 1996 and December
31, 1997. Representatives of Arthur Andersen are expected to be present at the
Annual Meeting and will be available to respond to appropriate questions and
to make any statements they desire.
ADJOURNMENT OF MEETING
In the event that there are not sufficient votes to approve the
Reorganization Amendments at the time of the Annual Meeting, such proposal
could not be approved unless the Annual Meeting were adjourned in order to
permit further solicitation of proxies from holders of Hollywood Park Common
Stock. Proxies that are being solicited by the Board grant the discretionary
authority to vote for any such adjournment, if necessary, except for proxies
indicating a vote against the Reorganization Amendments. If it is necessary to
adjourn the Annual Meeting and the adjournment is for a period of less than 30
days, no notice of the time and place of the adjourned meeting is required to
be given to stockholders other than an announcement of such time and place at
the Annual Meeting. A majority of the shares represented and voting at the
Annual Meeting is required to approve any such adjournment, provided that a
quorum is present. If a quorum is not present, then either the chairman of the
meeting or the stockholders entitled to vote at the meeting may adjourn the
meeting.
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE
The following documents filed by Hollywood Park with the Securities and
Exchange Commission (the "Commission") are incorporated herein by reference:
1. Annual Report on Form 10-K for the fiscal year ended December 31,
1996, as amended by the Annual Report on Form 10-K/A filed with the
Commission on November 5, 1997.
2. Quarterly Report on Form 10-Q for the quarterly period ended March 31,
1997.
3. Quarterly Report on Form 10-Q for the quarterly period ended June 30,
1997.
4. Current Report on Form 8-K, filed with the Commission on July 15,
1997.
5. Current Report on Form 8-K, filed with the Commission on August 12,
1997.
6. Registration Statement on Form S-4 (Registration No. 333-34471),
originally filed with the Commission on August 27, 1997, and all amendments
thereto.
7. Quarterly Report on Form 10-Q for the period ending September 30,
1997.
8. Registration Statement on Form 8-A, filed with the Commission on
November 21, 1997.
Hollywood Park will provide without charge to each person, including any
beneficial owner, to whom a copy of this Proxy Statement is delivered, on the
telephone or written request of any such person, a copy of any or all of the
foregoing documents incorporated herein by reference (other than any exhibits
to such documents which are not specifically incorporated herein by
reference). Requests should be directed to: Hollywood Park, Inc., Investor
Relations, 1050 South Prairie Avenue, Inglewood, California 90301 (Telephone
(310) 419-1610). In order to ensure timely delivery of the documents in
advance of the Annual Meeting, any such request should be made by March 23,
1998.
All reports and definitive proxy or information statements filed by
Hollywood Park pursuant to Sections 13(a), 13(c), 14 or 15(d) of the Exchange
Act subsequent to the date of this Proxy Statement and prior to the date of
the Annual Meeting or any adjournment thereof shall be deemed to be
incorporated by reference into this Proxy Statement from the date of filing of
such documents. Any statement contained in a document incorporated or deemed
to be incorporated herein shall be deemed to be modified or superseded for
purposes of this Proxy Statement to the extent that a statement contained
herein or in any other subsequently filed document which also is or is deemed
to be incorporated by reference herein modifies or supersedes such statement.
Any such statement so modified or superseded shall not be deemed, except as so
modified or superseded, to constitute a part of this Proxy Statement.
142
<PAGE>
AVAILABLE INFORMATION
Hollywood Park is subject to the informational requirements of the Exchange
Act and, in accordance therewith, file reports, proxy and information
statements and other information with the Commission. These materials can be
inspected and copied at the public reference facilities maintained by the
Commission at Room 1024, 450 Fifth Street, N.W., Washington, D.C. 20549 and at
the Commission's regional offices at Northwest Atrium Center, 500 West Madison
Street, Suite 1400, Chicago, Illinois 60661 and 7 World Trade Center, 13th
Floor, New York, New York 10048. The Commission maintains a Web site that
contains reports, proxy and information statements and other information
regarding registrants that file electronically with the Commission. Such
reports, proxy and information statements and other information may be found
on the Commission's site address, http://www.sec.gov. Copies of these
materials can also be obtained from the Commission at prescribed rates by
writing to the Public Reference Section of the Commission, 450 Fifth Street,
N.W., Washington, D.C. 20549. Such reports, proxy and information statements
and other information concerning Hollywood Park can also be inspected (i) if
filed with the Commission before December 1, 1997, at the offices of the
National Association of Securities Dealers, Inc., Reports Section, 1935 K
Street, N.W., Washington, D.C. 20006, or (ii) if filed with the Commission on
or after December 1, 1997, at the offices of the New York Stock Exchange,
20 Broad Street, New York, N.Y. 10005.
Hollywood Park and HP Operating Company will file with the Commission a
Registration Statement on Form 8-A and Form 10, respectively, with respect to
the shares of HP Realty Common Stock and HP Operating Company Common Stock to
be received by the stockholders of Hollywood Park in the Reorganization.
143
<PAGE>
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
HOLLYWOOD PARK, INC.
Report of Arthur Andersen LLP, Independent Public Accountants............ S-2
Consolidated Balance Sheets.............................................. S-3
Consolidated Statements of Operations.................................... S-4
Consolidated Statements of Changes in Stockholders' Equity............... S-5
Consolidated Statements of Cash Flows.................................... S-6
Notes to Consolidated Financial Statements............................... S-7
BOOMTOWN, INC.
Report of Ernst & Young LLP, Independent Auditors........................ S-42
Consolidated Balance Sheets.............................................. S-43
Consolidated Statements of Operations.................................... S-44
Consolidated Statements of Stockholders' Equity.......................... S-45
Consolidated Statements of Cash Flows.................................... S-46
Notes to Consolidated Financial Statements............................... S-47
</TABLE>
S-1
<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, 1996, and 1995, and the related consolidated statements of
operations, stockholders' equity and cash flows for each of the three years in
the period ended December 31, 1996. 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, 1996, and 1995, and the results of their
operations and their cash flows for each of the three years in the period
ended December 31, 1996 in conformity with generally accepted accounting
principles.
Arthur Andersen LLP
Los Angeles, California
February 18, 1997
S-2
<PAGE>
HOLLYWOOD PARK, INC.
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
AS OF
---------------------------------
DECEMBER 31,
------------------ SEPTEMBER 30,
1996 1995 1997
-------- -------- -------------
(UNAUDITED)
ASSETS
------ (IN THOUSANDS)
<S> <C> <C> <C>
Current Assets:
Cash and cash equivalents.................... $ 11,922 $ 22,406 $ 22,007
Restricted cash.............................. 4,486 3,126 1,209
Short term investments....................... 4,766 6,447 0
Other receivables, net of allowance for
doubtful accounts of $1,111,000 in 1997,
$1,089,000 in 1996, and $1,841,00 in 1995... 7,110 8,147 10,049
Prepaid expenses and other assets............ 6,215 3,888 20,057
Deferred tax assets.......................... 6,422 4,888 8,103
Current portion of notes receivable.......... 38 34 41
-------- -------- --------
Total current assets.................... 40,959 48,936 61,466
Notes receivable.............................. 819 857 9,450
Property, plant and equipment, net............ 130,835 174,717 293,737
Goodwill and lease with TRAK East, net........ 20,370 28,024 33,342
Long term gaming assets....................... 0 19,063 0
Other assets.................................. 12,903 11,706 15,384
-------- -------- --------
$205,886 $283,303 $413,379
======== ======== ========
<CAPTION>
LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
<S> <C> <C> <C>
Current Liabilities:
Accounts payable............................. $ 10,043 $ 12,518 $ 10,625
Accrued lawsuit settlement................... 2,750 5,232 2,750
Accrued liabilities.......................... 9,733 13,762 17,174
Accrued compensation......................... 4,198 3,295 6,843
Gaming liabilities........................... 2,499 3,998 3,696
Racing liabilities........................... 6,106 3,836 2,610
Current portion of notes payable............. 35 32,310 4,005
-------- -------- --------
Total current liabilities............... 35,364 74,951 47,703
Notes payable................................. 282 15,629 132,163
Gaming liabilities............................ 0 16,894 0
Deferred tax liabilities...................... 9,065 10,083 11,005
-------- -------- --------
Total liabilities....................... 44,711 117,557 190,871
Minority interests............................ 3,015 0 3,033
Stockholders' Equity
Capital stock--
Preferred--$1.00 par value, authorized
250,000 shares; none issued and
outstanding in 1997, and 27,499 issued
and outstanding in 1996 and 1995......... 28 28 0
Common--$.10 par value authorized
40,000,000 shares; 26,186,724 issued and
outstanding in 1997, 18,332,016 in 1996
and 18,504,798 in 1995................... 1,833 1,850 2,619
Capital in excess of par value.............. 167,074 168,479 222,023
Accumulated deficit......................... (10,775) (4,611) (5,167)
-------- -------- --------
Total stockholders' equity.............. 158,160 165,746 219,475
-------- -------- --------
$205,886 $283,303 $413,379
======== ======== ========
</TABLE>
See accompanying notes to consolidated financial statements.
S-3
<PAGE>
HOLLYWOOD PARK, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
FOR THE NINE
MONTHS ENDED
FOR THE YEARS ENDED DECEMBER 31, SEPTEMBER 30,
---------------------------------- ---------------
1996 1995 1994 1997 1996
---------- ---------- ---------- ------- -------
(UNAUDITED)
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C>
REVENUES:
Gaming.................. $ 50,717 $ 26,656 $ 11,745 $83,990 $37,917
Racing.................. 71,308 77,036 78,719 48,084 50,897
Food and beverage....... 13,947 19,783 20,540 13,016 10,516
Hotel and recreational
vehicle park........... 0 0 0 581 0
Truck stop and service
station................ 0 0 0 4,897 0
Other income............ 7,253 7,097 6,320 7,781 5,197
---------- ---------- ---------- ------- -------
143,225 130,572 117,324 158,349 104,527
---------- ---------- ---------- ------- -------
EXPENSES:
Gaming.................. 27,249 4,919 0 45,117 19,516
Racing.................. 30,167 29,574 32,099 21,615 21,623
Food and beverage....... 19,573 25,162 22,318 16,920 14,058
Hotel and recreational
vehicle park........... 0 0 0 199 0
Truck stop and service
station................ 0 0 0 4,461 0
Administrative.......... 41,477 46,792 39,858 38,622 31,575
Other................... 2,485 3,200 2,121 3,262 2,028
Depreciation and
amortization........... 10,695 11,384 9,563 11,939 7,898
REIT restructuring...... 0 0 0 609 0
Write off of investment
in Sunflower........... 11,412 0 0 0 11,412
Lawsuit settlement...... 0 6,088 0 0 0
Casino pre-opening and
training expenses...... 0 0 2,337 0 0
Turf Paradise
acquisition costs...... 0 0 627 0 0
---------- ---------- ---------- ------- -------
143,058 127,119 108,923 142,744 108,110
---------- ---------- ---------- ------- -------
Operating income (loss)... 167 3,453 8,401 15,605 (3,583)
Interest expense........ 942 3,922 3,061 3,782 918
---------- ---------- ---------- ------- -------
Income (loss) before
minority interest and
taxes.................... (775) (469) 5,340 11,823 (4,501)
Minority interest....... 15 0 0 80 0
Income tax expense...... 3,459 693 1,568 4,624 3,025
---------- ---------- ---------- ------- -------
Net income (loss)......... $ (4,249) $ (1,162) $ 3,772 $ 7,119 $(7,526)
========== ========== ========== ======= =======
Dividend requirements on
convertible preferred
stock.................... $ 1,925 $ 1,925 $ 1,925 $ 1,520 $ 1,443
Net income (loss)
available to (allocated
to) common shareholders.. $ (6,174) $ (3,087) $ 1,847 $ 5,599 $(8,969)
========== ========== ========== ======= =======
Per common share:
Net income (loss)--
primary................ $ (0.33) $ (0.17) $ 0.10 $ 0.27 $ (0.48)
Net income (loss)--fully
diluted................ $ (0.33) $ (0.17) $ 0.10 $ -- $ (0.48)
Number of shares--
primary.................. 18,505 18,399 18,224 20,596 18,605
Number of shares--fully
diluted.................. 20,797 20,691 20,516 -- 20,896
</TABLE>
See accompanying notes to consolidated financial statements.
S-4
<PAGE>
HOLLYWOOD PARK, INC.
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
FOR THE YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994 AND
THE NINE MONTHS ENDED SEPTEMBER 30, 1997
<TABLE>
<CAPTION>
CAPITAL IN TOTAL
PREFERRED COMMON EXCESS OF ACCUMULATED STOCKHOLDERS'
STOCK STOCK PAR VALUE DEFICIT EQUITY
--------- ------ -------------- ----------- -------------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
BALANCE AT YEAR END
1993................... $28 $1,772 $155,725 $ (3,325) $154,200
Net income............ 0 0 0 3,772 3,772
Net income--Turf
Paradise six months
ended December 31,
1993................. 0 0 0 198 198
Issuance of common
stock to acquire--
Sunflower Racing,
Inc.................. 0 59 11,099 0 11,158
Issuance of contingent
shares related to
Sunflower Racing,
Inc. acquisition..... 0 6 (6) 0 0
Net changes related to
Turf Paradise
equity............... 0 0 74 (222) (148)
Preferred stock
dividends--$70.00 per
share................ 0 0 0 (1,925) (1,925)
--- ------ -------- -------- --------
BALANCE AT YEAR END
1994................... 28 1,837 166,892 (1,502) 167,255
Net loss.............. 0 0 0 (1,162) (1,162)
Issuance of common
stock to acquire--
Pacific Casino
Management, Inc...... 0 13 1,587 0 1,600
Investment in bonds--
unrealized holding
loss................. 0 0 0 (22) (22)
Preferred stock
dividends--$70.00 per
share................ 0 0 0 (1,925) (1,925)
--- ------ -------- -------- --------
BALANCE AT YEAR END
1995................... 28 1,850 168,479 (4,611) 165,746
Net loss.............. 0 0 0 (4,249) (4,249)
Issuance of common
stock to acquire--
Pacific Casino
Management, Inc...... 0 5 535 0 540
Repurchase and
retirement of common
stock................ 0 (22) (1,940) 0 (1,962)
Investment in bonds--
unrealized holding
gain................. 0 0 0 10 10
Preferred stock
dividends--$70.00 per
share................ 0 0 0 (1,925) (1,925)
--- ------ -------- -------- --------
BALANCE AT YEAR END
1996................... 28 1,833 167,074 (10,775) 158,160
Net income............ 0 0 0 7,119 7,119
Issuance of common
stock to acquire--
Pacific Casino
Management, Inc...... 0 3 497 0 500
Issuance of common
stock to acquire--
Boomtown, Inc. ...... 0 581 56,423 0 57,004
Common stock options
exercised............ 0 18 1,650 0 1,668
Repurchase and
retirement of common
stock................ 0 (45) (3,420) 0 (3,465)
Investment in bonds--
unrealized holding
gain................. 0 0 0 9 9
Conversion of
convertible
preferred............ (28) 229 (201) 0 0
Preferred stock
dividends--$55.27 per
share................ 0 0 0 (1,520) (1,520)
--- ------ -------- -------- --------
BALANCE AT SEPTEMBER 30,
1997 (UNAUDITED)....... $ 0 $2,619 $222,023 $ (5,167) $219,475
=== ====== ======== ======== ========
</TABLE>
See accompanying notes to consolidated financial statements.
S-5
<PAGE>
HOLLYWOOD PARK, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
FOR THE YEARS ENDED FOR THE NINE MONTHS
DECEMBER 31, ENDED SEPTEMBER 30,
---------------------------- ------------------------
1996 1995 1994 1997 1996
-------- -------- -------- --------- --------
(UNAUDITED)
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
CASH FLOWS FROM
OPERATING ACTIVITIES:
Net income (loss)....... $ (4,249) $ (1,162) $ 3,772 $ 7,119 $ (7,526)
Adjustments to reconcile
net income (loss) to
net cash provided by
(used in) operating
activities:
Depreciation and
amortization.......... 10,027 10,857 10,064 11,939 7,342
Minority interests..... 15 0 0 17 0
Changes in accounts due
to deconsolidation of
subsidiary in
bankruptcy:
Property, plant and
equipment............. 58,380 0 0 0 58,380
Secured notes
payable............... (28,918) 0 0 0 (28,918)
Unsecured notes
payable............... (15,323) 0 0 0 (15,323)
Goodwill and lease
with TRAK East........ 6,908 0 0 0 6,908
(Gain) loss on sale or
disposal of property,
plant and equipment.... (2) 64 55 488 (3)
Unrealized gain on short
term bond investing.... 10 0 0 10 11
Changes in assets and
liabilities, net of
effects of the purchase
of a business:
(Increase) decrease in
restricted cash....... (1,360) (2,427) (490) 3,277 2,292
Increase in casino
lease and related
interest receivable,
net................... 0 (9,204) (11,745) 0 0
Decrease (increase) in
other receivables,
net................... 1,037 77 (5,022) (944) 1,891
(Increase) decrease in
prepaid expenses and
other assets.......... (3,524) (304) (5,488) 894 2,897
(Increase) decrease in
deferred tax assets... (1,534) (349) (3,207) (1,681) 10
(Decrease) increase in
accounts payable...... (2,475) 5,685 (1,596) (2,151) (3,920)
(Decrease) increase in
accrued lawsuit
settlement............ (2,482) 5,232 0 0 (2,482)
(Decrease) increase in
accrued gaming
liabilities........... (1,499) 3,998 0 1,197 (1,192)
(Decrease) increase in
accrued liabilities... (3,489) 6,437 1,612 (10,391) (970)
(Decrease) increase in
accrued
compensation.......... 903 (761) 1,559 (1,788) (262)
Increase (decrease) in
racing liabilities.... 2,270 1,404 1,026 (3,496) (2,313)
(Decrease) increase in
deferred tax
liabilities........... (1,018) 744 2,173 1,569 (5,061)
-------- -------- -------- --------- --------
Net cash provided by
(used in) operating
activities.......... 13,677 20,291 (7,287) 6,059 11,761
-------- -------- -------- --------- --------
Cash flows from
investing activities:
Additions to property,
plant and equipment... (23,786) (25,150) (27,584) (23,059) (17,969)
Receipts from sale of
property, plant and
equipment............. 9 98 75 114 9
Principal collected on
notes receivable...... 34 31 31 31 25
Purchase of short term
investments........... (16,888) (35,875) (96,822) (1,946) (14,009)
Proceeds from short
term investments...... 18,569 29,428 116,625 6,712 16,958
Long term gaming
assets................ 2,169 (2,169) 0 0 294
Cash acquired in the
purchase of a
business, net of
transaction and other
costs................. 0 715 344 12,264 0
-------- -------- -------- --------- --------
Net cash used in
investing
activities.......... (19,893) (32,922) (7,331) (5,884) (14,692)
-------- -------- -------- --------- --------
Cash flows from
financing activities:
Proceeds from
unsecured notes
payable............... 0 1,681 1,850 125,000 0
Proceeds from secured
notes payable......... 0 3,358 2,300 112,000 0
Payment of unsecured
notes payable......... (23) (3,813) (5,019) (31) (30)
Payment of secured
notes payable......... (3,358) (1,333) (5,998) (116,282) (3,358)
Payment of 11.5%
Boomtown First
Mortgage Notes........ 0 0 0 (110,924) 0
Payments under capital
lease obligations..... 0 (53) (135) 0 0
Payments from minority
interest partners..... 3,000 0 0 0 3,000
Common stock
repurchase and
retirement............ (1,962) 0 0 0 (1,961)
Turf Paradise equity
transactions.......... 0 0 50 0 0
Common stock options
exercised............. 0 0 0 1,667 0
Dividends paid to
preferred
stockholders.......... (1,925) (1,925) (1,925) (1,520) (1,443)
-------- -------- -------- --------- --------
Net cash provided by
(used for) financing
activities.......... (4,268) (2,085) (8,877) 9,910 (3,792)
-------- -------- -------- --------- --------
Increase (decrease) in
cash equivalents....... (10,484) (14,716) (23,495) 10,085 (6,723)
Cash and cash
equivalents at the
beginning of the
period................. 22,406 37,122 60,617 11,922 22,406
-------- -------- -------- --------- --------
Cash and cash
equivalents at the end
of the period.......... $ 11,922 $ 22,406 $ 37,122 $ 22,007 $ 15,683
======== ======== ======== ========= ========
</TABLE>
See accompanying notes to consolidated financial statements.
S-6
<PAGE>
HOLLYWOOD PARK, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
CONSOLIDATION The consolidated financial statements for the year ended
December 31, 1996, included the accounts of Hollywood Park, Inc. (the
"Company" or "Hollywood Park") and its wholly owned subsidiaries: Hollywood
Park Operating Company (which has two wholly owned subsidiaries, Hollywood
Park Food Services, Inc. and Hollywood Park Fall Operating Company), Sunflower
Racing, Inc. ("Sunflower") (which has one wholly owned subsidiary, SR Food and
Beverage, Inc.), Turf Paradise, Inc. ("Turf Paradise"), and HP/Compton, Inc.,
which owned 88% of Crystal Park Hotel and Casino Development Company LLC, as
of December 31, 1996, and presently owns 89.8% ("Crystal Park LLC"), which
built and presently leases the Crystal Park Hotel and Casino (the "Crystal
Park Casino"), to an unaffiliated third party. As of June 30, 1997, the
Company owns and operates a casino and hotel in Verdi, Nevada ("Boomtown
Reno"), a riverboat casino in Harvey, Louisiana ("Boomtown New Orleans"), and
a dockside casino in Biloxi, Mississippi ("Boomtown, Biloxi"). Sunflower was
acquired on March 23, 1994, and was accounted for under the purchase method of
accounting. Turf Paradise was acquired on August 11, 1994, and was accounted
for under the pooling of interests method of accounting. Crystal Park began
operations on October 25, 1996. The Hollywood Park-Casino is a division of
Hollywood Park, Inc.
On May 2, 1996, the Kansas Legislature adjourned without passing legislation
that would have allowed additional gaming at Sunflower, thereby permitting
Sunflower to more effectively compete with Missouri riverboat gaming. As a
result of the outcome of the Kansas Legislative session, Hollywood Park wrote
off its approximately $11,412,000 investment in Sunflower. There was no cash
involved with the write off of this investment. On May 17, 1996, Sunflower
filed for reorganization under Chapter 11 of the Bankruptcy Code. Sunflower is
operating during the reorganization, but Sunflower's operating results from
April 1, 1996, forward were not consolidated with Hollywood Park's operating
results.
The consolidated statements for the nine months ended September 30, 1997 and
1996, are unaudited, however, in the opinion of management they reflect all
normal and recurring adjustments that are necessary to present a fair
statement of the financial results for the interim periods. It should be
understood that accounting measurements at the interim dates inherently
involve greater reliance on estimates than at year end. The interim racing
results of operations are not indicative of the results for the full year due
to the seasonality of the horse racing business.
ACQUISITION OF BOOMTOWN, INC. (UNAUDITED). 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 "Merger"). As a result of the 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, (excluding shares repurchased from Edward P. Roski, Jr.
("Roski") and subsequently retired, as described below) were issued in the
Merger.
The Merger was accounted for under the purchase method of accounting for a
business combination, and thus the consolidated balance sheet of Boomtown as
of June 30, 1997, is consolidated with Hollywood Park's, though Boomtown's
consolidated statement of operations is not consolidated with Hollywood
Park's. The purchase price of the Merger was allocated to the identifiable
assets acquired and liabilities assumed based on their estimated fair values
at the date of acquisition. Based on financial analyses prepared by the
Company which considered the impact of general economic, financial and market
conditions on the assets acquired and liabilities assumed, the Company
determined that the estimated fair values approximated their carrying amounts.
The Merger generated approximately $2,683,000 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
S-7
<PAGE>
HOLLYWOOD PARK, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
is not deductible for income tax purposes. The Company anticipates finalizing
any reallocation of the purchase price within the next nine months.
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 Merger on July 1, 1997. Boomtown's Las Vegas property
was divested because it had generated significant operating losses since it
opened, thus reducing the overall profitability of Boomtown. 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 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. The first
note receivable is for $5,000,000, bearing interest at Bank of America
National Trust and Savings Association's ("Bank of America") reference rate
plus 1.5% per year, with annual principal receipts 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 to the Company, in full,
on July 1, 2000. 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 Roski in the Merger for a price of
approximately $3,465,000, payable in the form of a Hollywood Park promissory
note. The promissory note bears interest at Bank of America's reference rate
plus 1.0%. Interest is payable annually and annual principal payments in five
equal installments of approximately $693,000 are due commencing July 1, 1998.
Boomtown Reno is situated on 569 acres (though current operations presently
utilize approximately 61 acres) in Verdi Nevada, two miles from the California
border and seven miles west of downtown Reno, on Interstate 80, the major
highway connecting northern California and Nevada. Boomtown Reno draws a
significant portion of its customers from Interstate 80 traffic. Boomtown Reno
offers a 40,000-square foot casino, with 1,320 slot machines and 44 table
games, a 122-room hotel, a 35,000-square foot family entertainment center, a
16-acre truck stop, a full-service recreational vehicle park, a newly
renovated service station and mini-mart, and other related amenities.
Boomtown New Orleans opened in August 1994 on a 50 acre site in Harvey,
Louisiana, approximately ten miles form the French Quarter of New Orleans.
Gaming operations are conducted from a 250-foot replica of a paddle-wheel
riverboat, offering 911 slot machines and 55 table games in a 30,000-square
foot casino. The land-based facility includes a 20,000-square foot family
entertainment center, a western saloon and dance hall, with restaurant and
buffet services.
As of August 8, 1997, Boomtown New Orleans is wholly owned by the Company.
Previously, Boomtown New Orleans was owned and operated by a Louisiana limited
partnership (the "Louisiana Partnership"), of which 92.5% was owned by
Hollywood Park with the remaining 7.5% owned by Eric Skrmetta ("Skrmetta"). On
November 18, 1996, Boomtown entered into an agreement with Skrmetta under
which it would pay approximately $5,670,000 in return for Skrmetta's interest
in the Louisiana Partnership. Under the terms of the agreement, Boomtown made
a down payment of $500,000, and the Company paid the remaining $5,170,000 on
August 8, 1997.
Boomtown Biloxi opened in July 1994 and occupies 19 acres on Biloxi,
Mississippi's historic Back Bay. The dockside property consists of a land-
based facility which houses all non-gaming amenities including a 20,000-square
foot family entertainment center, food and beverage facilities and a western
themed dance hall and cabaret. Gaming operations are conducted on a 40,000-
square foot barge, which is permanently moored to the land-based facility. The
casino covers 33,632-square feet, offering 1,038 slot machines, 35 table games
and related amenities.
S-8
<PAGE>
HOLLYWOOD PARK, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Boomtown Biloxi is operated by a Mississippi limited partnership (the
"Mississippi Partnership"), of which 85% is owned and controlled by Hollywood
Park, with the remaining 15% owned by Skrmetta. Both Hollywood Park and
Skrmetta have an option, exercisable over a four year period, to exchange
Skrmetta's interest in the Mississippi Partnership, at Skrmetta's option, for
either cash and/or shares of Hollywood Park common stock with an aggregate
value equal to the value of Skrmetta's 15% interest in the Mississippi
Partnership, with such value determined by a formula set forth in the relevant
partnership agreements. On August 13, 1997, Hollywood Park exercised this
option and subsequently supplied Skrmetta with the calculation of the value of
his 15% interest in the Mississippi Partnership. Skrmetta did not agree to
this valuation of his 15% interest, and Hollywood Park and Skrmetta are
currently attempting to reach agreement on a value. In the event that
Hollywood Park and Skrmetta are unable to reach an agreement, Hollywood Park
plans to initiate arbitration proceedings.
The Boomtown Biloxi barge and building shell were owned by National Gaming
Mississippi, Inc., a subsidiary of Chartwell Leisure, Inc. ("National
Gaming"). Boomtown Biloxi leased these assets from National Gaming under a 25-
year lease with a 25-year renewal option, and also received marketing services
from National Gaming. National Gaming received 16% of the adjusted earnings
before interest, taxes, depreciation and amortization ("Adjusted EBITDA"), as
defined in the relevant contract. On August 4, 1997, Hollywood Park executed
an agreement pursuant to which one of the Hollywood Park entities purchased
the assets for $5,250,000, payable through a down payment of approximately
$1,500,000, with the balance paid in three equal annual installments of
$1,250,000. The Adjusted EBITDA participation and other related agreements
were terminated upon repurchase of the assets.
PRO FORMA RESULTS OF OPERATIONS The following pro forma results of
operations were prepared under the assumption that the acquisition of Boomtown
had occurred at the beginning of the period presented. The historical results
of operations of Boomtown (excluding the results of operations of Boomtown's
Las Vegas property, which was divested in connection with the Merger) were
combined with Hollywood Park's. Pro forma adjustments were made for the
following: elimination of the amortization of the issuance costs associated
with Boomtown's First Mortgage Notes; amortization of the issuance costs of
the $125,000,000 of Series A 9.5% Hollywood Park Senior Subordinated Notes due
2007 (the "Series A Notes,"and together with any Series B Notes issued in
replacement thereof, the "Notes"); amortization of the excess purchase price
over net assets acquired in the Merger; elimination of the amortization of the
discount associated with the Boomtown 11.5% First Mortgage Notes; interest
expense associated with the promissory notes from Hollywood Park to the former
lessor of Boomtown's Las Vegas property; elimination of the interest expense
associated with the Boomtown 11.5% First Mortgage Notes; amortization of the
up-front loan fees associated with the Company's Bank Credit Facility;
interest expense associated with the Notes at 9.5%; and the estimated 40% tax
benefit associated with the pro forma adjustments.
S-9
<PAGE>
HOLLYWOOD PARK, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
HOLLYWOOD PARK, INC.
UNAUDITED PRO FORMA COMBINED CONSOLIDATED RESULTS OF OPERATIONS
<TABLE>
<CAPTION>
FOR THE
TWELVE MONTHS
FOR THE NINE MONTHS ENDED ENDED
SEPTEMBER 30, DECEMBER 31,
------------------------- -------------
1997 1996 1996
------------ ------------ -------------
<S> <C> <C> <C>
Revenues:
Gaming.............................. $167,339,000 $158,734,000 $208,699,000
Racing.............................. 48,084,000 50,897,000 71,308,000
Other............................... 43,882,000 43,822,000 56,871,000
------------ ------------ ------------
259,305,000 253,453,000 336,878,000
------------ ------------ ------------
Operating income (loss) (a)........... 24,678,000 (22,968,000) (17,788,000)
Income (loss) before extraordinary
item................................. $ 7,715,000 $(39,867,000) $(37,346,000)
============ ============ ============
Dividend requirements on convertible
preferred stock...................... $ 1,520,000 $ 1,443,000 $ 1,925,000
Income (loss) before extraordinary
item available to (allocated to)
common shareholders.................. $ 6,195,000 $(41,310,000) $(39,271,000)
============ ============ ============
Per common share:
Income (loss) before extraordinary
item--primary...................... $ 0.25 $ (1.72) $ (1.65)
Income (loss) before extraordinary
item--fully diluted................ $ 0.25 $ (1.72) $ (1.65)
</TABLE>
- --------
(a) The 1996 operating loss included the non-recurring write off of Hollywood
Park's investment in Sunflower of $11,412,000, and the non-recurring loss
on Boomtown's sale of its Las Vegas property of $36,562,000.
ACQUISITION OF PACIFIC CASINO MANAGEMENT, INC. The Hollywood Park-Casino was
opened in July 1994 under a third party leasing arrangement with Pacific
Casino Management, Inc. ("PCM"). In 1994, under the California Gaming
Registration Act, it was the position of the California Attorney General that
as a publicly traded company, Hollywood Park was not eligible to register as
an operator of a card club, but could lease the site to a registered operator
unaffiliated with the Company. On August 3, 1995, Senate Bill ("SB") 100 was
enacted into law. SB 100 does the following: (i) allows for a publicly traded
racing association, or a subsidiary thereof, (hereafter the "Racing
Association") to operate a gaming club on the premises of its race track;
(ii) requires the officers, directors and shareholders of 5.0% or more of a
Racing Association (excluding institutional investors) to be licensed by the
Attorney General; (iii) provisionally licenses a Racing Association and its
officers, directors, and 5.0% shareholders to operate a gaming club on the
premises of its race track pending licenses pursuant to sub-paragraph (ii)
above; (iv) allows a Racing Association and its officers, directors and 5.0%
shareholders to have an interest in gaming activities located outside
California that are not legal in California. The provisions of SB 100 are
repealed effective January 1, 1999, unless prior thereto the California
legislature enacts a comprehensive scheme for the regulation of gaming under
the jurisdiction of a gaming control commission. The Company supports SB 900,
currently pending in the California Legislature, which would remove the sunset
clause from SB 100 and, among other things, would allow the Company to operate
the Hollywood Park-Casino beyond December 31, 1998. It is too early in the
legislative session to comment on the prospects of SB 900.
Pursuant to the authority provided by SB 100, on November 17, 1995,
Hollywood Park acquired substantially all of the assets, property and business
of PCM, and assumed substantially all of PCM's liabilities. Prior to the
acquisition, under a lease with the Company, PCM operated the gaming floor
activities of the Hollywood Park-Casino.
S-10
<PAGE>
HOLLYWOOD PARK, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
The purchase price of PCM's net assets was an aggregate $2,640,000, payable
in shares of Hollywood Park common stock, in three installments: (i) shares of
Hollywood Park common stock, having a value of $1,600,000, or 136,008 common
shares, issued on November 17, 1995, (ii) shares of Hollywood Park common
stock, having a value of $540,000, or 48,674 common shares, issued on November
19, 1996 and (iii) shares of Hollywood Park common stock, having a value of
$500,000, or 33,417 common shares, issued on February 10, 1997.
Virtually all of the approximately $21,568,000 of excess acquisition cost
over the recorded value of the net assets acquired from PCM was allocated to
goodwill and will be amortized over 40 years. The amortization of the goodwill
is not deductible for income tax purposes.
ACQUISITION OF SUNFLOWER On May 17, 1996, Sunflower filed for reorganization
under Chapter 11 of the Bankruptcy Code, due to the Kansas Legislature's
failure to pass legislation that would have allowed additional forms of gaming
at Sunflower, and thereby allowing Sunflower to more effectively compete with
Missouri riverboat gaming. On March 31, 1996, Hollywood Park wrote off its
approximately $11,412,000 investment in Sunflower. There was no cash involved
with the write off of this investment.
On March 23, 1994, the Company finalized the transaction to acquire
Sunflower, a greyhound and thoroughbred racing facility located in Kansas
City, Kansas. Sunflower, operating as the Woodlands, became a wholly owned
subsidiary of Hollywood Park, with the transaction accounted for under the
purchase method of accounting. The acquisition price was $15,000,000 paid for
with 591,715 shares of Hollywood Park common stock, with a then market price
of $25.35 per share. For financial reporting purposes, the transaction was
valued at $19.00 per Hollywood Park common share, based on the size of the
block of shares issued in the acquisition relative to the then current trading
volume. Immediately following the acquisition, the Company contributed
$5,000,000 in cash to Sunflower to repay a portion of the subordinated debt
Sunflower owed to Mr. Hubbard, in return for more favorable terms on the
balance of the subordinated debt. Of the approximately $6,625,000 of restated
excess acquisition cost over recorded value of the net assets acquired,
$1,153,000 was allocated to the racing facility lease and management agreement
Sunflower has with The Racing Association of Kansas East ("TRAK East") and was
to be amortized over the remaining lease period of 20 years, with the balance
of $5,472,000 allocated to goodwill, to be amortized over 40 years. The
amortization of the goodwill was not deductible for income tax purposes.
An additional 55,574 shares of Hollywood Park common stock were issued to
Mr. Richard Boushka, a former Sunflower shareholder, as required by the
agreement of merger, because the market price of Hollywood Park common stock
180 days after closing was more than 10% less than the market price on the
closing date of the acquisition. The agreement of merger provided that under
certain circumstances the former Sunflower shareholders were entitled to
receive additional shares of Hollywood Park common stock. As of March 23,
1995, the former Sunflower shareholders transferred their rights to such
additional consideration to Hollywood Park for nominal consideration and have
no further entitlements to additional consideration.
ACQUISITION OF TURF PARADISE On August 11, 1994, the shareholders of Turf
Paradise approved the Agreement of Merger, entered into on March 30, 1994, by
Hollywood Park and Turf Paradise and as amended on May 27, 1994, pursuant to
which Turf Paradise became a wholly owned subsidiary of Hollywood Park. Turf
Paradise owns and operates a thoroughbred race track in Phoenix, Arizona. The
transaction was accounted for under the pooling of interests method of
accounting, with approximately $627,000 of merger related costs incurred in
total and expensed by both the Company and Turf Paradise. In connection with
the merger, the Company issued a total of 1,498,016 shares of Hollywood Park
common stock, valued as of the date of issuance at approximately $33,800,000.
Each share of Turf Paradise common stock was valued at $13.00 and was
converted to approximately 0.577 shares of Hollywood Park common stock, which
had a then fair market value
S-11
<PAGE>
HOLLYWOOD PARK, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
of $22.53 based on the weighted average of all trades on the NASDAQ National
Market System for the twenty trading days up to and including August 10, 1994.
As required under the pooling of interests method of accounting, the
consolidated financial statements for the periods prior to the acquisition
have been restated to include the accounts and results of operations of Turf
Paradise. The consolidated financial statements for the year 1994 include the
results of operations for the twelve months ended December 31, 1994, for both
Hollywood Park and Turf Paradise.
Separate results of the combined entities are as follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, 1994
-------------------------------------
HOLLYWOOD TURF
PARK PARADISE COMBINED
------------ ----------- ------------
<S> <C> <C> <C>
Total revenues......................... $100,010,000 $17,313,000 $117,323,000
Total expenses......................... 97,563,000 15,988,000 113,551,000
------------ ----------- ------------
Net income........................... $ 2,447,000 $ 1,325,000 $ 3,772,000
============ =========== ============
</TABLE>
PRO FORMA RESULTS OF OPERATIONS The following pro forma results of
operations was prepared under the assumption that the acquisition of PCM and
Sunflower had occurred at the beginning of the period shown. The historical
results of operations for PCM, Sunflower and Turf Paradise were combined with
the Company's results and pro forma adjustments related to the PCM acquisition
were made for the following: lease rent revenue due to Hollywood Park from PCM
and concession sales made to PCM; lease rent expense recorded by PCM; other
operating expenses including consulting fees, legal and audit services and
other miscellaneous duplicate expenses; amortization of the excess purchase
price allocated to goodwill; interest expense on the unpaid lease rent; and
income taxes. Adjustments related to the Sunflower acquisition were made for
the following: amortization of the excess purchase price allocated to the
lease with TRAK East and to goodwill; interest expense reduction related to
the reduction in both the principal and interest on Sunflower's subordinated
debt; the termination of the management agreement Sunflower had with a former
shareholder and the wages and payroll taxes paid to a former Sunflower
shareholder; director's fees and income taxes.
The pro forma earnings per share reflect the 218,099 common shares actually
issued to the former PCM shareholders, as of February 10, 1997. The pro forma
earnings per share also reflect the 647,289 shares issued to the former
Sunflower shareholders.
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31,
1995
-----------------
(UNAUDITED)
<S> <C>
Revenues................................................... $149,892,000
Operating income........................................... 15,841,000
Net loss................................................. $ (1,866,000)
============
Dividend requirements on convertible preferred stock....... $ 1,925,000
Net loss allocated to common shareholders.................. $ (3,791,000)
Per common share:
Net loss--primary........................................ $ (0.20)
Net loss--fully diluted.................................. $ (0.20)
</TABLE>
RESTRICTED CASH Restricted cash as of September 30, 1997 and December 31,
1996, was for amounts due to horsemen for purses, stakes and awards.
Restricted cash as of December 31, 1995, included approximately $2,482,000
related to the Class Actions lawsuit settlement (see Note 18 Commitments and
Contingencies) and approximately $644,000 related to amounts due to horsemen
for purses, stakes and awards.
S-12
<PAGE>
HOLLYWOOD PARK, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
GAMING REVENUE AND PROMOTIONAL ALLOWANCES Gaming revenues at the Boomtown
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 basis. Revenues in the accompanying
statements of operations exclude the retail value of food and beverage
provided to card players on a complimentary basis. The estimated cost of
providing these promotional allowances was $1,316,000 for the year ended
December 31, 1996. There were no comparable costs for the year ended December
31, 1995. The estimated costs of providing these promotional allowances during
the nine months ended September 30, 1997 and 1996, was $3,410,000 and
$2,583,000, respectively.
RACING REVENUES AND EXPENSES The Company records pari-mutuel revenues,
admissions, food and beverage and other racing income associated with
thoroughbred horse racing on a daily basis, except for season admissions which
are recorded ratably over the racing season. Expenses associated with
thoroughbred horse racing revenues are charged against income in those periods
in which the thoroughbred horse racing revenues are recognized. Other expenses
are recognized as they actually occur throughout the year.
ALLOWANCE FOR DOUBTFUL ACCOUNTS With the November 17, 1995, acquisition of
PCM the Company assumed the gaming accounts receivable, and associated
allowance for doubtful account balances that were on PCM's balance sheet.
CAPITALIZED INTEREST No capitalized interest was recorded during the years
ended December 31, 1996, 1995 and 1994, nor for the nine months ended
September 30, 1996, because the Company had no outstanding debt, other than
Sunflower's debt which was non-recourse to the Company, and Sunflower did not
make any capital improvements during the periods covered.
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.
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
Equipment........................ 3 to 10
</TABLE>
Maintenance and repairs were charged to operations of facilities;
betterments were capitalized. The cost of property sold or otherwise disposed
of and the 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. In
accordance with current accounting standards, management uses estimated
expected future net cash flows to measure the recoverability of property,
plant and equipment. The estimation of expected future net cash flows is
inherently uncertain and relies to a considerable extent on assumptions
regarding current and future economic and market conditions, and the
availability of capital. If, in future periods, there are changes in the
estimates or assumptions incorporated into the impairment review analysis, the
changes could result in an adjustment to the carrying amount of the property,
plant and equipment.
S-13
<PAGE>
HOLLYWOOD PARK, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
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 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.
PRE-OPENING EXPENSES The Company expensed pre-opening costs associated with
the Hollywood Park-Casino, which opened on July 1, 1994, as incurred. These
costs included, project salaries, hiring costs and other pre-opening services.
POOLING OF INTERESTS EXPENSES Hollywood Park's costs of $414,000 incurred in
connection with the acquisition of Turf Paradise, and Turf Paradise's
acquisition costs of $213,000, were expensed as incurred.
EARNINGS PER SHARE Primary earnings per share were computed by dividing
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. Fully 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.
REDEMPTION OF DEPOSITARY SHARES As of August 28, 1997, the Company's
2,749,900 outstanding depositary shares were converted into approximately
2,291,500 shares of the Company's common stock, thereby, eliminating the
annual preferred stock cash dividend payment of approximately $1,925,000 for
future periods.
CASH FLOWS Cash and cash equivalents consisted of certificates of deposit
and short term investments with remaining maturities of 90 days or less.
STOCK REPURCHASE On July 22, 1996, the Company announced its intention to
repurchase, and to retire up to 2,000,0000 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 being made on
November 13, 1996) 222,300 common shares, at a cost of approximately
$1,962,000.
RECLASSIFICATIONS Certain reclassifications have been made to the 1996, 1995
and 1994 balances to be consistent with the 1997 financial statement
presentation.
NOTE 2--SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER
31,
------------------------------
1996 1995 1994
-------- ---------- ----------
<S> <C> <C> <C>
Cash paid during the year for:
Interest................................... $299,000 $2,098,000 $1,513,000
Income taxes............................... 40,000 143,000 2,524,000
-------- ---------- ----------
$339,000 $2,241,000 $4,037,000
======== ========== ==========
</TABLE>
S-14
<PAGE>
HOLLYWOOD PARK, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
NOTE 3--SHORT TERM INVESTMENTS
Short term investments as of December 31, 1996 and 1995, and September 30,
1997 consisted of the following:
<TABLE>
<CAPTION>
AS OF DECEMBER 31, AS OF
--------------------- SEPTEMBER 30,
1996 1995 1997
---------- ---------- -------------
(UNAUDITED)
<S> <C> <C> <C>
Corporate bonds......................... $4,766,000 $4,504,000 $ 0
Flexible deposit program................ 0 1,000,000 0
U.S. agency securities.................. 0 906,000 0
Accrued interest........................ 0 37,000 0
---------- ---------- ---------
Total................................. $4,766,000 $6,447,000 $ 0
========== ========== =========
</TABLE>
As of December 31, 1996, short term investments consisted of corporate bonds
with Moody's ratings of Ba2 to B3, and Standard and Poors rating of BB+ to B-,
though some of the bonds are not rated by either agency. Investments in
corporate bonds carry a greater amount of principal risk than other
investments made by the Company, and yield a corresponding higher return. The
corporate bond investment as of December 31, 1996, had a weighted average
maturity of 1.5 years, and because the Company reasonably expects to liquidate
these investments in its normal operating cycle the investments are classified
as short term, are held as available for sale, and recorded in the
accompanying financial statements at their fair value, as determined by the
quoted market price.
For the year ended December 31, 1996, proceeds from the sale or redemption
of corporate bond investments were approximately $8,429,000, all of which was
reinvested, and gross realized gains and gross realized losses were $28,000
and $39,000, respectively. For the year ended December 31, 1995, proceeds from
the sale or redemption of corporate bond investments were approximately
$7,806,000, all of which was reinvested, and gross realized gains and gross
realized losses were $34,000 and $3,000, respectively. The net unrealized
holding gains (losses), were $10,000 and ($22,000), for the year ended
December 31, 1996, and 1995, respectively.
As of September 30, 1997, the Company had liquidated its short term
investments in corporate bonds. For the nine months ended September 30, 1997,
gross realized gains and losses were approximately $9,000 and $88,000,
respectively.
The Flexible deposit program was a discretionary investment plan with
Bankers Trust that provided capital preservation when held to maturity, plus
income at a targeted rate; therefore, this investment was held to maturity.
The Flexible deposit program investment was not rated.
The investments in U.S. agency securities included U.S. Treasury Bills with
each U.S. agency security rated AAA by both Moodys and Standard and Poors.
The Company classified the Flexible deposit program and the U.S. agency
securities as held to maturity, and as such, the investments were recorded in
the accompanying financial statements at amortized costs, which, based on the
short term nature of the investments and their relative liquidity,
approximates fair value.
S-15
<PAGE>
HOLLYWOOD PARK, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
NOTE 4--PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment held at December 31, 1996, 1995 and September
30, 1997 consisted of the following:
<TABLE>
<CAPTION>
DECEMBER 31, AS OF
------------------------- SEPTEMBER 30,
1996 1995 1997 (A)
------------ ------------ -------------
(UNAUDITED)
<S> <C> <C> <C>
Land and land improvements.......... $ 32,215,000 $ 42,490,000 $ 49,830,000
Buildings........................... 150,935,000 175,960,000 269,089,000
Equipment........................... 31,531,000 36,003,000 75,234,000
Vessel.............................. 0 0 18,925,000
Construction in progress............ 128,000 8,394,000 16,022,000
------------ ------------ ------------
214,809,000 262,847,000 429,100,000
Less accumulated depreciation....... 83,974,000 88,130,000 135,363,000
------------ ------------ ------------
$130,835,000 $174,717,000 $293,737,000
============ ============ ============
</TABLE>
- --------
(a) Includes property, plant and equipment related to Boomtown.
NOTE 5--SECURED AND UNSECURED NOTES PAYABLE
Notes payable as of December 31, 1996, 1995 and September 30, 1997 consisted
of the following:
<TABLE>
<CAPTION>
AS OF DECEMBER 31, AS OF
-------------------- SEPTEMBER 30,
1996 1995 (A) 1997 (B)
-------- ----------- -------------
(UNAUDITED)
<S> <C> <C> <C>
Secured notes payable.................... $ 0 $28,667,000 $ 3,845,000
Unsecured notes payable.................. 317,000 15,914,000 4,015,000
Unsecured 9.5% Series A Notes............ 0 0 125,000,000
Secured note payable--Texaco............. 0 3,358,000 0
11.5% Boomtown First Mortgage Notes...... 0 0 1,253,000
Capital lease obligations................ 0 0 2,055,000
-------- ----------- ------------
317,000 47,939,000 136,168,000
Less current maturities.................. 35,000 32,310,000 4,005,000
-------- ----------- ------------
$282,000 $15,629,000 $132,163,000
======== =========== ============
</TABLE>
- --------
(a) The secured and unsecured notes payable as of December 31, 1995, related
to Sunflower and were non-recourse to Hollywood Park.
(b) Includes notes payable related to Boomtown.
HOLLYWOOD PARK (unaudited) On June 30, 1997, Hollywood Park and a bank
syndicate lead by Bank of America closed the reducing revolving credit
facility (the "Bank Credit Facility") for up to $225,000,000. On August 7,
1997, the Bank Credit Facility was reduced by $125,000,000 (representing the
funds received in the issuance of the Notes) to $100,000,000. Of the
$100,000,000, approximately $83,586,000 was available at September 30, 1997,
as a result of covenant limitations. The Bank Credit Facility is secured by
substantially all of the assets of Hollywood Park and its significant
subsidiaries, and imposes certain customary affirmative and negative
covenants.
The Bank Credit Facility has been amended twice. First, among other matters,
to reduce the availability of the facility until the Bank Credit Facility was
approved by the Louisiana Gaming Control Board. The Company
S-16
<PAGE>
HOLLYWOOD PARK, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
received this approval on July 10, 1997. Second, among other matters, to allow
the co-issuance of the Notes by HP Operating Company with Hollywood Park.
Debt service requirements on the Bank Credit Facility consist of current
interest payments on outstanding indebtedness through September 30, 1999. As
of September 30, 1999, and on the last day of each third calendar month
thereafter, through June 30, 2001, the Bank Credit Facility will decrease by
7.5% of the commitment in effect on September 30, 1999. As of September 30,
2001, and on the last day of each third calendar month thereafter, the Bank
Credit Facility will decrease by 10% of the commitment in effect on September
30, 1999. Any principal amounts outstanding in excess of the Bank Credit
Facility commitment, as so reduced, will be payable on such quarterly
reduction dates.
The Bank Credit Facility provides for a letter of credit sub-facility of
$10,000,000, of which $2,035,000 is currently outstanding for the benefit of
Hollywood Park's California self insured workers' compensation program. The
facility also provides for a swing sub-facility of up to $10,000,000.
Borrowings under the Bank Credit Facility bear interest at an annual rate
determined, at the election of the Company, by reference to the "Eurodollar
Rate" (for interest periods of 1, 2, 3 or 6 months) or the "Reference Rate",
as such terms are respectively defined in the Bank Credit Facility, plus
margins which vary depending upon Hollywood Park's ratio of funded debt to
earnings before interest, taxes, deprecation and amortization ("EBITDA"). The
margins start at 1.25% for Eurodollar loans and at 0.25% for Base Rate loans,
at funded debt to EBITDA ratio of less than 1.50%. Thereafter, the margins for
each type of loan increases by 25 basis points for each increase in the ratio
of funded debt to EBITDA of 50 basis points or more, up to 2.625% for
Eurodollar loans and 1.625% for Base Rate loans. However, if the ratio of
senior funded debt to EBITDA exceeds 2.50, the applicable margins will
increase to 3.25% for Eurodollar loans, and 2.25% for Base Rate loans.
Thereafter, the margins would increase by 25 basis points for each increase in
the ratio of senior funded debt to EBITDA of 50 basis points or more, up to a
maximum of 4.25% for Eurodollar loans and 3.25% for Base Rate loans. The
applicable margins as of September 30, 1997, were 1.75% with respect to the
Eurodollar Rate based interest rate and 0.75% with respect to the Base Rate
interest rate.
The Bank Credit Facility allows for interest rate swap agreements, or other
interest rate protection agreements, up to a maximum notional amount of
$125,000,000. Presently, Hollywood Park does not utilize such financial
instruments, though it may in the future.
Hollywood Park pays a quarterly commitment fee for the average daily amount
of unused portions of the Bank Credit Facility. The commitment fee is also
dependent upon the Company's ratio of funded debt to EBITDA. The commitment
fee for the Bank Credit Facility starts at 31.25 basis points when the ratio
is less than 1.00, and increases by 6.25 basis points for each increase in the
ratio of 0.50, up to a maximum of 50 basis points. For the quarter beginning
October 1, 1997, this fee is 43.75 basis points.
On July 3, 1997, Hollywood Park borrowed $112,000,000 from the Bank Credit
Facility to fund Boomtown's offer to purchase its 11.5% First Mortgage Notes,
and repaid this amount on August 7, 1997, with a portion of the proceeds from
the August 6, 1997, issuance of $125,000,000 of the Notes. The Notes were co-
issued by Hollywood Park and HP Operating Company (the "Obligors"). The
balance of the proceeds from the issuance of the Notes was primarily used for
the purchase of a new riverboat for Boomtown New Orleans, and other general
corporate needs.
Interest on the Notes is payable semi-annually, on February 1st and August
1st. The Notes will be redeemable at the option of the Company, in whole or in
part, on or after August 1, 2002, at a premium to face amount, plus accrued
interest, with the premium to the face amount decreasing on each subsequent
anniversary date. The Notes are unsecured obligations of Hollywood Park and HP
Operating Company, guaranteed by all other material restricted subsidiaries of
either Hollywood Park or HP Operating Company.
S-17
<PAGE>
HOLLYWOOD PARK, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
The indenture governing the Notes contains certain covenants that, among
other things, limit the ability of the Obligors and their restricted
subsidiaries to incur additional indebtness and issue preferred stock, pay
dividends or make other distributions, repurchase equity interests or
subordinated indebtness, 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.
On July 1, 1997, in connection with the divestiture of Boomtown's Las Vegas
property, Hollywood Park issued an unsecured promissory note of approximately
$3,465,000. The promissory note bears interest equal to the Bank of America
reference rate plus 1.0%. Interest is payable annually with five annual
principal payments of approximately $693,000 commencing July 1, 1998.
During the nine months ended September 30, 1997, the Company paid dividends
of $1,520,000 on its convertible preferred stock, representing $55.27 per
share, or $0.55 per depositary share.
Effective August 28, 1997, the Company exercised its option to covert all
2,749,900 of its outstanding depositary shares into approximately 2,291,492
shares of its common stock; thereby; eliminating the annual preferred cash
dividend payment of approximately $1,925,000.
Prior to execution of the Bank Credit Facility, Hollywood Park maintained a
$75,000,000 unsecured loan facility with Bank of America (the "Business Loan
Agreement"). The Business Loan Agreement consisted of a $60,000,000 line of
credit (the "Line of Credit") and a $15,000,000 revolver (the "Revolver"). The
Business Loan Agreement was amended five times to, among other matters, extend
the date for drawing down the Line of Credit and for using the Revolver to
June 30, 1997, to amend the quick asset to current liability ratio covenant,
and to adjust the tangible net worth covenant.
During the year ended December 31, 1996, the Company did not borrow any
funds under the Business Loan Agreement, except for the May 1, 1996, issuance
of a standby letter of credit of $2,617,000, as security for the Company's
workers' compensation self-insurance program.
Texaco Secured Note Payable On September 3, 1996, Hollywood Park paid the
secured non-interest bearing promissory note of $3,358,000, related to the
October 27, 1995, purchase of 37.33 acres of land adjacent to the Inglewood
property.
Gold Cup Contest The Company's Gold Cup note payable resulted from the
$1,000,000 Gold Cup Contest on July 20, 1986. The prize money is payable to
the winner in 20 annual installments of $50,000, beginning August 1, 1986. The
remaining liability of $317,000, at December 31, 1996.
BOOMTOWN (UNAUDITED). In November 1993, Boomtown sold $103,500,000 of 11.5%
First Mortgage Notes due November 1, 2003 (the "11.5% First Mortgage Notes").
On July 3, 1997, Boomtown repurchased and retired approximately $102,142,000
in principal amount of the 11.5% First Mortgage Notes, at a purchase price of
$1,085 per $1,000 in principal amount, along with accrued interest thereon,
pursuant to a tender offer.
As a result of the Merger, Boomtown, as required under the indenture
governing the 11.5% First Mortgage Notes, initiated a change in control
purchase offer at a price of $1,010 for each $1,000 for the remaining
approximately $1,358,000 aggregate principal amount of 11.5% First Mortgage
Notes outstanding. This change in control purchase offer was completed on
August 12, 1997, and only a portion of the remaining 11.5% First Mortgage
Notes were tendered.
On August 4, 1997, Hollywood Park executed a purchase agreement pursuant to
which one of the Hollywood Park entities purchased the barge and the building
shell at Boomtown Biloxi for at total cost of $5,250,000. A payment of
$1,500,000 was made on August 4, 1997, with the balance payable in three equal
annual installments of $1,250,000.
S-18
<PAGE>
HOLLYWOOD PARK, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
On August 7, 1997, Boomtown New Orleans prepaid the 13.0% note payable
secured by the original riverboat, currently in use. The cost of the
prepayment (inclusive of a 1.0% prepayment penalty) was approximately
$2,107,000.
As of August 8, 1997, Boomtown New Orleans is wholly owned by the Company.
Previously, Boomtown New Orleans was owned and operated by the Louisiana
Partnership, of which 92.5% was owned by Hollywood Park with the remaining
7.5% owned by Skrmetta. On November 18, 1996, Boomtown entered into an
agreement with Skrmetta under which it would pay approximately $5,670,000 in
return for Skrmetta's interest in the Louisiana Partnership. Under the term of
the agreement, Boomtown made a down payment of $500,000, and the Company paid
the remaining $5,170,000 on August 8, 1997.
As of September 30, 1997, Boomtown had two notes payable for gaming and
other operating equipment which total approximately $359,000. Boomtown also
has various capital lease obligations for gaming and other operating
equipment, totaling approximately $2,055,000.
In connection with the sale its Las Vegas property, Boomtown took back two
notes receivable from Roski, the former lessor of the Las Vegas property,
totaling approximately $8,465,000. The first note receivable is for
$5,000,000, bearing interest at Bank of America's reference rate plus 1.5% per
year, with annual principal receipts 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.
SUNFLOWER On March 24, 1994, an Amended and Restated Credit and Security
Agreement (the "Sunflower Senior Credit") was executed between Sunflower and
five banks in connection with the Company's acquisition of Sunflower. As of
September 30, 1997, the outstanding balance of the Sunflower Senior Credit was
$28,667,000. The Sunflower Senior Credit is non-recourse to Hollywood Park.
On May 17, 1996, Sunflower filed for reorganization under Chapter 11 of the
Bankruptcy Code. The Cash Collateral Agreement suspended any interest or
principal payments on the Sunflower Senior Credit until August 12, 1997. The
Bankruptcy Court has issued any order extending the Cash Collateral Agreement
until it issues its pending ruling regarding Sunflower's proposed plan of
reorganization. The Cash Collateral Agreement requires Sunflower to make
certain cash payments to Wyandotte County, Kansas, the creditors group under
the Senior Sunflower Credit and Trak East (the unaffiliated operator of racing
at Sunflower).
On July 15, 1997, Sunflower presented to the Bankruptcy Court a plan of
reorganization (the "Plan") which provides for the sale of Sunflower's
property to the Wyandotte Tribe of Oklahoma (the "Wyandotte Tribe"). Under the
Plan, some or all of the land would be held by the United States Government in
trust for the Wyandotte Tribe, and a casino would be developed on the
property. Upon completion of the casino, HP Kansas, Inc. (a wholly-owned
subsidiary of Hollywood Park) and a partner (North American Sports Management
or an affiliate) will provide consulting services to the casino. Under this
arrangement, HP Kansas would be entitled to receive a share of the revenues of
the casino. Under the plan, in order to allow the property to be released as
collateral and sold to the Wyandotte Tribe, Sunflower will be required to have
standby letters of credit issued to support certain payments to be made to the
lenders under the Sunflower Senior Credit and the Wyandotte County Treasurer's
office. The aggregate amount of such letters of credit is anticipated to be in
excess of $29 million. The Company will arrange for the issuance of such
letters of credit on behalf of Sunflower.
In 1995, under a promissory note executed in December 1994, between
Hollywood Park and Sunflower, Hollywood Park advanced $2,500,000 to Sunflower
to make certain payments due on the Sunflower Senior Credit. The amounts
borrowed under the promissory note, along with accrued interest, are
subordinate to the Sunflower Senior Credit. Although the Company will continue
to pursue payment of the promissory note, for financial reporting purposes the
outstanding balance of the promissory note was written off as of March 31,
1996.
S-19
<PAGE>
HOLLYWOOD PARK, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
As of September 30, 1997 and December 31, 1996, Sunflower's unsecured notes
payable totaled $15,574,000. The unsecured notes payable included $13,060,000,
payable to Mr. Hubbard (Chief Executive Officer of Hollywood Park, and former
shareholder of Sunflower) on January 1, 2003. As a condition of the merger
between the Company and Sunflower, Hollywood Park contributed $5,000,000 in
cash to Sunflower to pay accrued interest, and a portion of the note payable
to Mr. Hubbard in exchange for a reduction in the interest rate on this debt
to 9.0% from 14.0%. The remaining $2,514,000 relates to a Special Assessment
note payable to Wyandotte County, Kansas for the cost of construction of
various streets and sewers serving Sunflower. The Special Assessment note was
entered into in 1990, and is a 15 year note, with a fixed interest rate of
6.59%.
ANNUAL MATURITIES As of December 31, 1996, annual maturities of total notes
and loans payable are as follows:
<TABLE>
<CAPTION>
YEAR ENDING:
------------
<S> <C>
December 31, 1997................................................... $ 50,000
December 31, 1998................................................... 50,000
December 31, 1999................................................... 50,000
December 31, 2000................................................... 50,000
December 31, 2001................................................... 50,000
Thereafter.......................................................... 200,000
</TABLE>
The fair values of the Company's various debt instruments discussed above
approximate their carrying amounts based on the fact that borrowings bear
interest at variable market based rates.
NOTE 6--LONG TERM GAMING ASSETS
Long term gaming assets relate to the capital lease between the Company and
the city of Compton covering the hotel, surrounding parking and an expansion
parcel at Crystal Park. With the completion of the construction of Crystal
Park, as of December 31, 1996, the long term gaming assets were reclassed to
property, plant and equipment.
The capital lease was entered into on August 3, 1995, and has a term of up
to 50 years. The annual rent payments start at $600,000 and increase every
fifth year until year 46, when they stabilize at $2,850,000. Hollywood Park
received a rent payment credit equal to the costs incurred to renovate Crystal
Park, and no cash rent payments are expected to be made until the nineteenth
year of the lease, or 2014.
NOTE 7--LONG TERM GAMING LIABILITIES
Long term gaming liabilities consist of the Company's capital lease
obligation associated with the lease of the hotel, surrounding parking and the
expansion parcel from the city of Compton for the Crystal Park Hotel and
Casino. This liability was reduced as the construction disbursements were
made.
NOTE 8--ACCOUNTING FOR THE IMPAIRMENT OF LONG-LIVED ASSETS AND LONG-LIVED
ASSETS TO BE DISPOSED OF
In 1995, Statement of Financial Accounting Standards No. 121 ("SFAS") 121
Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets
to Be Disposed Of, was issued which established accounting standards for the
impairment of long-lived assets, certain identifiable intangibles, and
goodwill related to those assets. SFAS 121, which became effective for
Hollywood Park in the quarter ended March 31, 1996, addresses when impairment
losses should be recognized and how impairment losses should be measured.
Whenever there are recognized events or changes in circumstances that indicate
the carrying amount of an asset may not be recoverable, management reviews the
asset for possible impairment. In accordance with current accounting
standards, management uses estimated expected future net cash flows
(undiscounted and excluding interest costs, and grouped at the lowest level
for which there are identifiable cash flows that are as independent as
possible of other asset groups) to measure the recoverability of the asset. If
the expected future net cash flows
S-20
<PAGE>
HOLLYWOOD PARK, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
are less than the carrying amount of the asset an impairment loss would be
recognized. An impairment loss would be measured as the amount by which the
carrying amount of the asset exceeded the fair value of the asset, with fair
value measured as the amount at which the asset could be bought or sold in a
current transaction between willing parties, other than in a forced
liquidation sale. The estimation of expected future net cash flows is
inherently uncertain and relies to a considerable extent on assumptions
regarding current and future net cash flows, market conditions, and the
availability of capital. If, in future periods, there are changes in the
estimates or assumptions incorporated into the impairment review analysis the
changes could result in an adjustment to the carrying amount of the asset, but
at no time would previously recognized impairment losses be restored.
NOTE 9--DEVELOPMENT EXPENSES
Included in Administrative expenses were development costs of approximately
$1,092,000, $2,716,000, and $1,275,000 for the years ended December 31, 1996,
1995, and 1994, respectively. The expenses in 1996 consisted primarily of
costs related to the Inglewood site master plan and card clubs in California.
The expenses in 1995 consisted primarily of costs related to the following
projects: the environmental impact study for the proposed stadium at Hollywood
Park, card clubs under consideration in the cities of Stockton, Pomona and
South San Francisco, and the retail center project (since abandoned). The
costs incurred in 1994 were primarily generated by the initial financial and
economic analysis of the proposed stadium, numerous card clubs, and the music
dome.
Included in Administrative expenses for the nine months ended September 30,
1997, was $280,000 of development expenses; primarily related to the master
site plan for the Inglewood property, and the proposed Hollywood Park--Hilton
Indiana riverboat gaming project.
Included in Administrative expenses for the nine months ended September 30,
1996, was $446,000 of development expenses; primarily related to the proposed
stadium, the master site plan for the Inglewood property, and card clubs in
California.
NOTE 10--ACCOUNTING FOR STOCK-BASED COMPENSATION
Statement of Financial Accounting Standards No. 123 ("SFAS") 123 Accounting
for Stock-Based Compensation, requires that the Company disclose additional
information about employee stock-based compensation plans. The objective of
SFAS 123 is to estimate the fair value, based on the stock price at the grant
date, of the Company's stock options to which employees become entitled when
they have rendered the requisite service and satisfied any other conditions
necessary to earn the right to benefit from the stock options. The fair market
value of a stock option is to be estimated using an option-pricing model that
takes into account, as of the grant date, the exercise price and expected life
of the option, the current price of the underlying stock and its expected
volatility, expected dividends 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 DIVIDENDS
--------- -------- ---------- ---------
<S> <C> <C> <C> <C>
For options granted in the following
periods:
Second quarter 1995................. 5.0% 3 years 36.1% None
First quarter 1996.................. 5.0% 3 years 36.1% None
Second quarter 1996................ 5.1% 3 years 46.4% None
Fourth quarter 1996(a).............. 5.0% 10 years 47.4% None
</TABLE>
- --------
(a) The options granted during the fourth quarter of 1996 were to the
Company's directors, and it is expected that the directors will hold
options for a longer period of time than the Company's employees.
S-21
<PAGE>
HOLLYWOOD PARK, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
The following set forth the pro forma financial results under the
implementation of SFAS 123:
<TABLE>
<CAPTION>
FOR THE YEARS ENDED FOR THE NINE MONTHS ENDED
DECEMBER 31, SEPTEMBER 30,
------------------------ --------------------------
1996 1995 1997 1996
----------- ----------- ------------ -------------
<S> <C> <C> <C> <C>
Net income (loss) before
stock-based compensation
expense................. ($4,249,000) ($1,162,000) $7,119,000 ($7,526,000)
Stock-based compensation
expense................. 115,000 4,000 519,000 61,000
----------- ----------- ------------ -------------
Pro forma net income
(loss).................. ($4,364,000) ($1,166,000) $6,600,000 ($7,587,000)
=========== =========== ============ =============
Dividend requirements on
convertible preferred
stock................... $1,925,000 $1,925,000 $1,520,000 $1,443,000
Pro forma net income
(loss) available to
(allocated to) common
shareholders............ ($6,289,000) ($3,091,000) $5,080,000 ($9,030,000)
=========== =========== ============ =============
Per common share:
Pro forma net income
(loss) - primary...... ($0.34) ($0.17) $0.25 ($0.49)
Pro forma net income
(loss) - fully
diluted............... (0.34) ($0.17) -- ($0.49)
Number of shares -
primary................. 18,505,378 18,399,040 20,596,000 18,605,000
Number of shares - fully
diluted................. 20,796,870 20,690,532 -- 20,896,000
</TABLE>
NOTE 11--RACING OPERATIONS
The Company conducts thoroughbred racing at its Hollywood Park, Sunflower,
and Turf Paradise race tracks, located in California, Kansas and Arizona,
respectively. Sunflower is primarily a greyhound racing facility. On May 17,
1996, due to competition from Missouri riverboat gaming, Sunflower filed for
reorganization under Chapter 11 of the Bankruptcy Code, and as of April 1,
1996, Sunflower's operating results were no longer consolidated with Hollywood
Park's; therefore, Sunflower's 1996 racing results and statistics have been
excluded from this note. Sunflower is operating during the reorganization.
Under Kansas racing law, Sunflower is not granted any race days and does not
generate any pari-mutuel commissions. The Kansas Racing Commission granted
Sunflower the facility ownership and management licenses; with all race days
until the year 2014 granted to TRAK East, a Kansas not-for-profit corporation.
Sunflower has an agreement with TRAK East to provide the physical race tracks
along with management and consulting services for twenty-five years with
options to renew for one or more successive five year terms. The Agreement and
Restatement of Lease and Management Agreement was entered into as of September
14, 1989.
<TABLE>
<CAPTION>
1996 1995 1994
---- ---- ----
<S> <C> <C> <C>
LIVE ON-TRACK RACE DAYS
Hollywood Park race track..................................... 103 97 102
Turf Paradise race track...................................... 166 171 185
Sunflower--Horses............................................. -- 49 62
Sunflower--Greyhounds......................................... -- 294 213
</TABLE>
S-22
<PAGE>
HOLLYWOOD PARK, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
A summary of the pari-mutuel handle and deductions, by racing facility for
the year ended December 31, are as follows:
<TABLE>
<CAPTION>
1996 1995 1994
------------ ------------ ------------
<S> <C> <C> <C>
HOLLYWOOD PARK--LIVE HORSE RACING
Total pari-mutuel handle............ $677,827,000 $643,246,000 $699,748,000
Less patrons' winning tickets....... 547,775,000 520,291,000 565,685,000
------------ ------------ ------------
130,052,000 122,955,000 134,063,000
Less:
State pari-mutuel tax............. 19,263,000 20,691,000 26,260,000
City of Inglewood pari-mutuel
tax.............................. 1,287,000 1,384,000 1,711,000
Racing purses and awards.......... 26,300,000 26,888,000 31,183,000
Satellite wagering fees........... 12,784,000 13,545,000 16,732,000
Interstate location fees.......... 44,815,000 34,170,000 27,570,000
Other fees........................ 390,000 419,000 519,000
------------ ------------ ------------
Pari-mutuel commissions........... 25,213,000 25,858,000 30,088,000
Add off-track independent handle
commissions...................... 2,280,000 2,251,000 1,797,000
------------ ------------ ------------
Total pari-mutuel commissions
including charity days........... 27,493,000 28,109,000 31,885,000
Less charity day pari-mutuel
commissions...................... 0 0 739,000
------------ ------------ ------------
Total pari-mutuel commissions net
of charity days.................. $ 27,493,000 $ 28,109,000 $ 31,146,000
============ ============ ============
</TABLE>
Turf Paradise races live five days a week, and on three of these days Turf
Paradise concurrently operates as a simulcast site.
<TABLE>
<CAPTION>
1996 1995 1994
------------ ------------ -----------
<S> <C> <C> <C>
TURF PARADISE--LIVE HORSE RACING
Total pari-mutuel handle............. $147,748,000 $111,509,000 $96,493,000
Less patrons' winning tickets........ 114,585,000 86,460,000 74,918,000
------------ ------------ -----------
33,163,000 25,049,000 21,575,000
Less:
State pari-mutuel tax.............. 18,000 345,000 669,000
Racing purses and awards........... 4,501,000 4,757,000 5,399,000
State sales tax.................... 302,000 415,000 537,000
Off-track commissions.............. 115,000 117,000 137,000
Interstate location fees........... 20,034,000 10,943,000 6,006,000
------------ ------------ -----------
Pari-mutuel commissions.............. 8,193,000 8,472,000 8,827,000
Add off-track independent handle
commissions......................... 166,000 699,000 297,000
------------ ------------ -----------
Total pari-mutuel commissions
including charity days.............. 8,359,000 9,171,000 9,124,000
Less charity day pari-mutuel
commissions......................... 17,000 0 29,000
------------ ------------ -----------
Total pari-mutuel commissions net of
charity days........................ $ 8,342,000 $ 9,171,000 $ 9,095,000
============ ============ ===========
</TABLE>
S-23
<PAGE>
HOLLYWOOD PARK, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
The acquisition of Sunflower was accounted for under the purchase method of
accounting and as such results of operations prior to the March 23, 1994
acquisition date are not presented.
<TABLE>
<CAPTION>
GREYHOUNDS HORSES
1995 1995
----------- ----------
<S> <C> <C>
TRAK EAST AT SUNFLOWER--LIVE RACING
Total pari-mutuel handle............................. $47,406,000 $2,844,000
Less patrons' winning tickets........................ 37,379,000 2,273,000
----------- ----------
10,027,000 571,000
Less: State pari-mutuel tax.......................... 1,721,000 104,000
Racing purses and awards............................. 2,230,000 190,000
----------- ----------
Total pari-mutuel commissions........................ $ 6,076,000 $ 277,000
=========== ==========
<CAPTION>
GREYHOUNDS HORSES
1994 1994
----------- ----------
<S> <C> <C>
Total pari-mutuel handle............................. $74,941,000 $6,274,000
Less patrons' winning tickets........................ 59,778,000 5,012,000
----------- ----------
15,163,000 1,262,000
Less: State pari-mutuel tax.......................... 2,527,000 210,000
Racing purses and awards............................. 3,372,000 421,000
----------- ----------
Total pari-mutuel commissions........................ $ 9,264,000 $ 631,000
=========== ==========
</TABLE>
As a stipulation to the granting of race dates, the California Horse Racing
Board ("CHRB") requires that Hollywood Park designate three days from both the
live Spring/Summer Meet and the Autumn Meeting as charity days. As of the 1994
Autumn Meeting, the charity day payments were changed to the net proceeds from
the charity days not to exceed 2/10 of 1.0% of the total live on-track pari-
mutuel handle for the respective race meet. Charity day payments must be made
to a distributing agent approved by the CHRB. The following table summarizes
the revenues and expenses that were excluded from the statements of operations
for the period prior to the 1994 Autumn Meeting and the total charity day
liability for the past three years:
<TABLE>
<CAPTION>
1996 1995 1994
-------- -------- --------
<S> <C> <C> <C>
Racing revenues.................................. $ 0 $ 0 $961,000
Less: Salaries, wages and employee benefits...... 0 0 285,000
Other expenses................................... 0 0 298,000
-------- -------- --------
Net proceeds (old charity day law)............... 0 0 378,000
Add: 2/10 of 1% of live on track pari-mutuel
handle as of the Autumn Meeting 1994 (revised
charity day law)................................ 338,000 370,000 117,000
-------- -------- --------
Total charity day payable........................ $338,000 $370,000 $495,000
======== ======== ========
</TABLE>
Arizona racing law requires that 1.0% of the total in-state pari-mutuel
handle (on-track live pari-mutuel handle and off-track within the state pari-
mutuel handle) of three charity days be paid to a distributing agent approved
by the Arizona Racing Commission. The Arizona Department of Racing did not
assign any charity days in 1995, therefore no payments were required. Turf
Paradise paid $17,000 to the distributing agent in 1996, and paid $29,000 in
1994.
S-24
<PAGE>
HOLLYWOOD PARK, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Hollywood Park conducts simulcast meets of live races held at local southern
California race tracks. As of 1993, the Company began to simulcast races from
northern California concurrently with live on-track racing. In July 1994,
Assembly Bill 1418 was enacted allowing for unrestricted simulcasting between
northern and southern California. Previous legislation, enacted in September
1993, limited such simulcasting to races with purses of at least $20,000. A
summary of simulcast pari-mutuel handle and commissions for the years ended
December 31, are as follows:
<TABLE>
<CAPTION>
1996 1995 1994
------------ ------------ ------------
<S> <C> <C> <C>
HOLLYWOOD PARK--SIMULCAST RACING
Pari-mutuel handle:
Thoroughbred meets................ $375,910,000 $379,263,000 $291,526,000
Quarter Horse meets............... 23,067,000 22,793,000 18,754,000
Harness meets..................... 6,165,000 4,391,000 3,948,000
------------ ------------ ------------
$405,142,000 $406,447,000 $314,228,000
============ ============ ============
Pari-mutuel commissions:
Thoroughbred meets................ $ 12,669,000 $ 11,527,000 $ 7,624,000
Quarter Horse meets............... 454,000 457,000 377,000
Harness meets..................... 120,000 86,000 79,000
------------ ------------ ------------
$ 13,243,000 $ 12,070,000 $ 8,080,000
============ ============ ============
</TABLE>
TRAK East at Sunflower operates year round simulcasting of both greyhounds
and horses. Pari-mutuel handle and commissions earned by TRAK East for the
year ended December 31, 1995 and March 23, 1994 (the date Sunflower was
acquired) through December 31, 1994, are as follows:
<TABLE>
<CAPTION>
1996 1995 1994
---- ----------- -----------
<S> <C> <C> <C>
TRAK EAST AT SUNFLOWER--SIMULCAST RACING
Pari-mutuel handle:
Greyhounds................................... $-- $10,871,000 $ 7,162,000
Horses....................................... -- 29,600,000 24,010,000
---- ----------- -----------
$-- $40,471,000 $31,172,000
==== =========== ===========
Pari-mutuel commission:
Greyhounds................................... $-- $ 2,342,000 $ 1,361,000
Horses....................................... -- 5,742,000 4,690,000
---- ----------- -----------
$-- $ 8,084,000 $ 6,051,000
==== =========== ===========
</TABLE>
Turf Paradise accepts simulcasts of live races from other tracks
concurrently with live on-track racing as well as operating as a simulcast
site for Prescott Downs between live meets. Turf Paradise also accepts
simulcast signals on the two dark days (days without live racing) a week
during the live on-track meet.
<TABLE>
<CAPTION>
1996 1995 1994
----------- ----------- -----------
<S> <C> <C> <C>
TURF PARADISE--SIMULCAST RACING
Pari-mutuel handle all meets............ $55,814,000 $55,093,000 $46,549,000
Pari-mutuel commissions all meets....... 4,768,000 3,909,000 3,410,000
</TABLE>
S-25
<PAGE>
HOLLYWOOD PARK, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
NOTE 12--INCOME TAXES
As discussed in Note 1, the Company accounts for income taxes under SFAS
109. On November 17, 1995, the Company acquired PCM and accounted for the
acquisition under the purchase method of accounting. Before the acquisition,
PCM was an S-corporation for income tax purposes and under the terms of the
merger was dissolved into Hollywood Park. On March 23, 1994, the Company
acquired Sunflower and accounted for the acquisition under the purchase method
of accounting. Before the acquisition, Sunflower was an S-corporation and
under the terms of the merger became a C-corporation for income tax purposes.
Turf Paradise was acquired on August 11, 1994, and was accounted for under the
pooling of interests method of accounting.
The composition of the Company's income tax expense for the years ended
December 31, 1996, 1995 and 1994 is as follows:
<TABLE>
<CAPTION>
CURRENT DEFERRED TOTAL
----------- ----------- ----------
<S> <C> <C> <C>
YEAR ENDED DECEMBER 31, 1996:
U.S. Federal........................... $ 4,341,000 $(1,681,000) $2,660,000
State.................................. (3,293,000) 4,092,000 799,000
----------- ----------- ----------
$ 1,048,000 $ 2,411,000 $3,459,000
=========== =========== ==========
YEAR ENDED DECEMBER 31, 1995:
U.S. Federal........................... $ 0 $ 473,000 $ 473,000
State.................................. 42,000 178,000 220,000
----------- ----------- ----------
$ 42,000 $ 651,000 $ 693,000
=========== =========== ==========
YEAR ENDED DECEMBER 31, 1994:
U.S. Federal........................... $ 1,094,000 $ 656,000 $1,750,000
State.................................. (1,155,000) 973,000 (182,000)
----------- ----------- ----------
$ (61,000) $ 1,629,000 $1,568,000
=========== =========== ==========
</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>
1996 1995 1994
---------- --------- ----------
<S> <C> <C> <C>
Income (loss) before income tax
expense, at the statutory rate........ $ (269,000) $(159,000) $1,816,000
Pooling costs........................ 0 0 213,000
Goodwill amortization................ 195,000 72,000 0
Political and lobbying costs......... 291,000 353,000 179,000
State income taxes, net of federal
tax benefits........................ 800,000 145,000 (120,000)
Valuation allowance.................. 0 0 (465,000)
Non-deductible expenses.............. 105,000 260,000 0
Additional provisions................ 2,337,000 22,000 (55,000)
---------- --------- ----------
Income tax expense..................... $3,459,000 $ 693,000 $1,568,000
========== ========= ==========
</TABLE>
S-26
<PAGE>
HOLLYWOOD PARK, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
For the years ended December 31, 1996, and 1995, 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.
<TABLE>
<CAPTION>
1996 1995
------------ ------------
<S> <C> <C>
Current deferred tax assets:
Workers' compensation insurance reserve.......... $ 790,000 $ 905,000
General liability insurance reserve.............. 690,000 619,000
Legal accrual.................................... 58,000 76,000
Write off of investment in Sunflower............. 3,111,000 0
Development costs................................ 0 268,000
Lawsuit settlement............................... 1,104,000 2,087,000
Vacation and sick pay accrual.................... 270,000 377,000
Bad debt allowance............................... 437,000 739,000
Los Angeles revitalization zone credit........... 0 0
Other............................................ 435,000 177,000
------------ ------------
Current deferred tax assets.................... 6,895,000 5,248,000
Less valuation allowance......................... (120,000) (109,000)
------------ ------------
Current deferred tax assets.................... 6,775,000 5,139,000
Current deferred tax liabilities:
Business insurance and other..................... (353,000) (251,000)
------------ ------------
Net current deferred tax assets.................... $ 6,422,000 $ 4,888,000
============ ============
Non-current deferred tax assets:
Net operating loss carryforwards................. $ 0 $ 931,000
General business tax credits..................... 36,000 468,000
Los Angeles revitalization zone tax credits...... 9,299,000 6,406,000
Other............................................ 42,000 156,000
Alternative minimum tax credit................... 1,244,000 412,000
------------ ------------
Non-current deferred tax assets................ 10,621,000 8,373,000
Less valuation allowance......................... (5,511,000) (5,221,000)
------------ ------------
Non-current deferred tax assets................ 5,110,000 3,152,000
------------ ------------
Non-current deferred tax liabilities:
Expansion plans.................................. (400,000) (400,000)
Los Angeles revitalization zone accelerated
write-off....................................... (461,000) (560,000)
Depreciation and amortization.................... (10,580,000) (11,862,000)
Other............................................ (2,734,000) (413,000)
------------ ------------
Non-current deferred tax liabilities........... (14,175,000) (13,235,000)
------------ ------------
Net non-current deferred tax liabilities........... $ (9,065,000) $(10,083,000)
============ ============
</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 wages
paid to staff who reside within the zone. With the construction of the
Hollywood Park-Casino and Crystal Park, the Company earned substantial tax
credits related to sales tax paid on the assets acquired and on wages paid to
construction employees.
S-27
<PAGE>
HOLLYWOOD PARK, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
<TABLE>
<CAPTION>
DECEMBER 31,
---------------------
1996 1995
---------- ----------
<S> <C> <C>
Valuation allowance at beginning of period............... $5,330,000 $2,986,000
Valuation allowance utilized during the year............. 0 0
Valuation allowance established for California state..... 0 0
Los Angeles revitalization zone tax credit............... 302,000 2,344,000
---------- ----------
Valuation allowance at end of period................... $5,632,000 $5,330,000
========== ==========
</TABLE>
As of December 31, 1995, the Company had a federal regular net tax operating
loss of approximately $2,200,000 that in 1996 the Company carried back to 1994
generating a cash refund of approximately $56,000 and increased the
alternative minimum tax credit by approximately $660,000, and also increased
the general business tax credits by approximately $19,000. As of December 31,
1996, the Company had approximately $36,000 of general business tax credits
and $1,244,000 of alternative minimum tax credits available to reduce future
federal income taxes, although in either case, the tax credits generally
cannot reduce federal taxes paid below the calculated amount of alternative
minimum tax. The general business tax credits expire in 2000, and the
alternative minimum tax credits do not expire. The Company's use of its tax
credit carryforwards is subject to certain limitations imposed by Section 383
of the Internal Revenue Code and by the separate return limitation year rules
of the consolidated return regulations. Although Management currently expects
that such limitations will not prevent the Company from fully utilizing the
benefits of its tax credits, it is possible that such limitations could defer
or reduce the Company's use of its general business tax credits and
alternative minimum tax credit carryforwards.
NOTE 13--STOCKHOLDERS' EQUITY
Effective August 28, 1997, the Company exercised its option to convert all
2,749,900 of its outstanding Depositary Shares into approximately 2,291,492
shares of its common stock; thereby eliminating in future periods the annual
preferred cash dividend of approximately $1,925,000 (unaudited).
On June 30, 1997, the Company issued approximately 5,362,850 shares of
Hollywood Park common stock, valued at $9.8125, (excluding 446,491 shares of
the Company's common stock repurchased from Roski, and subsequently retired),
to acquire Boomtown (unaudited).
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.
On November 17, 1995, the Company acquired PCM's net assets for an aggregate
$2,640,000 payable in shares of Hollywood Park common stock, in three
installments: (i) shares of Hollywood Park common stock having a value of
$1,600,000, or 136,008 common shares were issued on November 17, 1995, (ii)
shares of Hollywood Park common stock, having a value of $540,000, or 48,674
common shares, were issued on November 19, 1996, and (iii) shares of Hollywood
Park common stock, having a value of $500,000, or 33,417 common shares were
issued on February 10, 1997.
On March 23, 1994, the Company issued 591,715 shares of Hollywood Park
common stock to acquire Sunflower. An additional 55,574 shares of Hollywood
Park common stock were subsequently issued to Mr. Richard Boushka, a former
Sunflower shareholder, as required by the agreement of merger. The acquisition
of Sunflower was accounted for under the purchase method of accounting.
S-28
<PAGE>
HOLLYWOOD PARK, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
On August 11, 1994, the Company issued 1,498,016 shares of Hollywood Park
common stock to acquire Turf Paradise. The acquisition of Turf Paradise was
accounted for under the pooling of interests method of accounting and the
historical per common share earnings of the Company have been restated as if
the acquisition had occurred at the beginning of each period presented.
NOTE 14--LEASE OBLIGATIONS
The Company leases certain equipment primarily for use in racing operations
(pari-mutuel wagering equipment) and general office equipment. Minimum lease
payments required under operating leases that have initial terms in excess of
one year as of December 31, 1996 are approximately $1,354,000 in 1997 and
annually thereafter. Total rent expense for these long term lease obligations
for the years ended December 31, 1996, 1995 and 1994 was $1,378,000,
$1,318,000 and $1,437,000, respectively.
NOTE 15--RETIREMENT PLANS
The Hollywood Park Pension Plan (the "Pension Plan") was a non-contributory,
defined benefit plan covering employees of Hollywood Park, Inc. who met the
Pension Plan's service requirements, 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 requirements.
Hollywood Park elected to terminate 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
accrued benefits were frozen as of December 31, 1996. As of the date the
Pension Plan benefits were frozen, participants became 100% vested in their
accrued benefits, regardless of the number of years of service. The funds
accumulated under the Pension Plan will be used to provide the retirement
benefits accrued by the participants. Pension Plan participants will receive
their fully accrued benefits only if the Pension Plan's assets are sufficient
to cover such accrued benefits, but in no event can the Pension Plan assets be
paid to the Company prior to the satisfaction of all accrued Pension Plan
benefits to the participants. Management presently believes that the
accumulated Pension Plan assets are sufficient to provide for the
participant's accumulated Pension Plan benefits.
The Company's Pension Plan funding policy was to contribute amounts to the
Pension Plan fund in an amount, at least equal to the minimum funding
requirements of the Employee Retirement Income Security Act of 1974, though
not in excess of the maximum deductible limit. The Pension Plan was subject to
full funding limitation in 1996; therefore, no contributions were made in
1996. The Company contributed approximately $22,000 to the Pension Plan in
1995.
S-29
<PAGE>
HOLLYWOOD PARK, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
RETIREMENT PLANS FUNDED STATUS
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------
1996 1995
---------- ----------
<S> <C> <C>
Actuarial present value of benefit obligations:
Accumulated benefit obligation, including vested
benefits of $2,627,000 and $4,078,000 at December 31,
1996 and 1995, respectively........................... $2,627,000 $4,190,000
========== ==========
Projected benefit obligation for service rendered to
date.................................................. $2,627,000 $5,080,000
Less Pension Plan assets at fair value................. 4,436,000 5,754,000
Less Pension Plan contribution......................... 0 22,000
---------- ----------
Pension Plan assets in excess of projected benefit
obligation............................................ 1,809,000 696,000
Unrecognized net gain from past experience different
from that assumed and effects of changes in
assumptions........................................... (1,052,000) (323,000)
Unrecognized net asset being recognized over 15 years.. (452,000) (539,000)
---------- ----------
Pension Plan asset (liability)....................... $ 305,000 $ (166,000)
========== ==========
Net pension expense--Service cost...................... $ 698,000 $ 314,000
Net pension expense--Interest cost..................... 325,000 354,000
Actual return on assets................................ (784,000) (753,000)
Net amortization and deferral.......................... 255,000 247,000
---------- ----------
Net periodic pension cost............................ $ 494,000 $ 162,000
========== ==========
</TABLE>
The December 31, 1996, reserve liabilities and related asset values for the
annuity contract are not included in the table above, because the Company
executed an agreement with the insurance company holding the annuity contracts
to no longer participate in the annual adjustments to the contract values. The
December 31, 1995, Pension Plan liabilities and assets included in the table
above are annuity contract reserve liabilities and the related assets for the
current Pension Plan retirees.
The weighted average discount rate and rate of increase in future
compensation levels used in determining the actuarial present value of the
projected benefit obligations were 7.5% and 5.0%, respectively, at
December 31, 1996, and 8.0% and 5.0%, respectively, at December 31, 1995. The
expected long term rate of return on assets was 8.0% at December 31, 1996 and
1995.
The Company also contributed to several collectively-bargained multi-
employer pension and retirement plans (covering full and part-time employees)
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, 1996, 1995 and 1994 totaled $1,872,000, $1,781,000 and
$1,846,000, respectively. Contributions to the collectively-bargained plans
are 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 is 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.
There is no defined benefit pension plan for Turf Paradise.
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
S-30
<PAGE>
HOLLYWOOD PARK, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
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.
NOTE 16--RELATED PARTY TRANSACTIONS
Since November 1993, the Company has had an aircraft time sharing agreement
with R.D. Hubbard Enterprises, Inc. ("Hubbard Enterprises"), which is wholly
owned by Mr. Hubbard. The agreement automatically renews each month unless
written notice of termination is given by either party at least two weeks
before a renewal date. The Company reimburses Hubbard Enterprises for expenses
incurred as a result of the Company's use of the aircraft, which totaled
approximately $120,000 in 1996, $126,000 in 1995, and $139,000 in 1994.
On March 23, 1994, the Company acquired Sunflower, a greyhound and
thoroughbred race track located in Kansas City, Kansas, in which Mr. Hubbard
owned a 60% interest. The agreement of merger also provided that under certain
circumstances the former Sunflower shareholders were entitled to receive
additional shares of Hollywood Park common stock. As of March 23, 1995, the
former Sunflower shareholders transferred their right to such additional
consideration to Hollywood Park for nominal consideration and have no further
entitlements to additional consideration.
On May 2, 1996, the Kansas Legislature adjourned without passing legislation
that would have allowed additional gaming at Sunflower, thereby permitting
Sunflower to more effectively compete with Missouri riverboat gaming. As a
result of the outcome of the Kansas Legislative session, Hollywood Park wrote
off its approximately $11,412,000 investment in Sunflower. There was no cash
involved in the write off of this investment. On May 17, 1996, Sunflower filed
for reorganization under Chapter 11 of the Bankruptcy Code. Sunflower is
operating during the reorganization.
NOTE 17--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. On May 19, 1995, the Company amended the non-qualified
stock option agreements issued through this date, to reflect the substantial
decline in the fair market value of the common stock, lowering the per share
price of the outstanding options to $13.00. In 1994, Turf Paradise had
approximately 23,000 stock options outstanding, all of which were fully
exercised prior to the acquisition.
S-31
<PAGE>
HOLLYWOOD PARK, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
The following table summarizes information related to shares under option
and shares available for grant under the Plan.
<TABLE>
<CAPTION>
1996 1995 1994
------- ------- -------
<S> <C> <C> <C>
Options outstanding at beginning of year......... 249,000 235,000 150,000
Options granted during the year.................. 433,500 15,000 85,000
Options expired during the year.................. (40,000) (1,000) 0
------- ------- -------
Options outstanding at end of year............. 642,500 249,000 235,000
======= ======= =======
Total shares available for issuance under the
plan............................................ 900,000 625,000 625,000
Per share price of outstanding options issued in
prior year...................................... $ 10.00 $ 13.00 $ 25.50
Per share price of outstanding options issued in
current year.................................... $ 10.00 $ 13.25 $ 22.00
Per share price of outstanding options issued in
current year.................................... $ 11.50 -- --
Number of shares subject to exercisable option at
end of year..................................... 188,332 128,000 50,000
</TABLE>
NOTE 18--COMMITMENTS AND CONTINGENCIES
As previously reported by the Company, and described in the Company's Annual
Report on Form 10-K for 1994, six purported class actions (the "Class
Actions") were filed beginning in September 1994, against the Company and
certain of its directors and officers in the United States District Court,
Central District of California (the "District Court") and consolidated in a
single action entitled In re Hollywood Park Securities Litigation. On
September 15, 1995, a related stockholder derivative action, entitled Barney
v. Hubbard, et al. (the "Derivative Action"), was filed in the California
Superior Court for the County of San Diego (the "State Court").
The Company and other defendants each denied any liability or wrongdoing and
asserted various defenses. The District Court ordered the parties to engage in
non-binding mediation in an effort to settle all related claims. As previously
reported, as a result of the court ordered mediation, the parties reached an
agreement-in-principle to settle all claims raised in the Class and Derivative
Actions. The Company entered into the settlements in order to avoid the
expense, uncertainty and distraction of further litigation.
On November 6 and 13, 1995, respectively, the parties executed definitive
settlement agreements in the Derivative and Class Actions. Those agreements
provided for the release and dismissal of all claims raised or which might
have been raised in the Class and Derivative actions, subject to approval by
each of the respective courts. In settlement of the Class Actions, a
settlement fund in the principal amount of $5,800,000 has been created for the
benefit of the alleged class with contributions from the Company and the
insurance carrier for its directors and officers. After giving consideration
to the amounts to be received by the Company in settlement of the Derivative
Action, the Company's net settlement payment in the Class Actions was less
than $2,500,000. Under settlement of the Derivative Action, the Company will
receive a $2,000,000 payment from the insurance carrier which the Company will
use to pay plaintiff's attorneys fees and expenses and partially to defray the
Company's payment in the settlement of the Class Actions. The Derivative
Action settlement also includes provisions enhancing the Company's financial
controls and modifying certain terms of its acquisition of Sunflower.
On February 26, 1996, the District Court approved the settlement of the
Class Actions and entered a judgment dismissing the Class Actions in their
entirety. On May 6, 1996, the State Court approved the settlement of the
Derivative Action and entered a judgment dismissing the Derivative Action in
its entirety. On or about July 2, 1996, a notice of appeal was filed in
connection with the Derivative Action judgment, and on or about February 14,
1997, the appellant filed her opening brief. The Company intends to oppose the
purported appeal.
S-32
<PAGE>
HOLLYWOOD PARK, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
The Company also executed a separate settlement as to all purported claims
against the Company and its officers and directors by the former controlling
stockholder of Turf Paradise (the "Walkers") in connection with the Company's
acquisition of Turf Paradise. Under the terms of the consummation of the
settlement of the Class and Derivative Actions, the Walkers were excluded from
participating in the Class Actions settlement fund, agreed to release all of
their potential threatened claims, and are to receive a payment in the
principal amount of $2,750,000.
The lawsuit settlement expense recorded in the accompanying statement of
operations for the year ended December 31, 1995, included $2,450,000 for the
Class Actions, $2,750,000 for the Walkers settlement and approximately
$888,000 in legal costs, for a total of approximately $6,088,000.
The accrued lawsuit settlement recorded in the accompanying financial
statements as of December 31, 1996, of $2,750,000 represents the settlement
with the Walkers.
Sunflower entered into a two year consulting agreement with Mr. Richard
Boushka, a former Sunflower shareholder, as of March 24, 1994. Consulting
services include assisting Sunflower in obtaining all approvals, licenses and
permits necessary for Sunflower to conduct casino gaming and to operate video
lottery terminals at or next to Sunflower's property. Under the terms of the
agreement Mr. Boushka will receive monthly payments totaling $100,000 per
year. As of May 1995, given Sunflower's financial results, all payments to Mr.
Boushka were suspended, though Mr. Boushka did continue to provide services
per the agreement.
S-33
<PAGE>
HOLLYWOOD PARK, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
NOTE 19--UNAUDITED QUARTERLY INFORMATION
The following is a summary of unaudited quarterly financial data for the
years ended December 31, 1996 and 1995:
<TABLE>
<CAPTION>
1996
----------------------------------------
DEC. SEPT. JUNE MAR.
31, 30, 30, 31,
------- ------- ------- --------
(IN THOUSANDS, EXCEPT PER SHARE
DATA)
<S> <C> <C> <C> <C>
Revenues..................... $38,698 $30,247 $46,427 $ 27,853
======= ======= ======= ========
Net income (loss)............ $ 3,277 $ 603 $ 5,249 $(13,378)
======= ======= ======= ========
Net income (loss) available
to (allocated to) common
shareholders................ $ 2,795 $ 122 $ 4,768 $(13,859)(a)
======= ======= ======= ========
Per common share:
Net income (loss)--
primary................... $ 0.15 $ 0.01 $ 0.26 $ (0.74)
======= ======= ======= ========
Net income (loss)--fully
diluted................... $ 0.15 $ 0.01 $ 0.25 $ (0.74)
======= ======= ======= ========
Cash dividends............. $ 0.00 $ 0.00 $ 0.00 $ 0.00
======= ======= ======= ========
<CAPTION>
1995
----------------------------------------
DEC. SEPT. JUNE MAR.
31, 30, 30, 31,
------- ------- ------- -------
(IN THOUSANDS, EXCEPT PER SHARE
DATA)
<S> <C> <C> <C> <C>
Revenues..................... $36,693 $26,595 $42,828 $ 24,456
Net income (loss)............ $ 212 $(5,637) $ 4,857 $ (594)
======= ======= ======= ========
Net income (loss) available
to (allocated to) common
shareholders................ $ (270)(b) $(6,118)(c) $ 4,376 $ (1,075)(d)
======= ======= ======= ========
Per common share:
Net income (loss)--
primary................... $ (0.01) $ (0.33) $ 0.24 $ (0.06)
======= ======= ======= ========
Net income (loss)--fully
diluted................... $ (0.01) $ (0.33) $ 0.24 $ (0.06)
======= ======= ======= ========
Cash dividends............. $ 0.00 $ 0.00 $ 0.00 $ 0.00
======= ======= ======= ========
</TABLE>
- --------
(a) The primary reason for this quarter's loss was the $11,346,000 write off
of the Company's investment in Sunflower. 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.
(b) The primary reason for this quarter's loss was due to losses at Sunflower
due to intense competition from nearby Missouri riverboat gaming.
(c) The primary reasons for this quarter's loss were the $5,627,000 of expense
related to the lawsuit settlement, and losses at Sunflower, due to
competition from Missouri riverboat gaming.
(d) The primary reasons for this quarter's loss was due to Hollywood Park Race
Track being closed for live on-track racing (as historically happens
during the three months ended March 31), and losses at Sunflower, due to
competition from Missouri riverboat gaming.
S-34
<PAGE>
HOLLYWOOD PARK, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
NOTE 20--UNAUDITED SUBSEQUENT EVENTS
POSSIBLE RESTORATION OF REAL ESTATE INVESTMENT TRUST/PAIRED-SHARE
STRUCTURE From 1982 to 1991, the Company was operated as a Real Estate
Investment Trust ("REIT") known as Hollywood Park Realty Enterprises, Inc.
("HP Realty"), and its stock was paired with, or stapled to, that of Hollywood
Park Operating Company ("HP Operating Company"). HP Realty was primarily an
owner and lessor of real property. HP Operating Company was primarily engaged
in the active conduct of racing operations and leased a significant amount of
real property from HP Realty to conduct those racing operations. Generally, a
REIT is required to distribute, as dividends to its stockholders, 95% of its
taxable income (other than net capital gains), and such amounts distributed
are not subject to federal income tax at the corporate level. Effective as of
January 1, 1992, as part of a corporate reorganization, HP Realty and HP
Operating Company ceased operating in a REIT/Paired-Share Structure, HP
Operating Company became a wholly owned subsidiary of HP Realty and HP Realty
was renamed Hollywood Park, Inc.
In May 1997, the Company announced that it was exploring the possibility of
restoring the REIT/Paired-Share Structure. The Company now expects to proceed
with the REIT/Paired-Share Structure, subject to, among other things, receipt
of all required stockholder, regulatory and other approvals. There can be no
assurance that the Company will receive such approvals necessary to effect the
REIT/Paired-Share Structure, or that the benefits expected from the
restoration will be achieved.
YAKAMA EXPANSION Hollywood Park, through its wholly owned subsidiaries HP
Yakama, Inc. ("HP Yakama") and HP Yakama Consulting, Inc. ("HPY Consulting"),
has entered into agreements with the Yakama Tribal Gaming Corporation (the
"Tribal Corporation") and The Confederated Tribes and Bands of the Yakama
Indian Nation (the "Tribes") to fund the construction and development of
(through HP Yakama), and to provide development services with respect to
(through HPY Consulting), a casino in Yakima County, Washington. HP Yakama has
committed to fund up to $9,000,000 to construct and equip the casino, and the
Tribal Corporation has signed a promissory note to repay up to $9,000,000, at
a 10% annual interest rate over seven years from the date of completion. Under
the Development Agreement between HPY Consulting and the Tribal Corporation,
HPY Consulting would provide development services to the Tribal Corporation at
a cost of $1.00 per year, plus certain consulting expenses, not to exceed
$2,000 per month.
HP Yakama has also entered into a Master Lease to lease the completed casino
and underlying land (the "Facility") from the Tribes, for a seven year term
commencing with the opening of the casino, for $12,000 per year, and then to
Sublease the Facility to the Tribal Corporation, for the same seven year term.
Rent due from the Tribal Corporation to HP Yakama, under the Sublease is
initially set at 28% of Net Revenues (as defined), until such time as the
aggregate accrued Net Revenues equal $26,000,000 and then the rent decreases
to 25% of Net Revenues, until such time as the aggregate accrued Net Revenues
equal $41,000,000, and then rent decreases to 22% for the remainder of the
Sublease period. "Net Revenues" is defined as Gross Revenues less normal and
necessary operating expenses as determined under generally accepted accounting
principles, to include interest payments due from the Tribal Corporation to HP
Yakama, and to exclude rent due under the Sublease.
Hollywood Park has entered into a Profit Participation Agreement with North
American Sports Management, Inc. ("NORAM"), which entered into the original
Memorandum of Understanding with the Tribes. NORAM will receive 22% of the
portion of the Net Revenues (as described above) actually received by HP
Yakama under the Sublease.
Construction on the casino is underway and is expected to open in the second
quarter of 1998. The casino will feature a 600 seat bingo hall, certain table
games including: Blackjack, Poker, Craps, Roulette, Mini-bac, Caribbean Stud,
and will offer electronic pull tabs and electronic bingo, but will not offer
slot machines. Gaming
S-35
<PAGE>
HOLLYWOOD PARK, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
is played in the traditional Las Vegas style, where players bet against the
house. The casino is located approximately 130 miles from both Seattle,
Washington and Portland, Oregon, in a valley at the foot of Mt. Adams, which
is a major vacation site. The nearest gaming facility is 157 miles away in
Pendelton, Oregon.
Presently, Hollywood Park, the Tribes and the Tribal Corporation are
awaiting final approval of the documentation from the Bureau of Indian Affairs
(the "BIA"). Hollywood Park and HP Yakama also have applications pending with
the Washington Gambling Commission (the "WGC") for Class III Indian Gaming-
Financier approval. There can be no assurance that the BIA will approve the
documentation or that the WGC will grant Hollywood Park and HP Yakama the
Class III Indian Gaming-Financier approval.
CRYSTAL PARK HOTEL AND CASINO On October 11, 1997, the California Attorney
General accepted CEI's withdrawal of its conditional gaming registration
pursuant to a previously negotiated agreement, and the City of Compton
concurrently revoked CEI's city gaming license. Crystal Park LLC subsequently
terminated CEI's lease, and 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 addition to the judgment for possession and for damages of
approximately $150,000, Crystal Park LLC has a claim against CEI for
additional damages relating to subsequent unpaid rent and additional unpaid
amounts.
After evicting CEI, Crystal Park LLC entered into a new lease for the
Crystal Park Casino with California Casino Management, Inc. ("CCM"), a
California corporation, owned by Mr. Leo Chu. Mr. Chu presently has a
conditional gaming registration from the California Attorney General and a
gaming license from the City of Compton to operate the Crystal Park Casino.
Mr. Chu presently holds a California gaming registration to operate a small
card club in Northern California. CCM reopened the Crystal Park Casino on
December 26, 1997 for a term of four years. The lease provides for monthly
payments of $100,000 for the first six months, $350,000 for months 7 through
18, and $550,000 for months 19 through 48.
As of December 4, 1997, HP Casino, Inc. ("HP Casino"), a wholly-owned
subsidiary of Hollywood Park, acquired the membership interests in Crystal
Park LLC held by First Park Investments, LLC for $1,000,000, the amount
initially invested. HP Casino is in negotiations with Redwood Gaming, LLC to
purchase Redwood Gaming's membership interest. As a result of the First Park
transaction, Hollywood Park (through HP Casino and HP/Compton, Inc.) owns
93.2% of the membership interests of Crystal Park LLC and would own 100% of
such membership interests if the Redwood Gaming transaction is completed.
As of September 30, 1997, CEI owed Crystal Park LLC $600,000, of which
$200,000 is covered by a rent security deposit Crystal Park LLC received from
CEI in October 1996, and of which $350,000 was fully reserved and, therefore,
is not reflected in the operating results for the period ended September 30,
1997.
S-36
<PAGE>
HOLLYWOOD PARK, INC.
SELECTED FINANCIAL DATA BY OPERATIONAL LOCATION
<TABLE>
<CAPTION>
FOR THE THREE MONTHS ENDED (UNAUDITED) THREE MONTHS ENDED (UNAUDITED)
--------------------------------------------- YEAR ENDED --------------------------------
DECEMBER 31, SEPTEMBER 30, JUNE 30, MARCH 31, DECEMBER 31, SEPTEMBER 30, JUNE 30, MARCH 31,
1996 1996 1996 1996 1996 1997 1997 1997
------------ ------------- -------- --------- ------------ ------------- -------- ---------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
REVENUES:
Hollywood Park, Inc.--
Casino Division....... $14,531 $15,205 $15,173 $13,773 $ 58,682 $14,759 $15,323 $13,994
HP/Compton, Inc.--
Crystal Park Hotel and
Casino................ 445 0 0 0 445 702 900 600
Boomtown Reno.......... 0 0 0 0 0 20,978 0 0
Boomtown New Orleans... 0 0 0 0 0 19,380 0 0
Boomtown Biloxi........ 0 0 0 0 0 15,028 0 0
Hollywood Park Race
Track.................. 17,338 13,209 27,710 5,282 63,539 12,334 26,747 3,249
Turf Paradise, Inc..... 5,828 1,546 3,219 6,597 17,190 1,647 3,143 6,562
Sunflower Racing, Inc.. 0 0 0 1,782 1,782 0 0 0
Hollywood Park, Inc.--
Corporate............. 556 287 325 419 1,587 327 211 2,410
Boomtown, Inc.--
Corporate.............. 0 0 0 0 0 55 0 0
------- ------- ------- ------- -------- ------- ------- -------
38,698 30,247 46,427 27,853 143,225 85,210 46,324 26,815
------- ------- ------- ------- -------- ------- ------- -------
EXPENSES:
Hollywood Park, Inc.--
Casino Division....... 12,885 12,676 12,576 12,297 50,434 12,071 12,927 12,441
HP/Compton, Inc.--
Crystal Park Hotel and
Casino................ 1 0 0 0 1 25 18 22
Boomtown Reno.......... 0 0 0 0 0 16,665 0 0
Boomtown New Orleans... 0 0 0 0 0 13,860 0 0
Boomtown Biloxi........ 0 0 0 0 0 12,642 0 0
Hollywood Park Race
Track.................. 12,998 11,032 17,034 8,190 49,254 11,183 16,735 7,286
Turf Paradise, Inc..... 4,134 2,013 2,700 4,122 12,969 2,023 2,670 4,230
Sunflower Racing, Inc.. 0 0 0 1,703 1,703 0 0 0
Hollywood Park, Inc.--
Corporate.............. 2,133 824 2,488 1,145 6,590 1,744 1,346 1,336
Boomtown, Inc.--
Corporate.............. 0 0 0 0 0 836 0 0
------- ------- ------- ------- -------- ------- ------- -------
32,151 26,545 34,798 27,457 120,951 71,049 33,696 25,315
------- ------- ------- ------- -------- ------- ------- -------
NON-RECURRING EXPENSES:
REIT restructuring..... 0 0 0 0 0 397 212 0
Write off of investment
in Sunflower Racing,
Inc................... 0 0 66 11,346 11,412 0 0 0
------- ------- ------- ------- -------- ------- ------- -------
0 0 66 11,346 11,412 397 212 0
------- ------- ------- ------- -------- ------- ------- -------
DEPRECIATION AND
AMORTIZATION:
Hollywood Park, Inc.--
Casino Division....... 751 740 736 675 2,902 685 900 764
HP/Compton, Inc.--
Crystal Park Hotel and
Casino................ 319 0 0 0 319 521 402 400
Boomtown Reno.......... 0 0 0 0 0 1,353 0 0
Boomtown New Orleans... 0 0 0 0 0 1,031 0 0
Boomtown Biloxi........ 0 0 0 0 0 820 0 0
Hollywood Park Race
Track.................. 999 1,016 1,008 952 3,975 1,013 1,001 991
Turf Paradise, Inc..... 294 301 301 309 1,205 288 297 295
Sunflower Racing, Inc.. 0 0 0 536 536 0 0 0
Hollywood Park, Inc.--
Corporate.............. 434 441 442 441 1,758 431 431 434
Boomtown, Inc.--
Corporate.............. 0 0 0 0 0 17 0 0
------- ------- ------- ------- -------- ------- ------- -------
2,797 2,498 2,487 2,913 10,695 6,159 3,031 2,884
------- ------- ------- ------- -------- ------- ------- -------
</TABLE>
S-37
<PAGE>
HOLLYWOOD PARK, INC.
SELECTED FINANCIAL DATA BY OPERATIONAL LOCATION--(CONTINUED)
<TABLE>
<CAPTION>
FOR THE THREE MONTHS ENDED (UNAUDITED) THREE MONTHS ENDED (UNAUDITED)
--------------------------------------------- YEAR ENDED --------------------------------
DECEMBER 31, SEPTEMBER 30, JUNE 30, MARCH 31, DECEMBER 31, SEPTEMBER 30, JUNE 30, MARCH 31,
1996 1996 1996 1996 1996 1997 1997 1997
------------ ------------- -------- --------- ------------ ------------- -------- ---------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
OPERATING INCOME
(LOSS):
Hollywood Park, Inc.--
Casino Division...... 895 1,789 1,861 801 5,346 2,003 1,496 789
HP/Compton, Inc.--
Crystal Park Hotel
and Casino........... 125 0 0 0 125 156 480 178
Boomtown Reno......... 0 0 0 0 0 2,960 0 0
Boomtown New Orleans.. 0 0 0 0 0 4,489 0 0
Boomtown Biloxi....... 0 0 0 0 0 1,566 0 0
Hollywood Park Race
Track................. 3,341 1,161 9,668 (3,860) 10,310 138 9,011 (5,028)
Turf Paradise, Inc.... 1,400 (768) 218 2,166 3,016 (664) 176 2,037
Sunflower Racing, Inc. 0 0 0 (457) (457) 0 0 0
Hollywood Park, Inc.--
Corporate............. (2,011) (978) (2,605) (1,167) (6,761) (1,848) (1,566) 640
Boomtown, Inc.--
Corporate............. 0 0 0 0 0 (798) 0 0
REIT restructuring.... 0 0 0 0 0 (397) (212) 0
Write off of
investment in
Sunflower Racing,
Inc.................. 0 0 (66) (11,346) (11,412) 0 0 0
------ ------ ------ -------- -------- ------ ------ -------
3,750 1,204 9,076 (13,863) 167 7,605 9,385 (1,384)
------ ------ ------ -------- -------- ------ ------ -------
Interest expense....... 24 20 54 844 942 3,653 65 64
MINORITY INTEREST:
HP/Compton, Inc.--
Crystal Park Hotel
and Casino........... 15 0 0 0 15 17 42 22
------ ------ ------ -------- -------- ------ ------ -------
Income (loss) before
income tax expense.... 3,711 1,184 9,022 (14,707) (790) 3,935 9,278 (1,470)
Income tax expense..... 434 581 3,773 (1,329) 3,459 1,524 3,675 (575)
------ ------ ------ -------- -------- ------ ------ -------
Net income (loss)...... $3,277 $ 603 $5,249 $(13,378) $ (4,249) $2,411 $5,603 $ (895)
====== ====== ====== ======== ======== ====== ====== =======
Dividend requirements
on convertible
preferred stock....... $ 482 $ 481 $ 481 $ 481 $ 1,925 $ 558 $ 481 $ 481
Net income (loss)
available to
(allocated to) common
shareholders.......... $2,795 $ 122 $4,768 $(13,859) $ (6,174) $1,853 $5,122 $(1,376)
====== ====== ====== ======== ======== ====== ====== =======
Per common share:
Net income (loss)--
primary............... $ 0.15 $ 0.01 $ 0.26 $ (0.74) $ (0.33) $ 0.08 $ 0.28 $ (0.07)
Net income (loss)--
fully diluted......... $ 0.15 $ 0.01 $ 0.25 $ (0.74) $ (0.33) -- $ 0.27 $ (0.07)
Number of shares--
primary................ 18,365 18,535 18,613 18,610 18,505 24,706 18,462 18,372
Number of shares--fully
diluted................ 20,657 20,826 20,904 20,902 20,797 -- 20,754 20,664
</TABLE>
S-38
<PAGE>
HOLLYWOOD PARK, INC.
CALCULATION OF EARNINGS PER SHARE
<TABLE>
<CAPTION>
FOR THE THREE MONTHS ENDED DECEMBER 31,
(UNAUDITED)
-------------------------------------------------
ASSUMING FULL DILUTION
PRIMARY (A)
------------------------ ------------------------
1996 1995 1994 1996 1995 1994
------- ------- ------ ------- ------- ------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C>
Average number of common
shares outstanding.......... 18,365 18,486 18,370 18,365 18,486 18,370
Average common shares due to
assumed conversion of the
convertible preferred
shares...................... 0 0 0 2,291 2,291 2,291
------- ------- ------ ------- ------- ------
Total shares............... 18,365 18,486 18,370 20,656 20,777 20,661
======= ======= ====== ======= ======= ======
Net income................... $ 3,277 $ 212 $2,736 $ 3,277 $ 212 $2,736
Less dividend requirements on
convertible preferred
shares...................... 482 482 481 0 0 0
------- ------- ------ ------- ------- ------
Net income (loss) available
to (allocated to) common
shareholders................ $ 2,795 $ (270) $2,255 $ 3,277 $ 212 $2,736
======= ======= ====== ======= ======= ======
Net income (loss) per share.. $ 0.15 $ (0.01) $ 0.12 $ 0.16 $ 0.01 $ 0.13
======= ======= ====== ======= ======= ======
<CAPTION>
FOR THE YEARS ENDED DECEMBER 31,
-------------------------------------------------
ASSUMING FULL DILUTION
PRIMARY (A)
------------------------ ------------------------
1996 1995 1994 1996 1995 1994
------- ------- ------ ------- ------- ------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C>
Average number of common
shares outstanding.......... 18,505 18,399 18,224 18,505 18,399 18,224
Average common shares due to
assumed conversion of the
convertible preferred
shares...................... 0 0 0 2,291 2,291 2,291
------- ------- ------ ------- ------- ------
Total shares............... 18,505 18,399 18,224 20,796 20,690 20,515
======= ======= ====== ======= ======= ======
Net income (loss)............ $(4,249) $(1,162) $3,772 $(4,249) $(1,506) $3,772
Less dividend requirements on
convertible preferred
shares...................... 1,925 1,925 1,925 0 0 0
------- ------- ------ ------- ------- ------
Net income (loss) available
to (allocated to) common
shareholders................ $(6,174) $(3,087) $1,847 $(4,249) $(1,506) $3,772
======= ======= ====== ======= ======= ======
Net income (loss) per share.. $ (0.33) $ (0.17) $ 0.10 $ (0.20) $ (0.07) $ 0.18
======= ======= ====== ======= ======= ======
</TABLE>
S-39
<PAGE>
HOLLYWOOD PARK, INC.
CALCULATION OF EARNINGS PER SHARE--(CONTINUED)
<TABLE>
<CAPTION>
FOR THE THREE MONTHS ENDED FOR THE NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
--------------------------- ------------------------------
ASSUMING FULL ASSUMING FULL
PRIMARY DILUTION (A) PRIMARY DILUTION (A)
------------- ------------- -------------- --------------
1997 1996 1997 1996 1997 1996 1997 1996
------ ------ ------ ------ ------ ------- ------ -------
(IN THOUSANDS, EXCEPT PER SHARE DATA--UNAUDITED)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Average number of common
shares outstanding..... 24,706 18,535 24,706 18,535 20,596 18,605 20,596 18,605
Average common shares
due to assumed
conversion of the
convertible preferred
shares................. 0 0 -- 2,291 0 0 -- 2,291
------ ------ ------ ------ ------ ------- ------ -------
Total shares.......... 24,706 18,535 24,706 20,826 20,596 18,605 20,596 20,896
====== ====== ====== ====== ====== ======= ====== =======
Net income (loss) ...... $2,411 $ 603 $2,411 $ 603 $7,119 $(7,526) $7,119 $(7,526)
Less dividend
requirements on
convertible preferred
shares................. 558 481 0 0 1,520 1,443 0 0
------ ------ ------ ------ ------ ------- ------ -------
Net income (loss)
available to (allocated
to) common
shareholders........... $1,853 $ 122 $2,411 $ 603 $5,599 $(8,969) $7,119 $(7,526)
====== ====== ====== ====== ====== ======= ====== =======
Net income (loss) per
share.................. $ 0.08 $ 0.01 $ 0.10 $ 0.03 $ 0.27 $ (0.48) $ 0.35 $ (0.36)
====== ====== ====== ====== ====== ======= ====== =======
</TABLE>
- --------
Note: As of August 28, 1997, the Company's 2,749,900 outstanding depositary
shares were converted into approximately 2,291,500 shares of the Company's
Common Stock.
(a) The computed values, assuming full dilution, are anti-dilutive; therefore,
the primary share values are presented on the face of the Consolidated
Statements of Operations.
S-40
<PAGE>
HOLLYWOOD PARK REALTY ENTERPRISES, INC.
SCHEDULE III--UNAUDITED PRO FORMA
REAL ESTATE AND ACCUMULATED DEPRECIATION
AS OF SEPTEMBER 30, 1997
<TABLE>
<CAPTION>
GROSS AMOUNT OF WHICH
INITIAL COST TO COSTS SUBSEQUENT TO CARRIED AT CLOSE OF
COMPANY ACQUISITION PERIOD
----------------- ------------------------- -------------------------
LAND AND BUILDINGS ACCUMULATED
LAND AND BUILDING DEPRECIATION
LAND BUILDING IMPROVEMENTS IMPROVEMENTS AND YEAR OF
DESCRIPTION ENCUMBRANCES (A) LAND BUILDINGS IMPROVEMENTS IMPROVEMENTS TOTAL TOTAL AMORTIZATION CONSTRUCTION
----------- ---------------- ------- --------- ------------ ------------ ------------ ------------ ------------ ------------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Race track
assets:
Hollywood Park
Race Track--
Inglewood,
CA (b).......... $ 0 $18,973 $ 83,558 $271 $4,952 $19,244 $ 88,510 $51,209 1938
Turf Paradise
Race Track--
Phoenix, AZ..... 0 4,289 17,422 291 148 4,580 17,570 11,990 1956
Gaming assets:
Hollywood Park-
Casino--
Inglewood, CA... 0 757 27,177 67 571 824 27,748 3,429 1994
Other assets:
Hollywood Park
Golf and Sports
Center--
Inglewood, CA... 0 1,269 730 12 7 1,281 737 260 1992
Turf Paradise
Trailer Park--
Phoenix, AZ..... 0 64 347 0 6 64 353 325 1971
--- ------- -------- ---- ------ ------- -------- -------
$0 $25,352 $129,234 $641 $5,684 $25,993 $134,918 $67,213
=== ======= ======== ==== ====== ======= ======== =======
Land and land
improvements..... $ 25,993 $ 7,665
Buildings and
building
improvement...... 134,918 59,548
Furniture and
equipment........ 1,335 1,102
Construction in
progress......... 2,052 0
-------- -------
Total........... $164,298 $68,315
======== =======
<CAPTION>
LIFE ON
WHICH
DEPRECIATION
IN LATEST
INCOME
DATE STATEMENTS
DESCRIPTION ACQUIRED IS COMPUTED
----------- -------- ------------
<S> <C> <C>
Race track
assets:
Hollywood Park
Race Track--
Inglewood,
CA (b).......... 1938 23
Turf Paradise
Race Track--
Phoenix, AZ..... 1994 20
Gaming assets:
Hollywood Park-
Casino--
Inglewood, CA... 1994 23
Other assets:
Hollywood Park
Golf and Sports
Center--
Inglewood, CA... 1992 23
Turf Paradise
Trailer Park--
Phoenix, AZ..... 1994 12
Land and land
improvements.....
Buildings and
building
improvement......
Furniture and
equipment........
Construction in
progress.........
Total...........
</TABLE>
- ----
(a) The Company presently has an open letter of credit in the amount of
$2,035,000 under the Bank Credit Facility, which is secured by the assets
presented here.
(b) The initial cost as of January 1, 1996. Historical cost information
related to the initial construction of the Hollywood Park Race Track in
1938 is not available. Hollywood Park is currently seeking shareholder
approval of the Reorganization Amendments to enable Hollywood Park to
reorganize into a real estate investment trust and an operating company;
thereby creating the requirement for inclusion of Schedule III. If the
Reorganization is completed, the date of completion of the Reorganization
will be used for purposes of determining the initial cost in future
presentations of this schedule.
S-41
<PAGE>
BOOMTOWN, INC.
CONSOLIDATED FINANCIAL STATEMENTS
REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
The Board of Directors
Boomtown, Inc.
We have audited the accompanying consolidated balance sheets of Boomtown,
Inc. (the "Company") as of September 30, 1995 and 1996, and the related
consolidated statements of operations, stockholders' equity and cash flows for
each of the three years in the period ended September 30, 1996. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based
upon 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 consolidated 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 consolidated financial position of Boomtown,
Inc. at September 30, 1995 and 1996, and the consolidated results of its
operations and its cash flows for each of the three years in the period ended
September 30, 1996, in conformity with generally accepted accounting
principles.
Ernst & Young LLP
Reno, Nevada
November 15, 1996, except
for the first paragraph of
Note 13 as to which the
date is November 18, 1996
S-42
<PAGE>
BOOMTOWN, INC.
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
SEPTEMBER 30,
-----------------
1996 1995
-------- --------
(IN THOUSANDS)
<S> <C> <C>
ASSETS
------
Current Assets:
Cash and cash equivalents (including restricted cash of
approximately $2.4 million as of September 30, 1995)...... $ 23,101 $ 20,775
Accounts receivable, net................................... 942 924
Income taxes receivable.................................... 1,815 1,508
Inventories................................................ 1,725 2,715
Prepaid expenses........................................... 7,333 7,025
Other current assets....................................... 1,762 765
-------- --------
Total current assets..................................... 36,678 33,712
Property, plant and equipment, net......................... 145,330 150,955
Goodwill, net.............................................. 6,267 6,644
Investment in lease, net................................... 0 13,077
Notes receivable from a related party...................... 8,683 27,294
Other assets............................................... 9,030 7,516
-------- --------
$205,988 $239,198
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
Current Liabilities:
Accounts payable........................................... $ 3,812 $ 3,747
Accrued compensation....................................... 3,611 2,930
Other accrued liabilities.................................. 8,823 9,740
Accrued interest payable................................... 5,005 4,959
Income taxes payable....................................... 751 506
Current portion of long-term debt.......................... 5,032 2,948
-------- --------
Total current liabilities................................ 27,034 24,830
Long-term debt (net of unamortized discount of
approximately $2.5 million and $2.7 million as of
September 30, 1996 and 1995, respectively)................ 103,729 106,547
Deferred income taxes...................................... 3,183 1,621
Deferred gain on sale leaseback............................ 112 213
Minority interest.......................................... 1,542 741
Commitments and contingencies (see Note 7 and Note 13)..... -- --
</TABLE>
<TABLE>
<S> <C> <C>
Stockholders' equity:
Common stock, $0.01 par value, 20,000,000 shares
authorized, 9,266,193 and 9,233,074 issued and
outstanding as of September 30, 1996 and 1995,
respectively, net of a note receivable from a stockholder
of $221,000.............................................. 103,653 103,453
Retained earnings (deficit)............................... (33,265) 1,793
-------- --------
Total stockholders' equity.............................. 70,388 105,246
-------- --------
$205,988 $239,198
======== ========
</TABLE>
See accompanying notes.
S-43
<PAGE>
BOOMTOWN, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
NINE MONTHS ENDED
YEARS ENDED SEPTEMBER 30, JUNE 30,
---------------------------- ------------------
1996 1995 1994 1997 1996
-------- -------- -------- -------- --------
(UNAUDITED)
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C>
REVENUES:
Gaming.................... $188,368 $189,306 $ 76,326 $144,353 $139,350
Family entertainment
center................... 6,300 6,387 3,656 4,035 4,426
Food and beverage......... 16,314 15,613 7,973 13,036 12,293
Hotel and recreational
vehicle park............. 7,289 6,584 3,082 5,666 5,479
Showroom.................. 823 440 329 623 0
Truck stop, service
station and mini-mart.... 14,401 10,811 10,858 9,901 9,815
Other income.............. 2,547 2,626 1,151 1,490 2,816
-------- -------- -------- -------- --------
236,042 231,767 103,375 179,104 174,179
-------- -------- -------- -------- --------
EXPENSES:
Gaming.................... 73,479 73,233 30,818 58,667 57,166
Gaming equipment leases... 6,716 5,811 412 3,299 5,041
Family entertainment
center................... 3,332 3,274 1,762 2,550 2,553
Food and beverage......... 19,213 17,639 8,179 17,159 14,271
Hotel and recreational
vehicle park............. 3,002 3,168 1,706 2,545 2,401
Showroom.................. 683 308 2,130 426 0
Truckstop, service station
and mini-mart............ 13,038 9,722 9,661 9,037 8,929
Marketing and promotion... 22,439 19,593 7,524 19,154 16,993
General and
administrative........... 70,620 75,296 25,760 47,494 49,642
Pre-opening expenses...... 0 0 15,787 0 0
Discontinued projects,
merger costs ............ 1,603 6,054 0 1,802 920
Loss on sale of Boomtown
Las Vegas................ 36,563 0 0 1,271 36,563
Depreciation and
amortization............. 10,618 10,422 5,891 11,636 8,135
-------- -------- -------- -------- --------
261,306 224,520 109,630 175,040 202,614
-------- -------- -------- -------- --------
Income (loss) from
operations................. (25,264) 7,247 (6,255) 4,064 (28,435)
Interest expense, net of
capitalized interest....... (13,838) (13,434) (5,632) (10,439) (10,362)
Interest and other income... 4,193 3,081 2,624 2,355 2,346
Loss on marketable
securities................. 0 0 (1,691) 0 0
Gain (loss) on sale of
assets..................... 0 0 0 (109) 240
-------- -------- -------- -------- --------
Loss before minority
interests , extraordinary
item and income taxes...... (34,909) (3,106) (10,954) (4,129) (36,211)
Minority interests.......... 645 1,105 352 (96) 878
-------- -------- -------- -------- --------
Loss before extraordinary
item and income taxes...... (34,264) (2,001) (10,602) (4,225) (35,333)
Income tax expense
(benefit).................. 794 876 (2,779) (2,103) (50)
-------- -------- -------- -------- --------
Loss before extraordinary
item....................... (35,058) (2,877) (7,823) (2,122) (35,283)
Extraordinary loss, net of
tax effect................. 0 0 (229) (8,420) 0
-------- -------- -------- -------- --------
Net loss.................... $(35,058) $ (2,877) $ (8,052) $(10,542) $(35,283)
======== ======== ======== ======== ========
Per common share:
Income (loss) before
extraordinary item....... $ (3.79) $ (0.31) $ (0.90) $ (0.21) $ (3.82)
======== ======== ======== ======== ========
Extraordinary loss........ $ 0.00 $ 0.00 $ (0.03) $ (0.86) $ 0.00
======== ======== ======== ======== ========
Net loss.................. $ (3.79) $ (0.31) $ (0.93) $ (1.07) $ (3.82)
======== ======== ======== ======== ========
Number of common shares..... 9,248 9,228 8,690 9,830 9,243
======== ======== ======== ======== ========
</TABLE>
See accompanying notes.
S-44
<PAGE>
BOOMTOWN, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
FOR THE YEARS ENDED SEPTEMBER 30, 1996, 1995 AND 1994
<TABLE>
<CAPTION>
COMMON STOCK RETAINED TOTAL
------------------- EARNINGS STOCKHOLDERS'
SHARES(#) AMOUNT($) (DEFICIT) EQUITY
--------- --------- --------- -------------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
BALANCES, SEPTEMBER 30, 1993....... 8,506 $ 88,313 $ 12,722 $101,035
Issuance of common stock
warrants........................ 0 2,995 0 2,995
Employer 401(k) contributions.... 4 75 0 75
Common stock issued for
additional interest in Blue
Diamond Hotel & Casino, Inc.
(Boomtown Las Vegas)............ 714 11,964 0 11,964
Net loss......................... 0 0 (8,052) (8,052)
----- -------- -------- --------
BALANCES, SEPTEMBER 30, 1994....... 9,224 103,347 4,670 108,017
Employer 401(k) contributions.... 9 105 0 105
Net loss......................... 0 0 (2,877) (2,877)
----- -------- -------- --------
BALANCES, SEPTEMBER 30, 1995....... 9,233 103,452 1,793 105,245
Employer 401(k) contributions.... 33 200 0 200
Net loss......................... 0 0 (35,058) (35,058)
----- -------- -------- --------
BALANCES, SEPTEMBER 30, 1996....... 9,266 $103,652 $(33,265) $ 70,387
===== ======== ======== ========
</TABLE>
See accompanying notes.
S-45
<PAGE>
BOOMTOWN, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS
<TABLE>
<CAPTION>
NINE MONTHS ENDED
YEARS ENDED SEPTEMBER 30, JUNE 30,
----------------------------- ------------------
1996 1995 1994 1997 1996
-------- -------- --------- -------- --------
(UNAUDITED)
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
CASH FLOWS FROM OPERATING
ACTIVITIES:
Net loss.................. $(35,058) $ (2,877) $ (8,052) $(10,542) $(35,283)
Adjustments to reconcile
net loss to net cash
provided by (used in)
operating activities:
Lease expense recorded in
exchange for limited
partnership interest..... 1,500 2,000 389 0 1,500
Minority interests........ (645) (1,105) (351) (1,542) (878)
Gain (loss) on sale of
property, plant and
equipment................ 191 164 (57) 117 0
Depreciation and
amortization............. 10,618 10,422 5,891 11,638 8,135
Loss on sale of Boomtown
Las Vegas................ 36,563 0 0 1,271 36,563
Deferred income taxes..... 2,598 1,614 (4,145) 2,028 1,199
Changes in operating
assets and liabilities:
Accounts receivable,
net..................... (256) 397 (1,011) 228 0
Income taxes receivable.. (440) (1,508) 0 1,561 (1,604)
Inventories.............. 154 301 (2,453) (28) 275
Prepaid expenses......... (208) 93 (4,971) 2,041 1,319
Accounts payable, net.... 149 (5,406) 7,950 (308) 377
Income taxes payable..... 330 24 213 (8,611) 1,096
Accrued compensation..... 681 1,320 631 1,189 (1,397)
Other accrued
liabilities............. (1,048) 4,189 4,467 2,966 57
Accrued interest
payable................. 0 0 0 11,938 0
Discount on bonds........ 0 0 0 2,448 0
Other changes, net....... (1,278) 312 1,318 (4,199) (1,163)
-------- -------- --------- -------- --------
Net cash provided by
(used in) operating
activities.............. 13,851 9,940 (181) 12,195 10,195
CASH FLOWS FROM INVESTING
ACTIVITIES:
Proceeds from sale of
property, plant and
equipment................ 215 7,953 17,464 0 406
Additions to property,
plant and equipment...... (5,679) (15,146) (114,729) (9,718) (7,168)
Payments for future
development costs........ 0 1,871 (1,775) 0 0
Loans to related parties.. 0 0 (7,794) 0 0
Payments for purchase of
land option at Biloxi
property................. 0 0 0 (200) 0
Change in construction
related payables......... (84) (1,472) 680 0 (16)
-------- -------- --------- -------- --------
Net cash used in
investing activities.... (5,548) (6,794) (106,154) (9,918) (6,779)
CASH FLOWS FROM FINANCING
ACTIVITIES:
Proceeds from short-term
borrowings............... 0 5,000 0 0 0
Repayment of short-term
borrowings............... 0 (5,000) 0 0 0
Prepaid property lease.... (2,480) 0 0 0 (2,480)
Proceeds from long-term
debt..................... 377 8,794 100,240 1,381 2,457
Payment of long-term
debt..................... (3,874) (2,363) (107) (6,548) (2,581)
Distributions to minority
interests................ 0 (193) 0 0 0
-------- -------- --------- -------- --------
Net cash (used in)
provided by financing
activities.............. (5,977) 6,238 100,133 (5,167) (2,605)
-------- -------- --------- -------- --------
Increase (decrease) in cash
and cash equivalents....... 2,326 9,384 (6,202) (2,890) 812
Cash and cash equivalents at
the beginning of the
period..................... 20,775 11,391 17,593 23,101 20,775
-------- -------- --------- -------- --------
Cash and cash equivalents at
the end of the period...... $ 23,101 $ 20,775 $ 11,391 $ 20,211 $ 21,587
======== ======== ========= ======== ========
</TABLE>
See accompanying notes.
S-46
<PAGE>
BOOMTOWN, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BASIS OF PRESENTATION AND CONSOLIDATION--The consolidated financial
statements include the accounts of Boomtown, Inc. (the "Company" or
"Boomtown"), a Delaware corporation and all of its controlled subsidiaries and
partnerships. The significant operating subsidiaries include gaming operations
in Reno, Las Vegas ("Blue Diamond"), Biloxi ("Mississippi Partnership") and
New Orleans ("Louisiana Partnership"). All significant intercompany accounts
and transactions have been eliminated.
INTERIM FINANCIAL INFORMATION--The interim financial information is
unaudited. In the opinion of management, all adjustments considered necessary
for a fair presentation of the consolidated results of operations and
consolidated cash flows for the nine months ended June 30, 1997 and 1996, have
been included. All adjustments to the interim financial information were of a
normal recurring nature and consistent with the adjustments made in the
consolidated financial statements for the fiscal years ended September 30,
1994, 1995, and 1996, respectively. The Company's operations are seasonal and
thus operating results for the nine months ended June 30, 1997 should not be
considered indicative of the results that may be expected for the fiscal year
ending September 30, 1997.
BOOMTOWN'S MERGER WITH HOLLYWOOD PARK, INC. ("HOLLYWOOD PARK")--On April 23,
1996, Boomtown entered into an Agreement and Plan of Merger (the "Merger
Agreement") with Hollywood Park relating to the strategic combination of
Hollywood Park and Boomtown. Pursuant to the Merger Agreement and subject to
the terms and conditions set forth therein, Boomtown would become a wholly
owned subsidiary of Hollywood Park (the "Merger"). Pursuant to the Merger
Agreement, at the effective date of the Merger (the "Effective Date"), each
issued and outstanding share of Boomtown Common Stock will be converted into
the right to receive 0.625 (the "Exchange Ratio") of a share of Hollywood Park
Common Stock. The Merger is intended to be structured as a tax-free
reorganization for income tax purposes and will be accounted for as a purchase
for financial reporting purposes.
USE OF ESTIMATES--The accompanying consolidated financial statements have
been prepared in conformity with generally accepted accounting principles
which require the Company's management to make estimates and assumptions that
affect the amounts reported therein. Actual results could vary from such
estimates.
CASH AND CASH EQUIVALENTS--Cash and cash equivalents consist of cash on hand
and in banks, interest bearing deposits and highly liquid investments with
original maturities of three months or less. Cash equivalents are carried at
cost which approximates market. The Company paid interest of approximately
$107,000 (net of $5,895,000 capitalized), $13,111,000 (net of $701,000
capitalized), and $13,793,000 (none capitalized) and income taxes of
approximately $1,089,000, $746,000, and $688,500 during the years ended
September 30, 1994, 1995 and 1996, respectively. Long-term debt incurred for
the purchase of property and equipment during the years ended September 30,
1994, 1995 and 1996 amounted to approximately $6,296,000, $1,677,000 and
$2,763,000, respectively.
CONCENTRATIONS OF CREDIT RISK--The Company places its cash in short-term
investments which potentially subject the Company to concentrations of credit
risk. Such investments are made with financial institutions having a high
credit quality and are collateralized by securities issued by the United
States Government and other investment grade securities.
INVENTORIES--Inventories consist primarily of fuel and petroleum products,
food and beverage stock and hotel linens, uniforms and supplies and are stated
at the lower of cost (determined using the first-in, first-out method) or
market.
S-47
<PAGE>
BOOMTOWN, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
DEPRECIATION AND AMORTIZATION--Depreciation and amortization of property,
plant and equipment is provided on the straight-line method over the lesser of
the estimated useful lives of the respective assets or the lease term. The
estimated useful lives for each class of property, plant and equipment are as
follows:
<TABLE>
<S> <C>
Buildings and improvements..................................... 20-35 years
Furniture and fixtures......................................... 7-10 years
Gaming equipment............................................... 5-10 years
Outdoor signs.................................................. 10-20 years
Other assets................................................... 3-15 years
</TABLE>
In connection with the Swap Agreement (see Note 4) Blue Diamond's property
and equipment were written down to net realizable value as of September 30,
1996.
INTANGIBLES--Goodwill relates to the acquisition of the Reno property in
1988 and the investment in lease (at September 30, 1995) which resulted when
the Company purchased the remaining 50% ownership interest in Blue Diamond
(Note 4). Also, as more fully discussed in Note 4, Blue Diamond had an option
to purchase the Resort during a period of six months beginning in May 1996,
and ending in November 1996. However, through execution of the "Swap
Agreement" as discussed in Note 4, Roski and Boomtown entered into an
agreement to terminate the "Property Lease", whereby Boomtown would
immediately cease operations of the Blue Diamond Resort simultaneous with the
closing of Boomtown's merger with Hollywood Park, Inc., as previously
discussed. As a result of the Swap Agreement, the investment in lease was
expensed in fiscal 1996. Additional goodwill was recorded subsequent to
September 30, 1996, related to the Company's purchase of the minority
partner's interest in the Louisiana Partnership in December 1996 (Note 13)
(unaudited). Goodwill is being amortized on the straight-line method over
twenty-five years. Accumulated amortization at September 30, 1995 and 1996 was
approximately $3,314,000 and $3,145,000, respectively.
The carrying value of intangibles is periodically evaluated by management
and if facts and circumstances (including undiscounted cash flows) indicate an
impairment, the amount is reduced and an impairment loss is recorded.
GAMING REVENUES AND PROMOTIONAL ALLOWANCES--In accordance with industry
practice, the Company recognizes as gaming revenues the net win from gaming
activities, which is the difference between gaming wins and losses. Revenues
in the accompanying consolidated statements of operations exclude the retail
value of rooms, food and beverage and other promotional allowances provided to
customers without charge.
The estimated costs of providing such promotional allowances have been
classified as gaming operating expenses through interdepartmental allocations
as follows (in thousands):
<TABLE>
<CAPTION>
YEARS ENDED SEPTEMBER
30,
----------------------
1994 1995 1996
------ ------- -------
<S> <C> <C> <C>
Food and beverage................................... $5,433 $11,638 $12,746
Hotel............................................... 172 400 299
Other............................................... 43 167 210
------ ------- -------
Total............................................... $5,648 $12,205 $13,255
====== ======= =======
</TABLE>
STOCK BASED COMPENSATION--The Company accounts for its stock option plans in
accordance with the provisions of the Accounting Principles Board's Opinion
No. 25 (APB 25), "Accounting for Stock Issued to Employees". In 1995, the
Financial Accounting Standards Board released Statement of Financial
Accounting Standard No. 123 (SFAS 123), "Accounting for Stock Based
Compensation". SFAS 123 provides an alternative to APB 25 and is effective for
fiscal years beginning after December 15, 1995. The Company expects to
continue
S-48
<PAGE>
BOOMTOWN, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
to account for its stock plans in accordance with APB 25. Accordingly, SFAS
123 is not expected to have a material impact on the Company's consolidated
financial position or results of operations.
ADVERTISING COSTS--Advertising costs are expensed as incurred. Advertising
expenses for the years ended September 30, 1994, 1995 and 1996 totaled
approximately $2.6 million, $6.7 million and $6.3 million, respectively.
FUTURE DEVELOPMENT COSTS--The Company capitalizes costs associated with new
gaming projects until 1) the project is no longer considered viable and the
costs are expensed or 2) the likelihood of the project is relatively certain
and the costs are reclassified to pre-opening and expensed when operations
commence. During the year ended September 30, 1995, the Company expensed
approximately $6.1 million of future development costs. During fiscal 1996,
future development costs were approximately $1.6 million and included costs
associated with its pending merger with Hollywood Park, Inc. and its proposed
gaming project in the state of Indiana. These amounts are classified as
discontinued projects and future development costs in the accompanying
statements of operations.
PRE-OPENING EXPENSES--Pre-opening expenses were associated with the
acquisition, development and opening of the Company's new casino resorts.
These amounts were expensed in fiscal 1994, when the casinos commenced
operations and include items that were capitalized as incurred prior to
opening and items that are directly related to the opening of the property and
are non-recurring in nature.
INCOME TAXES--The Company accounts for income taxes under Statement of
Financial Accounting Standards ("SFAS") No. 109, "Accounting for Income
Taxes", which requires the Company to record deferred income taxes for
temporary differences that are reported in different years for financial
reporting and for income tax purposes and classifies deferred tax liabilities
and assets into current and non-current amounts based on the classification of
the related assets and liabilities.
EXTRAORDINARY LOSS (UNAUDITED)--Boomtown recorded an extraordinary loss of
approximately $14.2 million (approximately $8.4 million net of tax effect) in
the period ended June 30, 1997, related to the tender and consent cost
(approximately $9.0 million) and the write off of deferred financing costs
(approximately $5.2 million) associated with the early extinguishment of the
11.5% First Mortgage Notes (Note 5).
MINORITY INTEREST--Minority interest represents the minority limited
partners' proportionate share of the equity and operations of the consolidated
partnerships.
NET LOSS PER SHARE--Net loss per share is computed using the weighted
average number of shares of Common Stock outstanding and common equivalent
shares from stock options and warrants are excluded from the computation
because their effect is antidilutive.
In February 1997, the Financial Accounting Standards Board issued Statement
No. 128, Earnings per Share, which is required to be adopted on December 31,
1997. At that time, the Company will be required to change the method
currently used to compute earnings per share and to restate all prior periods.
Under the new requirements for calculating primary earnings per share, the
dilutive effect of stock options will be excluded. The impact of Statement 128
on the calculation of primary and fully diluted earnings per share is not
expected to be material.
Fully diluted loss per share amounts are the same as primary per share
amounts for the periods presented.
RECLASSIFICATIONS--Certain reclassifications have been made to the 1994,
1995 and 1996 consolidated financial statements to conform to the 1997
presentation.
S-49
<PAGE>
BOOMTOWN, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
2. ISSUANCE OF COMMON STOCK AND WARRANTS
During October 1992, the Company sold 2,901,786 shares of common stock in an
initial public offering which generated net proceeds of approximately $26
million after deducting underwriting discounts and expenses. In addition, a
stockholder of the Company (the "Selling Stockholder") sold 835,714 shares of
common stock in the public offering and received proceeds to repay a
subordinated term note and $2 million to redeem all of its outstanding
preferred stock held by the Selling Stockholder.
In connection with the Company's initial public offering, the Company sold
to the underwriters for an aggregate of $25,000, warrants to purchase 162,500
shares of the Company's common stock at $12 per share. The warrants expire
October 1997 and 50% became exercisable in October 1993 and the remaining 50%
became exercisable in October 1994. At any time after October 1994 and prior
to the expiration of the warrants, the holders have a one time right to demand
a registration of the underlying shares, with expenses of such registration to
be paid by the Company.
During June 1993, the Company sold 2,223,380 shares of common stock in a
public offering which generated net proceeds of approximately $57.2 million
after deducting underwriting discounts and expenses. The proceeds were used to
fund a portion of the construction costs of the new gaming facilities and for
general corporate purposes. In addition, a stockholder of the Company sold
1,686,620 shares of common stock in the public offering and received proceeds,
net of underwriting discounts, of $43.9 million.
During November 1993, in connection with the placement of the First Mortgage
Notes (Note 5), the Company issued 472,500 warrants to purchase Common Stock
at $21.19 per share. The warrants became exercisable on December 10, 1993, and
expire on November 1, 1998.
3. PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment consists of the following (in thousands):
<TABLE>
<CAPTION>
SEPTEMBER 30,
-----------------
1995 1996
-------- --------
<S> <C> <C>
Buildings and improvements.............................. $102,979 $105,097
Equipment............................................... 24,834 29,834
Boat.................................................... 18,925 18,925
Land and land improvements.............................. 17,397 17,690
Furniture and fixtures.................................. 13,166 13,428
Construction-in-progress................................ 1,631 1,370
-------- --------
178,932 186,344
Less accumulated depreciation and amortization.......... 27,977 35,949
Write-down of assets in connection with the Swap
Agreement (see Note 4)................................. 0 5,065
-------- --------
$150,955 $145,330
======== ========
</TABLE>
The construction-in-progress amounts at September 30, 1995 and 1996, relate
primarily to the costs associated with the on-going construction of the land-
based facility in Harvey, Louisiana.
Amortization of leased assets is included in depreciation and amortization
expense.
S-50
<PAGE>
BOOMTOWN, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
4. RELATED PARTY TRANSACTIONS
STOCKHOLDER NOTE--The note receivable from a stockholder was issued in
connection with the stockholder's purchase of the Company's common stock and
therefore has been presented as a reduction of stockholders' equity in the
accompanying consolidated balance sheets. This note, as amended, bears
interest at 6% with interest and principal payable in four annual installments
commencing April 7, 1998.
IVAC NOTE--Prior to the commencement of operations at Boomtown Las Vegas,
the Company loaned IVAC, a California general partnership controlled by Edward
P. Roski ("Roski") and a member of the Company's Board of Directors (the
"Stockholder"), approximately $27.3 million (the "IVAC Notes") for purposes of
constructing the Blue Diamond Resort (the "Resort"). One of the notes has a
principal balance of $7.5 million and the other note, a variable principal
note, has a principal balance of $19.8 million at September 30, 1995 and 1996,
and both notes bear interest at 10%. These notes were written down to their
net realizable value under the Swap Agreement of approximately $8.5 million at
September 30, 1996. The IVAC Notes are secured by separate deeds of trust on
the resort, which deeds of trust are subordinate to separate deeds of trust
securing Blue Diamond and the Company's obligations in connection with the
Indenture. As defined in the terms of the IVAC Notes, interest became payable
upon commencement of Blue Diamond's Las Vegas operations. Interest income
related to the IVAC Notes amounted to approximately $2,729,000 during the
years ended September 30, 1995 and 1996, respectively and offsets a portion of
the rent discussed in the following paragraph. Interest receivable from IVAC
amounted to approximately $227,000 at September 30, 1995 and 1996.
Prior to commencing gaming operations at the Las Vegas site on May 20, 1994,
the Company owned 50% of Blue Diamond and the Stockholder owned the remaining
50% of Blue Diamond. After commencement of operations of Blue Diamond, the
Company exercised its option to purchase all of the stockholder's ownership
interest in Blue Diamond for 714,286 shares of the Company's common stock.
Blue Diamond is leasing the resort from IVAC for an initial term of five years
with certain renewal options in certain very limited circumstances. Blue
Diamond had an option to purchase the resort from IVAC exercisable during a
period of six months beginning in May 1996, in exchange for, at IVAC's option,
either 1) shares of the Company's common stock (which would be at a minimum of
2.5 million shares) or 2) cash (which amount would be a minimum of $33
million). At the time of exercise, the investment in lease would be
capitalized as a part of the resort purchase price. In addition, the Company's
loans to IVAC including accrued interest (preceding paragraph) would be
capitalized as part of the resort purchase price.
TERMINATION OF LAS VEGAS PROPERTY LEASE--On August 12, 1996, Boomtown, Blue
Diamond, Hollywood Park, Roski, IVAC and Majestic Realty entered into the Blue
Diamond Swap Agreement (the "Swap Agreement") pursuant to which the parties
agreed that, upon consummation of the Merger, and contingent upon the closing
of the Merger, Boomtown and Blue Diamond (or any transferee thereof as set
forth in the Swap Agreement) would exchange their entire interest in the Blue
Diamond Resort (the "Resort") (including the IVAC Loans), and effectively
transfer all interest in the Resort to Roski, in exchange for a $5.0 million
unsecured promissory note (the "First Note") and will have an unsecured
promissory note (the "Second Note") equal in amount to the note to be issued
by Hollywood Park to Roski for the purchase of his Boomtown Common Stock
referred to in a following paragraph (valued at approximately $3.5 million)
and assumption by Roski, IVAC or an affiliate of certain liabilities (the
"Swap"). The First Note has an interest rate equal to the prime rate plus one
and one half percent (1.5%) per annum and will provide for annual principal
payments of one million dollars ($1,000,000) plus accrued interest and
maturing on the date that is five years after the Exchange Date (as such term
is defined in the Swap Agreement). The Second Note will have an interest rate
equal to the prime rate plus one-half percent (.5%) per annum and will provide
for a payment of all principal plus accrued interest on the date that is three
(3) years after the Exchange Date. Consummation of the Swap is subject to
obtaining all necessary Governmental approvals, including gaming approval.
S-51
<PAGE>
BOOMTOWN, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
In exchange for its interest in the Resort, the Company will receive notes
from Roski payable to Boomtown with an estimated value totaling $8.5 million,
an estimated cash payment of $2.1 million, release from lease obligations
under the Resort lease, Roski's assumption of certain liabilities and note
obligations totaling approximately $3.8 million and the ongoing expenses of
the Resort. Additionally, Roski will assume all operating leases including any
residual balances due under such leases. The Swap Agreement requires approvals
from applicable gaming authorities and Boomtown intends to seek the consent of
the holders of a majority of the outstanding principal amount on the Notes
where defined. The Swap would be effected immediately following the Merger
which is expected to be completed by the end of the first quarter of calendar
1997.
In accordance with the terms of the Swap Agreement, with certain exceptions
set forth in the Swap Agreement, the Company will continue to operate the
property until consummation of the Merger. Boomtown and Blue Diamond will be
responsible for the liabilities of the Resort prior to the Swap and Roski will
be responsible for the liabilities of the Resort subsequent to the Swap. In
addition, Roski will resign from Boomtown's Board of Directors, effective as
of the Exchange Date. Subject to certain conditions set forth in the Swap
Agreement, the Swap may be effectuated through any structure agreed upon by
Boomtown and Hollywood Park. If the Swap were not consummated for any reason,
Boomtown would continue to operate the property through the expiration of the
lease term in July 1999, and the IVAC Notes would be required to be repaid to
Boomtown at such time.
Additionally, on August 12, 1996, Hollywood Park and Roski further entered
into a Stock Purchase Agreement (the "Stock Purchase Agreement") pursuant to
which Hollywood Park will, concurrently with the Swap, purchase the stock in
Boomtown held by Roski ("Roski Stock") for its market price on the date of the
Swap (estimated to be $3.5 million). The purchase price will be paid through
the issuance of an unsecured promissory note having an interest rate equal to
the prime rate plus one percent (1%) per annum and providing for four equal
annual principal payments plus accrued interest and maturing on the date that
is four years after the Exchange Date. The Stock Purchase Agreement may also
be terminated by Hollywood Park in the event that Boomtown and Hollywood Park,
in accordance with the provisions set forth in the Swap Agreement, elect to
utilize a structure to effect the Swap which would require Roski to retain the
Roski Stock.
The Company took a non-cash, pre-tax charge of $36.6 million related to the
Swap Agreement. The charge is comprised of the write-off of the Company's
investment in lease of $12.7 million, an $18.9 million write-down of the
related party notes receivable to $8.5 million and the write-down of the
remaining net assets less the liabilities assumed by Roski of $5.0 million. In
the event that the actual amount of the Second Note is less than $3.5 million
the Company will incur an additional loss on the sale of Blue Diamond.
The Company owns an 85% interest in the Mississippi Partnership. As a result
of executing a lease for the property upon which the Mississippi Partnership's
Biloxi, Mississippi gaming facility is located (Note 7), a 15% limited
partnership interest was transferred to an individual (the "Lessor") in lieu
of base rent payments for the first two years. After three years of operation,
either the Company or the Lessor may exercise an option to convert the
Lessor's ownership interest into the Company's common stock or cash, at the
option of the Lessor, at an amount calculated per the agreement which is based
upon a multiple of earnings.
The Company owned a 92.5% interest in the Louisiana Partnership. The
remaining 7.5% limited partnership interest was owned by the Lessor identified
in the preceding paragraph (the "Partner").
Quarterly distributions to all partners will be required in both the
Mississippi Partnership and the Louisiana Partnership based upon the pro-rata
share of cash flows generated, as defined. Subsequent to year-end Boomtown
entered into an agreement to purchase the Partner's 7.5% Louisiana Partnership
interest (see Note 13).
S-52
<PAGE>
BOOMTOWN, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
5. LONG-TERM DEBT
Long-term debt consists of the following (in thousands):
<TABLE>
<CAPTION>
SEPTEMBER 30,
-----------------
1995 1996
-------- --------
<S> <C> <C>
11.5% first mortgage notes (net of unamortized
discount of approximately $2.7 million and $2.4
million as of September 30, 1995 and 1996,
respectively)........................................ $100,842 $101,052
13% note payable...................................... 4,336 3,227
Capital lease obligations............................. 1,126 2,734
11.5% notes payable................................... 2,431 1,300
12.25% note payable................................... 760 448
-------- --------
109,495 108,761
Less amounts due within one year...................... 2,948 5,032
-------- --------
$106,547 $103,729
======== ========
</TABLE>
On November 24, 1993, the Company completed the private placement of $103.5
million of 11.5% First Mortgage Notes Due November 2003 (the "Notes").
Interest on the Notes is payable semi-annually. The Notes will be redeemable
at the option of the Company, in whole or in part, on or after November 1,
1998, at a premium to the face amount ($103.5 million) which decreases on each
subsequent anniversary date, plus accrued interest to the date of redemption.
The Notes are secured by substantially all of the Company's assets.
The Indenture governing the Notes places certain business, financial and
operating restrictions on the Company and its subsidiaries including, among
other things, the incurrence of additional indebtedness, issuance of preferred
equity interests and entering into operating leases; limitations on dividends,
repurchases of capital stock of the Company and redemptions of subordinated
debt; limitations on amending existing partnership and facility construction
agreements; and limitations on the use of proceeds from the issuance of the
Notes.
The 13%, 11.5% and 12.25% notes payable are secured by property, plant and
equipment with net book values of approximately $17,296,000, $2,922,000 and
$718,000, at September 30, 1996. The notes mature in January 1999, September
1997, and January 1998, respectively.
The capital lease obligations are secured by equipment with a net book value
of $3,632,000 at September 30, 1996. The capital lease obligations mature
between September 1997 and January 1998.
Principal maturates of long-term debt by fiscal year as of September 30,
1996 are as follows (in thousands):
<TABLE>
<S> <C>
1997.............................................................. $ 5,032
1998.............................................................. 2,084
1999.............................................................. 593
2000.............................................................. 0
2001.............................................................. 0
Thereafter........................................................ 103,500
--------
$111,209
========
</TABLE>
S-53
<PAGE>
BOOMTOWN, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
6. INCOME TAXES
The (benefit) provision for income taxes consists of the following (in
thousands):
<TABLE>
<CAPTION>
YEARS ENDED SEPTEMBER
30,
-----------------------
1994 1995 1996
------- ------- -----
<S> <C> <C> <C>
Current:
Federal........................................ $ 947 $(1,805) $(669)
State.......................................... 195 768 870
------- ------- -----
1,142 (1,037) 201
Deferred (primarily federal)................... (3,921) 1,913 593
------- ------- -----
$(2,779) $ 876 $ 794
======= ======= =====
</TABLE>
The difference between the Company's (benefit) provision for income taxes as
presented in the accompanying consolidated statements of operations and a
provision (benefit) for income taxes computed at the federal statutory rate is
comprised of the items shown in the following table as a percentage of pre-tax
earnings (loss):
<TABLE>
<CAPTION>
YEARS ENDED
SEPTEMBER 30,
---------------------
1994 1995 1996
----- ----- -----
<S> <C> <C> <C>
Income tax (benefit) provision at the statutory
rate........................................... (34.0)% (34.0)% (34.0)%
Goodwill amortization........................... 1.6 8.3 0.8
Meals and entertainment......................... 1.3 17.5 0.4
Loss on investments............................. 5.4 0.0 0.0
Loss on sale of Blue Diamond.................... 0.0 0.0 31.7
State income taxes, net of federal benefit...... (1.4) 41.0 1.8
Merger costs.................................... 0.0 0.0 1.3
Operating loss benefit limitation............... 0.0 8.0 0.0
Others, net..................................... 0.9 3.0 0.3
----- ----- -----
(26.2)% 43.8 % 2.3 %
===== ===== =====
</TABLE>
S-54
<PAGE>
BOOMTOWN, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
The significant components of the deferred income tax assets and liabilities
included in the accompanying consolidated balance sheets are as follows (in
thousands):
<TABLE>
<CAPTION>
SEPTEMBER 30,
-----------------
1995 1996
------- --------
<S> <C> <C>
Deferred income tax assets:
Pre-opening costs, net of amortization.............. $ 3,768 $ 2,607
Compensation accrued for stock appreciation rights
and stock option plans............................. 1,062 1,062
Loss on sale of Blue Diamond........................ 0 1,722
Alternative minimum tax credit carryforwards........ 887 1,071
Capital loss carryforwards.......................... 575 6,911
Operating loss carryforwards........................ 160 160
Merger expenses..................................... 0 402
Accrued expenses.................................... 1,410 1,829
Less valuation allowance--loss carryforwards and
merger expenses.................................... (735) (7,473)
------- --------
Total deferred income tax assets.................. 7,127 8,291
------- --------
Deferred income tax liabilities:
Excess of book basis over tax basis of assets
acquired........................................... (3,232) (3,187)
Depreciation........................................ (3,692) (5,466)
Prepaid expenses.................................... (1,322) (1,101)
State deferreds..................................... (0) (249)
------- --------
Total deferred income tax liabilities............. (8,246) (10,003)
------- --------
Net deferred income tax liability................... $(1,119) $ (1,712)
======= ========
</TABLE>
7. COMMITMENTS AND CONTINGENCIES
OPERATING LEASES--The Company and its subsidiaries lease facilities,
billboards and certain equipment under noncancelable operating lease
arrangements with terms in excess of one year. The aggregate future minimum
annual rental commitments as of September 30, 1996 under operating leases
having noncancelable lease terms in excess of one year are as follows (in
thousands):
<TABLE>
<CAPTION>
RELATED PARTY
(NOTE 4) OTHER
------------- -------
<S> <C> <C>
1997................................................. $ 5,429 $10,257
1998................................................. 5,429 3,437
1999................................................. 3,456 1,568
2000................................................. 0 451
2001................................................. 0 340
Thereafter........................................... 0 871
------- -------
$14,314 $16,924
======= =======
</TABLE>
TERMINATION OF LAS VEGAS PROPERTY LEASE--As more fully discussed in Note 4
the Company entered into the Swap Agreement pursuant to which Boomtown will be
released from its obligations under the Resort Lease.
BARGE LEASE--The Mississippi Partnership sold the barge in Biloxi,
Mississippi and the building upon the barge housing the casino to HFS Gaming
Corporation ("HFS"), a Delaware corporation. $2.4 million of the
S-55
<PAGE>
BOOMTOWN, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
$11 million sales price was held by the Company to be used for the development
and construction at the Mississippi casino site. Simultaneously with the sale,
the Mississippi Partnership leased the barge and building for 25 years and was
granted the option to purchase the leased asset for fair market value at the
end of the lease or upon the occurrence of certain events as defined in the
lease agreement. In the event of default by the Mississippi Partnership, HFS
may terminate the lease or require the Mississippi Partnership to repurchase
the assets for fair market value. HFS agreed to provide certain marketing
services for the Mississippi Partnership. The Mississippi Partnership will pay
HFS aggregate rent under the lease and payments for services under the
marketing agreement equal to approximately 20% of the annual adjusted earnings
before interest, taxes, depreciation and amortization, as defined, for the
Partnership (including the proposed hotel). As the lease payments represent
contingent rentals, they are excluded from the future minimum annual rental
commitments schedule above. HFS subsequently transferred its contractual
rights to National Gaming Corporation, Inc. ("NGC").
In November 1995, Boomtown executed an agreement with NGC whereby the $2.4
million was returned to NGC in return for reduction of the EBITDA
distributions from 20% to 16% . The $2.4 million is included on the
accompanying balance sheet as a component of other assets and it is being
amortized on the straight-line method over the remaining lease term.
Additionally, the Company secured an option to buy the barge from NGC as well
as to buy out the EBITDA participation at a cost approximating the original
investment made by HFS less the $2.4 million that was paid. The option
terminates on March 31, 1997, but is renewable for an additional two years for
$100,000 a year. Upon exercise of the barge and building purchase option, the
remaining unamortized balance of the $2.4 million will be capitalized as a
component of the purchase price. (See note 13 below.)
TIDELANDS LEASE--The Mississippi Partnership leases submerged tidelands at
the casino site from the State of Mississippi. Annual rent is $525,000 and the
term of the lease is ten years with a five-year option to renew. Rent in the
second five-year period of the lease will be determined in accordance with
Mississippi law. Annual rent in the five-year renewal term will be based on an
appraisal obtained by the State of Mississippi.
LAND LEASE WITH A RELATED PARTY--The Company signed an agreement to lease
property through the Mississippi Partnership intended for the development,
construction and operation of the Mississippi gaming facility. The Mississippi
Partnership invested $2 million as a long-term deposit on the lease and
committed to annual rentals of base rent (estimated at $2 million) and
percentage rent (5% of adjusted gaming win over $25 million), plus $200,000
per year during the first ten years of the lease. The Mississippi Partnership
exchanged a 15% interest with the lessor in lieu of base rent payments for the
first two years. Rent expense is being charged to operations for the two year
period and the lessor's limited partner capital account is being credited. The
lease term is 99 years and is cancelable upon one year's notice.
RENTAL EXPENSE--Included in the accompanying consolidated statements of
operations, rental expense was approximately, $3,879,000 (including $389,000
in contingent rentals), $16,102,000 (including $511,000 in contingent rentals)
and $19,243,000 (including $729,000 in contingent rentals) during the years
ended September 30, 1994, 1995 and 1996, respectively. During the years ended
September 30, 1994, 1995, and 1996, $2,418,000, $8,140,000 and $8,363,000,
respectively, of rental expense was with related parties.
SELF-INSURANCE--The Company maintains a plan of partial self-insurance for
medical and dental coverage for substantially all full-time employees and
their dependents. Claims aggregating between $50,000 and $75,000 or more per
individual during the policy year are fully covered by insurance. Management
has established reserves considered adequate to cover estimated future
payments on claims incurred through September 30, 1996.
GAMING LICENSE REQUIREMENTS--In October 1994, the Mississippi Gaming
Commission adopted a regulation that requires, as a condition of licensure or
license renewal, for a gaming establishment's plan to include various
expenditures including parking facilities and infrastructure facilities
amounting to at least 25% of the casino cost.
S-56
<PAGE>
BOOMTOWN, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Although the Company believes they have satisfied this requirement, there can
be no assurance the Mississippi Gaming Commission will not require further
development on the casino site including hotel rooms and additional parking
facilities. Additionally, there can be no assurance that the Partnership will
be successful in completing such a project or that the Partnership would be
able to obtain a waiver if the Partnership decides not to build.
8. FUNFLIGHT PROGRAM
The Company operates a gaming junket program under the name Boomtown
FunFlights. This program contracts with agents in various cities to book
passengers on a chartered airplane for either overnight or "turn-around"
flights to Boomtown Reno. The agents are paid a commission for each passenger
booked. The passenger pays a nominal "boarding fee" which is recorded as
revenue upon the passenger's arrival at the casino. The Company pays all costs
associated with this program.
9. STOCK OPTION PLANS
STOCK OPTION PLAN--On March 8, 1991, the Company's Board of Directors
adopted a non-qualified stock option plan for officers and key employees (the
"Option Plan"). The Option Plan authorized the grant of up to 198,744 shares
of the Company's common stock. All available shares under the Option Plan were
granted retroactive to October 1, 1989 to one individual at $.66 per share
subject to certain contingent exercisability provisions. This option was
amended in 1992, to provide full vesting and exercisability as of June 30,
1992, and it expires in March 2001.
The Option Plan was amended and restated on September 10, 1992 to provide
for the granting to employees of the Company of incentive stock options and
for the granting of non-statutory stock options and stock purchase rights to
employees and consultants of the Company. The options granted will be for
various terms not exceeding ten years and will vest over periods determined at
the date of grant. The exercise price for incentive stock options granted will
be not less than the fair market value of the common stock at the date of
grant. At September 30, 1996, the total number of shares reserved for issuance
under the Option Plan is 1,892,066 of which options to purchase 1,726,742
shares have been granted at exercise prices ranging from $.66 to $6.25 per
share. At September 30, 1996, options to purchase 586,992 shares of the
Company's common stock at exercise prices ranging from $.66 to $6.25 per share
were exercisable.
During the year ended September 30, 1996 the Company's Board of Directors
repriced certain non-executive options of the Option Plan totaling 165,000
shares to $9.00 from prices ranging from $11.50 to $20.75. Subsequently a
repricing occurred concurrent with the Merger Agreement (April 23, 1996)
whereby virtually all options outstanding, under the Option Plan as of such
date were repriced to $6.25.
1992 DIRECTORS' OPTION PLAN--On September 10, 1992, the Company's Board of
Directors adopted a directors' option plan (the "Directors' Plan") whereby
each non-employee director is granted an option to purchase 3,900 shares of
the Company's' common stock upon joining the Board and an option to purchase
1,300 shares of common stock on each anniversary date thereafter during their
tenure as a director. The options granted have a ten-year term and vest
ratably over a three-year period. The exercise price is the fair market value
of the common stock on the date of grant. Options granted under the Directors'
Plan may be exercised only (1) while the optionee director is serving as a
director on the Company's Board, (2) within twelve months after termination by
death or disability, or (3) within three months after termination as a
director for any other reason. A total of 45,000 share have been granted under
this plan at original exercise prices ranging from $4.88 to $26.50 per share.
At September 30, 1996, options to purchase 19,064 shares of the Company's
common stock at prices ranging from $12.00 to $26.50 were exercisable under
this plan.
S-57
<PAGE>
BOOMTOWN, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
1993 EMPLOYEE STOCK BONUS PLAN--On February 25, 1993, the Company's Board of
Directors adopted a Stock Bonus Plan (the "Bonus Plan") which covers certain
employees of the Company. The Company has authorized and reserved 5,000 shares
of common stock for granting under the Bonus Plan. The shares granted under
the plan vest ratably over a four-year period. At September 30, 1996, the
Company has not granted any shares under the Bonus Plan.
10. 401(K) PLAN
On January 1, 1993, the Company's Board of Directors approved a voluntary
savings and investment plan (the "401(k) Plan"). The 401(k) Plan is available
to all eligible employees of the Company and subsidiaries. Under the 401(k)
Plan the Company will match 50% of employees' contributions up to a maximum of
5% of the employees' wages. The Company's 401(k) Plan expense was
approximately, $233,000, $384,000 and $623,000 during the years ended
September 1994, 1995, and 1996, respectively.
11. FAIR VALUE OF FINANCIAL INSTRUMENTS
The following methods and assumptions were used by the Company in estimating
its fair value disclosures for financial instruments:
CASH AND CASH EQUIVALENTS: The carrying amount reported on the accompanying
consolidate balance sheets for cash and cash equivalents approximates their
fair value.
NOTES RECEIVABLE: The fair value of the Company's notes receivable at
September 30, 1995 was estimated by discounting the future cash flows using
interest rates determined by management to reflect the credit risk and
remaining maturities of the related notes receivable. The September 30, 1996
value was based on the negotiated price with Roski as discussed in Note 4.
11.5% FIRST MORTGAGE NOTES: The fair value of the Company's other long-term
notes are estimated based upon market quotes of notes with similar
characteristics and remaining maturities.
OTHER LONG-TERM DEBT: The fair values of the Company's notes payable and
capital lease obligations are estimated using discounted cash flow analyses,
based on the Company's current incremental borrowing rates for similar types
of borrowing instruments.
The carrying amounts and fair values of the Company's financial instruments
at September 30, 1995 and 1996 are as follows (in thousands):
<TABLE>
<CAPTION>
SEPTEMBER 30, 1995
-------------------
CARRYING
AMOUNT FAIR VALUE
-------- ----------
<S> <C> <C>
Cash and cash equivalents.............................. $ 20,775 $ 20,775
Notes receivable....................................... 27,294 26,652
11.5% first mortgage notes............................. 100,842 95,738
Other long-term debt................................... 8,653 8,390
<CAPTION>
SEPTEMBER 30, 1996
-------------------
CARRYING
AMOUNT FAIR VALUE
-------- ----------
<S> <C> <C>
Cash and cash equivalents.............................. $ 23,101 $ 23,101
Notes receivable....................................... 8,683 7,947
11.5% first mortgage notes............................. 101,052 106,605
Other long-term debt................................... 7,709 7,606
</TABLE>
S-58
<PAGE>
BOOMTOWN, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
12. SUMMARIZED CONSOLIDATING FINANCIAL INFORMATION (UNAUDITED)
In connection with the Notes issued in November 1993 (Note 5), the
subsidiaries of the Company (guarantor entities) have guaranteed the Notes.
Summarized consolidating financial information follows:
SUMMARIZED CONSOLIDATING FINANCIAL INFORMATION
AS OF AND FOR THE YEAR ENDED SEPTEMBER 30, 1996
(IN THOUSANDS)
<TABLE>
<CAPTION>
GUARANTOR ENTITIES
-----------------------------------
BLUE
DIAMOND BOOMTOWN
BOOMTOWN, HOTEL & HOTEL & NON-WHOLLY ELIMINATIONS & BOOMTOWN
INC. CASINO, CASINO, OWNED RECLASSIFICATIONS INC.
(PARENT CO.) INC.(1) INC.(2) SUBSIDIARIES(3) DR(CR)(4) (CONSOLIDATED)
------------ -------- -------- --------------- ----------------- --------------
<S> <C> <C> <C> <C> <C> <C>
Current assets.......... $ 24,346 $ 4,756 $ 6,779 $ 11,170 $ (10,373) $ 36,678
Advances to affiliates.. 112,391 0 0 0 (112,391) 0
Non-current assets...... 44,360 3,080 59,576 96,087 (33,793) 169,310
-------- -------- ------- -------- --------- --------
$181,097 $ 7,836 $66,355 $107,257 $(156,557) $205,988
======== ======== ======= ======== ========= ========
Current liabilities..... $ 6,652 $ 11,054 $ 4,523 $ 15,178 $ (10,373) $ 27,034
Non-current
liabilities............ 106,159 0 209 2,460 (261) 108,567
Advances from parent.... 0 33,785 11,479 67,127 (112,391) 0
Equity.................. 68,286 (37,003) 50,144 22,492 (33,532) 70,387
-------- -------- ------- -------- --------- --------
$181,097 $ 7,836 $66,355 $107,257 $(156,557) $205,988
======== ======== ======= ======== ========= ========
Revenues................ $ 0 $ 44,721 $67,618 $123,703 $ 0 $236,042
Income (loss) from
operations............. $(21,455) $(26,007) $ 3,602 $ 18,596 $ 0 $(25,264)
Equity in earnings
(loss) of consolidated
subsidiaries and
partnerships........... $(12,559) $ 0 $ 0 $ 0 $ 12,559 $ 0
Net loss................ $(22,499) $(24,194) $ 1,496 $ 9,494 $ 645 $(35,058)
Net cash provided by
(used in) operating
activities............. $ 1,503 $ (3,606) $ (308) $ 13,781 $ 0 $ 11,370
Net cash used in
investing activities... 0 (544) (1,928) (3,075) 0 (5,547)
Net cash provided by
(used in) financing
activities............. (1,857) 4,083 4,564 (10,287) 0 (3,497)
-------- -------- ------- -------- --------- --------
Net increase (decrease)
in cash and cash
equivalents............ (354) (67) 2,328 419 0 2,326
Cash and cash
equivalents:
Beginning of year..... 10,811 2,630 1,334 6,000 0 20,775
-------- -------- ------- -------- --------- --------
End of year........... $ 10,457 $ 2,563 $ 3,662 $ 6,419 $ 0 $ 23,101
======== ======== ======= ======== ========= ========
</TABLE>
- --------
Notes to Summarized Consolidating Financial Information:
(1) Blue Diamond Hotel & Casino, Inc. is a wholly-owned subsidiary that is
consolidated in the accompanying consolidated financial statements.
S-59
<PAGE>
BOOMTOWN, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(2) Boomtown Hotel and Casino, Inc. is a wholly-owned subsidiary that is
consolidated in the accompanying consolidated financial statements. These
amounts do not include the operations of the Company's wholly-owned
subsidiaries which are general partners of the Company's non-wholly owned
subsidiaries. The operations of such wholly-owned subsidiaries are
insignificant and have been included in the column "Non-wholly owned
Subsidiaries".
(3) "Non-wholly Owned Subsidiaries" include Boomtown, Inc.'s wholly-owned
subsidiaries in Mississippi and Louisiana and 100% of the assets,
liabilities and equity of the limited partnerships formed to operate the
gaming facilities in those states.
(4) Eliminations consist of Boomtown, Inc.'s (a) investment in the guarantor
entities, (b) advances to the guarantor and non-guarantor entities and
subsidiaries and (c) equity in earnings (loss) of consolidated
subsidiaries and partnerships. The advances are subordinated in right of
payment to the guarantees of the Notes.
S-60
<PAGE>
BOOMTOWN, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
SUMMARIZED CONSOLIDATING FINANCIAL INFORMATION
AS OF AND FOR THE NINE MONTHS ENDED JUNE 30, 1997
(IN THOUSANDS, UNAUDITED)
<TABLE>
<CAPTION>
GUARANTOR ENTITIES
---------------------------------------------------------
BOOMTOWN, BLUE DIAMOND BOOMTOWN LOUISIANA-I MISSISSIPPI-I ELIMINATIONS & BOOMTOWN,
INC. HOTEL & HOTEL & GAMING, GAMING, RECLASSIFICATIONS INC.
(PARENT CO.) CASINO, INC.(1) CASINO, INC.(2) L.P.(3) L.P.(4) DR(CR)(5) (CONSOLIDATED)
------------ --------------- --------------- ----------- ------------- ----------------- --------------
<S> <C> <C> <C> <C> <C> <C> <C>
Current assets... $ 22,294 $ 5,239 $ 6,592 $ 5,422 $ 5,535 $ (14,850) $ 30,232
Advances to
affiliates...... 111,239 0 0 0 0 (111,239) 0
Non-current
assets.......... 46,408 1,996 60,093 61,217 41,809 (37,348) 174,175
-------- -------- ------- ------- ------- --------- --------
$179,941 $ 7,235 $66,685 $66,639 $47,344 $(163,437) $204,407
======== ======== ======= ======= ======= ========= ========
Current
liabilities..... $ 3,522 $ 14,338 $ 6,197 $ 8,674 $ 9,647 $ (14,850) $ 27,528
Non-current
liabilities..... 115,630 0 109 1,085 23 0 116,847
Advances from
parent.......... 0 35,947 12,566 20,261 42,465 (111,239) 0
Equity........... 60,789 (43,050) 47,813 36,619 (4,791) (37,348) 60,032
-------- -------- ------- ------- ------- --------- --------
$179,941 $ 7,235 $66,685 $66,639 $47,344 $(163,437) $204,407
======== ======== ======= ======= ======= ========= ========
Revenues......... $ 0 $ 35,275 $45,824 $56,349 $41,656 $ 0 $179,104
Income (loss)
from
operations...... $ (3,290) $ (5,740) $(2,509) $12,732 $ 2,871 $ 0 $ 4,064
Equity in
earnings (loss)
of consolidated
subsidiaries.... $ 809 $ (809) $ 0
Net income
(loss).......... $(11,351) $ (6,046) (2,330) $10,403 $(1,122) $ (96) $(10,542)
Net cash provided
by (used in)
operating
activities...... (9,796) (517) 4,939 14,095 3,474 0 12,195
Net cash used in
investing
activities...... 0 (414) (5,332) (1,719) (2,453) 0 (9,918)
Net cash provided
by (used in)
financing
activities...... 4,822 1,628 713 (11,444) (886) 0 (5,167)
-------- -------- ------- ------- ------- --------- --------
Net increase
(decrease) in
cash and cash
equivalents..... (4,974) 697 320 932 135 0 (2,890)
Cash and cash
equivalents:
Beginning of
year........... 10,457 2,563 3,662 3,512 2,907 0 23,101
-------- -------- ------- ------- ------- --------- --------
End of period... $ 5,483 $ 3,260 $ 3,982 $ 4,444 $ 3,042 $ 0 $ 20,211
======== ======== ======= ======= ======= ========= ========
</TABLE>
- --------
Notes to Summarized Consolidating Financial Information:
(1) Blue Diamond Hotel & Casino, Inc. is a wholly-owned subsidiary that is
consolidated in the accompanying consolidated financial statements.
(2) Boomtown Hotel & Casino, Inc. is a wholly-owned subsidiary that is
consolidated in the accompanying consolidated financial statements. These
amounts do not include the operations of the Company's wholly-owned
subsidiaries which are general partners of the Company's non wholly-owned
subsidiaries.
(3) Louisiana-I Gaming, L.P. is a wholly-owned subsidiary (as of November 18,
1996) that is consolidated in the Company's consolidated financial
statements.
(4) Mississippi-I Gaming, L.P. is a non wholly-owned subsidiary of the Company
that is consolidated in the Company's consolidated financial statements.
(5) Eliminations consist of Boomtown, Inc.'s (a) investment in the guarantor
entities, (b) advances to the guarantor and non-guarantor subsidiaries and
(c) equity earnings (loss) of consolidated subsidiaries and partnerships.
The advances are subordinated in right of payment to the guarantees of the
Notes.
S-61
<PAGE>
BOOMTOWN, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
13. SUBSEQUENT EVENTS
ACQUISITION OF LOUISIANA PARTNERSHIP MINORITY INTEREST--On November 18, 1996
the Company entered into an agreement with Eric Skrmetta, the lessor, in which
the Company agreed to pay $5,673,000 in return for Skrmetta's 7.5% interest in
the Louisiana Partnership in addition to releasing the Company from any and
all claims, liabilities and causes of action of any kind arising from or
related to the Partnership Agreement. The agreement required Boomtown to make
a deposit of $500,000 by December 5, 1996 and the remaining $5,173,000 was
paid on August 8, 1997 (unaudited).
MERGER WITH HOLLYWOOD PARK (UNAUDITED)--On June 30, 1997, pursuant to the
Merger Agreement dated as of April 23, 1996, by and among Hollywood Park, HP
Acquisition, Inc., a wholly owned subsidiary of Hollywood Park, and Boomtown,
HP Acquisition, Inc. was merged with and into Boomtown.
SWAP AGREEMENT CONSUMMATION (UNAUDITED)--On July 1, 1997, Boomtown completed
a swap pursuant to the Swap Agreement. See Management's Discussion and
Analysis of Financial Condition and Results of Operations--"Boomtown--
Disposition of Boomtown Las Vegas."
EARLY EXTINGUISHMENT OF FIRST MORTGAGE NOTES (UNAUDITED)--Concurrently with
the closing of the Merger and the Swap, Hollywood Park supplied the funds
necessary to enable Boomtown to repurchase and retire an aggregate of
approximately $102.7 million in principal amount of Boomtown's First Mortgage
Notes (the "Notes") leaving an aggregate of approximately $1.4 million in
principal amount of the Notes outstanding. Boomtown recorded an extraordinary
loss of approximately $14.2 million (approximately $8.4 million net of tax
effect) in the period ended June 30, 1997, related to the tender and consent
costs (approximately $9.0 million) and the write off of deferred financing
costs (approximately $5.2 million) associated with the early extinguishment of
the First Mortgage Notes.
BARGE AND BUILDING SHELL PURCHASE (UNAUDITED)--On August 4, 1997, Hollywood
Park executed a purchase agreement pursuant to which one of the Hollywood Park
entities repurchased the barge and the building shell at Boomtown Biloxi for a
total cost of $5,250,000. A payment of $1,500,000 was made on August 4, 1997,
with the balance payable in three equal annual installments of $1,250,000.
S-62
<PAGE>
APPENDIX A
RESTATED
CERTIFICATE OF INCORPORATION
OF
HOLLYWOOD PARK REALTY ENTERPRISES, INC.
A DELAWARE CORPORATION
ARTICLE I
The name of the corporation is Hollywood Park Realty Enterprises, Inc.
ARTICLE II
The address of the corporation's registered office in the State of Delaware
is 30 Old Rudnick Lane, in the City of Dover, County of Kent. The name of the
corporation's registered agent at such address is CorpAmerica, Inc.
ARTICLE III
The nature of the business to be conducted or promoted is to engage in any
lawful act or activity for which corporations may be organized under the
General Corporation Law of the State of Delaware.
ARTICLE IV
The amount of the total authorized capital stock of the Corporation is
165,001,000 shares which are divided into four classes as follows:
40,000,000 shares of Preferred Stock having a par value of $.01 per share
("Preferred Stock");
1,000 shares of Unpaired Common Stock having a par value of $.10 per share
("Unpaired Common Stock");
100,000,000 shares of Common Stock having a par value of $.01 per share
("Common Stock"); and
25,000,000 shares of Excess Common Stock having a par value of $.01 per
share ("Excess Stock").
The voting powers, designations, preferences and relative, participating,
optional or other special rights, and qualifications, limitations or
restrictions of the above classes of stock are as follows:
A. Preferred Stock
The Board of Directors is expressly authorized, from time to time, (1) to
fix the number of shares of one or more series of Preferred Stock; (2) to
determine the designation of any such series; and (3) to determine or alter,
without limitation or restriction, the voting powers, preferences and
relative, participating, optional or other rights, or the qualifications,
limitations or restrictions granted to or imposed upon any wholly unissued
series of Preferred Stock; provided, however, no shares of any series of
Preferred Stock may be authorized or issued unless (i) the certificate of
designations relating to such series contains restrictions on ownership and
transfer and conversion provisions applicable to such series comparable to
those set forth in Sections (C) and (D) of this Article IV, and (ii) a
corresponding series of Preferred Stock, to be issued in accordance with such
conversion provisions upon a violation of such restrictions on ownership and
transfer, is simultaneously authorized by filing of a certificate of
designations.
A-1
<PAGE>
B. Unpaired Common Stock and Common Stock
1. Each share of Unpaired Common Stock and Common Stock shall be equal in
respect of rights to dividends, when and as declared, in the form of cash,
stock or other property of the Corporation. Subject to the rights of the
holders of Preferred Stock, the holders of the Unpaired Common Stock and the
Common Stock shall be entitled to receive, to the extent permitted by law,
such dividends as may be declared from time to time by the Board of Directors.
2. Subject to the rights of the holders of Preferred Stock and Excess Stock,
in the event of the voluntary or involuntary liquidation, dissolution,
distribution of assets or winding up of the Corporation, after distribution in
full of the preferential amount to be distributed to the holders of shares of
the Preferred Stock, holders of the Unpaired Common Stock and the Common Stock
shall be entitled to receive all the remaining assets of the Corporation of
whatever kind available for distribution to stockholders, ratably in
proportion to the number of shares of Unpaired Common Stock and Common Stock
held by them respectively. A consolidation, merger or reorganization of the
Corporation with any other corporation or corporations, or a sale of all or
substantially all of the assets of the Corporation, shall not be considered a
dissolution, liquidation or winding up of the Corporation within the meaning
of these provisions.
3. With respect to all matters upon which stockholders are entitled to vote
or to which stockholders are entitled to give consent, the holders of the
outstanding shares of the Unpaired Common Stock and the Common Stock shall
vote together without regard to class. Except as may be otherwise required by
law, each share of Unpaired Common Stock and Common Stock shall entitle the
holder to one vote in respect of each matter voted by the stockholders.
4. Except as otherwise required by the Delaware General Corporation Law or
as otherwise provided in this Certificate of Incorporation, each share of
Unpaired Common Stock and Common Stock shall have identical rights,
preferences, privileges and restrictions, including rights in liquidation.
C. Restrictions on Ownership and Transfer of Common Stock
1. Definitions. For purposes of this Article IV, the following terms shall
have the meanings set forth below:
"Beneficial Ownership" shall mean, with respect to any Person, ownership of
shares of Common Stock equal to the sum of (i) the shares of Common Stock
directly or indirectly owned by such Person, (ii) the number of shares of
Common Stock treated as owned directly or indirectly by such Person through
the application of the constructive ownership rules of Section 544 of the
Internal Revenue Code of 1986, as amended (the "Code"), as modified by Section
856(h) of the Code, and (iii) the number of shares of Common Stock which such
Person is deemed to beneficially own pursuant to Rule 13d-3 under the
Securities Exchange Act of 1934, as amended (the "Exchange Act"). The terms
"Beneficial Owner," "Beneficially Owns" and "Beneficially Owned" shall have
correlative meanings.
"Beneficiary" shall mean, with respect to any Trust, one or more
organizations described in each of Section 170(b)(1)(A) (other than clauses
(vii) and (viii) thereof) and Section 170(c)(2) of the Code that are named by
the Corporation as the beneficiary or beneficiaries of such Trust, in
accordance with the provisions of Section (D)(4) of this Article IV.
"Constructive Ownership" shall mean ownership of shares of Common Stock by a
Person who is or would be treated as a direct or indirect owner of such shares
of Common Stock through the application of Section 318 of the Code, as
modified by Section 856(d)(5) of the Code. The terms "Constructive Owner,"
"Constructively Owns" and "Constructively Owned" shall have correlative
meanings.
"Market Price" on any date shall mean the average of the Closing Price for
the five consecutive Trading Days ending on such date. The "Closing Price" on
any date shall mean the last sale price of the Common Stock, regular way, or,
in case no such sale takes place on such day, the average of the closing bid
and asked prices of
A-2
<PAGE>
the Common Stock, regular way, in either case as reported in the principal
consolidated transaction reporting system with respect to securities listed or
admitted to trading on the New York Stock Exchange or, if the shares of Common
Stock are not listed or admitted to trading on the New York Stock Exchange, as
reported in the principal consolidated transaction reporting system with
respect to securities listed on the principal national securities exchange on
which the shares of Common Stock are listed or admitted to trading or, if the
shares of Common Stock are not listed or admitted to trading on any national
securities exchange, the last quoted closing sales price of the Common Stock,
or if not so quoted, the average of the high bid and low asked prices of the
Common Stock in the over-the-counter market, as reported by the Nasdaq Stock
Market, Inc. or, if such system is no longer in use, the principal other
automated quotation system that may then be in use or, if the shares of Common
Stock are not quoted by any such organization, the average of the closing bid
and asked prices of such security as furnished by a professional market maker
selected by the Board of Directors making a market in the shares of Common
Stock. In the case of Common Stock that is paired, "Market Price" shall mean
the "Market Price" for Paired Shares multiplied by the Valuation Percentage.
"Non-Transfer Event" shall mean an event other than a purported Transfer
that would cause any Person to Beneficially Own or Constructively Own shares
of Common Stock in excess of the Ownership Limit or that would result in a
violation of the ownership restrictions set forth in Sections (C)(2)(b)-(d) of
this Article IV, including, but not limited to, (i) the granting of any option
or entering into any agreement for the sale, transfer or other disposition of
shares of Common Stock or (ii) the sale, transfer, assignment or other
disposition of interests in any Person or of any securities or rights
convertible into or exchangeable for shares of Common Stock that results in
changes in Beneficial Ownership or Constructive Ownership of shares of Common
Stock.
"Ownership Limit" shall mean, with respect to the Common Stock, 9.8% of the
number of outstanding shares of the Common Stock and the Excess Stock. For
purposes of computing the percentage of shares of Common Stock that is
Beneficially Owned by any Person, any shares of Common Stock that are deemed
to be Beneficially Owned by such Person pursuant to Rule 13d-3 of the Exchange
Act but which are not outstanding shall be deemed to be outstanding.
"Paired Share" means a unit consisting of one share of Common Stock and one
share of the common stock, $.01 par value, of Operating Company that are
paired pursuant to the Pairing Agreement.
"Pairing Agreement" shall mean the 1998 Pairing Agreement, by and between
the Corporation and Hollywood Park Operating Company (the "Operating
Company"), as amended from time to time in accordance with the provisions
thereof.
"Permitted Transferee" shall mean any Person designated as a Permitted
Transferee in accordance with the provisions of Section (D)(8) of this Article
IV.
"Person" shall mean (a) an individual or any corporation, partnership,
limited liability company, estate, trust, association, private foundation,
joint stock company or any other entity and (b) a "group" as that term is
defined for purposes of Rule 13d-5 of the Exchange Act.
"Prohibited Owner" shall mean, with respect to any purported Transfer or
Non-Transfer Event, any Person who is prevented from being or becoming the
owner of record title to shares of Common Stock by the provisions of Section
(D)(1) of this Article IV.
"Restriction Termination Date" shall mean (i) the first day on which the
Board of Directors publicly announces that the Corporation will not elect to
be taxed under the Code as a real estate investment trust (a "REIT"), or (ii)
if the Corporation has already elected to be taxed as a REIT, the later of (A)
the date as of which the Corporation voluntarily terminates such election or
(B) the date on which the Corporation submits such termination to the Internal
Revenue Service.
"Trading Day" shall mean a day on which the principal national securities
exchange on which shares of Common Stock are listed or admitted to trading is
open for the transaction of business or, if shares of Common Stock are not
listed or admitted to trading on any national securities exchange, any day
other than a Saturday, a Sunday or a day on which banking institutions in the
State of New York are authorized or obligated by law or executive order to
close.
A-3
<PAGE>
"Transfer" (as a noun) shall mean any sale, transfer, gift, assignment,
devise or other disposition of shares of Common Stock, whether voluntary or
involuntary, whether of record, constructively or beneficially and whether by
operation of law or otherwise. "Transfer" (as a verb) shall have the
correlative meaning.
"Trust" shall mean any separate trust created and administered in accordance
with the terms of Section (D) of this Article IV, for the exclusive benefit of
any Beneficiary.
"Trustee" shall mean any Person or entity unaffiliated with both the
Corporation and any Prohibited Owner designated by the Corporation to act as
trustee of any Trust, or any successor trustee thereof. The Trustee shall be
designated by the Corporation and the Operating Company in accordance with the
Pairing Agreement.
"Valuation Percentage" shall mean a fraction (expressed as a percentage)
determined by dividing the value of a share of Common Stock most recently
determined under Section 2.5 of the Pairing Agreement by the value of a Paired
Share most recently determined under Section 2.5 of the Pairing Agreement. Any
holder of Common Stock, upon delivery of a written request to the Corporation,
shall be promptly notified by the Corporation of the Valuation Percentage then
in effect.
2. Restriction on Ownership and Transfer.
a. Except as provided in Section (C)(4) of this Article IV, until the
Restriction Termination Date, (i) no Person shall Beneficially Own or
Constructively Own outstanding shares of Common Stock in excess of the
Ownership Limit and (ii) any Transfer (whether or not the result of a
transaction entered into through the facilities of the New York Stock
Exchange) that, if effective, would result in any Person Beneficially Owning
or Constructively Owning shares of Common Stock in excess of the Ownership
Limit shall be void ab initio as to the Transfer of that number of shares of
Common Stock which would be otherwise Beneficially Owned or Constructively
Owned by such Person in excess of the Ownership Limit and the intended
transferee shall acquire no rights in such shares of Common Stock (which
shares of Common Stock shall be subject to the provisions of Section (D) of
this Article IV).
b. Until the Restriction Termination Date, any Transfer (whether or not the
result of a transaction entered into through the facilities of the New York
Stock Exchange) of shares of Common Stock that, if effective, would result in
the Corporation being "closely held" within the meaning of Section 856(h) of
the Code shall be void ab initio as to the Transfer of that number of shares
of Common Stock that would cause the Corporation to be "closely held" within
the meaning of Section 856(h) of the Code, and the intended transferee shall
acquire no rights in such shares of Common Stock (which shares of Common Stock
shall be subject to the provisions of Section (D) of this Article IV).
c. Until the Restriction Termination Date, any Transfer (whether or not the
result of a transaction entered into through the facilities of the New York
Stock Exchange) of shares of Common Stock that, if effective, would cause the
Corporation to Constructively Own 10% or more of the ownership interests in a
tenant of the real property of the Corporation or any direct or indirect
subsidiary (whether a corporation, partnership, limited liability company or
other entity) of the Corporation (a "Subsidiary"), within the meaning of
Section 856(d)(2)(B) of the Code, shall be void ab initio as to the Transfer
of that number of shares of Common Stock that would cause the Corporation to
Constructively Own 10% or more of the ownership interests in a tenant of the
real property of the Corporation or a Subsidiary within the meaning of Section
856(d)(2)(B) of the Code, and the intended transferee shall acquire no rights
in such shares of Common Stock (which shares of Common Stock shall be subject
to the provisions of Section (D) of this Article IV).
d. Until the Restriction Termination Date, any Transfer (whether or not the
result of a transaction entered into through the facilities of the New York
Stock Exchange) of shares of Common Stock that, if effective, would result in
the shares of capital stock of the Corporation being beneficially owned
(within the meaning of Section 856(a)(5) of the Code) by fewer than 100
persons within the meaning of Section 856(a)(5) of the Code shall be void ab
initio and the intended transferee shall acquire no rights in such shares of
Common Stock (which shares of Common Stock shall be subject to the provisions
of Section (D) of this Article IV).
A-4
<PAGE>
3. Owners Required To Provide Information. As long as any of the
restrictions contained in Section (C)(2) of this Article IV is in effect:
a. Every Beneficial Owner or Constructive Owner of more than 5%, or such
lower percentages as may be required pursuant to regulations under the Code,
of the outstanding shares of Common Stock shall, within 30 days after January
1 of each year, provide to the Corporation a written statement or affidavit
stating the name and address of such Beneficial Owner or Constructive Owner,
the number of shares of Common Stock Beneficially Owned or Constructively
Owned, and a description of how such shares are held. Each such Beneficial
Owner or Constructive Owner shall provide to the Corporation such additional
information as the Corporation may request to ensure compliance with the
restrictions in this Section C of this Article IV.
b. Each Person who is a Beneficial Owner or Constructive Owner of shares of
Common Stock and each Person (including the stockholder of record) who is
holding shares of Common Stock for a Beneficial Owner or Constructive Owner
shall provide to the Corporation a written statement or affidavit stating such
information as the Corporation may request in order to determine the
Corporation's status as a REIT and to ensure compliance with the Ownership
Limit.
4. Exception. The Board of Directors, upon receipt of a ruling from the
Internal Revenue Service or an opinion of counsel in each case to the effect
that the restrictions contained in Sections (C)(2)(b) through (d) of this
Article IV would not be violated, may exempt a Person from the Ownership
Limit, provided that (A) the Board of Directors obtains such representations
and undertakings from such Person as are reasonably necessary to ascertain
that no Person's Beneficial Ownership or Constructive Ownership of shares of
Common Stock will (i) result in the capital stock of the Corporation being
beneficially owned (within the meaning of Section 856(a)(5) of the Code) by
fewer than 100 persons within the meaning of Section 856(a)(5) of the Code,
(ii) result in the Corporation being "closely held" within the meaning of
Section 856(h) of the Code or (iii) cause the Corporation to Constructively
Own 10% or more of the ownership interests in a tenant of the real property of
the Corporation or a Subsidiary within the meaning of Section 856(d)(2)(B) of
the Code and (B) such Person agrees in writing that any violation or attempted
violation of the restrictions contained in Sections (C)(2)(b) through (d) of
this Article IV will result in the conversion of such shares into shares of
Excess Stock pursuant to Section (D)(1) of this Article IV.
5. New York Stock Exchange Transactions. Notwithstanding any provision
contained herein to the contrary, nothing in this Certificate shall preclude
the settlement of any transaction entered into through the facilities of the
New York Stock Exchange.
D. Excess Stock
1. Conversion into Excess Stock.
a. If, notwithstanding the other provisions contained in this Article IV,
during the period that any of the restrictions contained in Section (C)(2) of
this Article IV is in effect, there is a purported Transfer or Non-Transfer
Event such that any Person would either Beneficially Own or Constructively Own
shares of Common Stock in excess of the Ownership Limit, then, (i) except as
otherwise provided in Section (C)(4) of this Article IV, with respect to any
such purported transfer, the purported transferee shall be deemed to be a
Prohibited Owner and shall acquire no right or interest (or, in the case of a
Non-Transfer Event, the Person holding record title to the shares of Common
Stock Beneficially Owned or Constructively Owned by such Beneficial Owner or
Constructive Owner by reason of such Non-Transfer Event, shall cease to own
any right or interest) in such number of shares of Common Stock which would
cause such Beneficial Owner or Constructive Owner to Beneficially Own or
Constructively Own shares of Common Stock (rounded up to the nearest whole
share) in excess of the Ownership Limit, (ii) such number of shares of Common
Stock in excess of the Ownership Limit shall be automatically converted into
an equal number of shares of Excess Stock, (iii) such shares of Excess Stock
shall be transferred to a Trust in accordance with Section (D)(4) of this
Article IV and (iv) the Prohibited Owner (or, if different, the record owner)
shall submit certificates formerly representing such number of shares of
Common Stock to the Corporation for registration in the name of the Trustee of
the Trust. Such conversion into Excess Stock and transfer to a Trust shall be
effective as of the close of trading on the Trading Day prior to the date of
the Transfer or Non-Transfer Event, as the case may be.
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b. If, notwithstanding the other provisions contained in this Article IV,
during the period that any of the restrictions contained in Section (C)(2) of
this Article IV is in effect, there is a purported Transfer or Non-Transfer
Event that, if effective, would (i) result in the capital stock of the
Corporation being beneficially owned (within the meaning of Section 856(a)(5)
of the Code) by fewer than 100 persons within the meaning of Section 856(a)(5)
of the Code, (ii) result in the Corporation being "closely held" within the
meaning of Section 856(h) of the Code or (iii) cause the Corporation to
Constructively Own 10% or more of the ownership interest in a tenant of the
Corporation's or a Subsidiary's real property within the meaning of Section
856(d)(2)(B) of the Code, then (w) the purported transferee shall be deemed to
be a Prohibited Owner and shall acquire no right or interest (or, in the case
of a Non-Transfer Event, the Person holding record title of the shares of
Common Stock with respect to which such Non-Transfer Event occurred, shall
cease to own any right or interest) in such number of shares of Common Stock
(rounded up to the nearest whole share), the ownership of which by such
purported transferee or record holder would (A) result in the shares of
capital stock of the Corporation being beneficially owned (within the meaning
of Section 856(a)(5) of the Code) by fewer than 100 persons within the meaning
of Section 856(a)(5) of the Code, (B) result in the Corporation being "closely
held" within the meaning of Section 856(h) of the Code or (C) cause the
Corporation to Constructively Own 10% or more of the ownership interests in a
tenant of the Corporation's or a Subsidiary's real property within the meaning
of Section 856(d)(2)(B) of the Code, (x) such number of shares of Common Stock
shall be automatically converted into an equal number of shares of Excess
Stock, (y) such shares of Excess Stock shall be automatically transferred to a
Trust in accordance with Section (D)(4) of this Article IV and (z) the
Prohibited Owner shall submit certificates formerly representing such number
of shares of Common Stock to the Corporation for registration in the name of
the Trustee of the Trust. Such conversion into Excess Stock and transfer to a
Trust shall be effective as of the close of trading on the Trading Day prior
to the date of the Transfer or Non-Transfer Event, as the case may be.
c. Upon the occurrence of such a conversion of shares of Common Stock into
an equal number of shares of Excess Stock, such shares of Common Stock shall
be retired and canceled, without any action required by the Board of Directors
of the Corporation, and shall thereupon be restored to the status of
authorized but unissued shares of Common Stock and may be reissued by the
Corporation as that particular class or series of Equity Stock.
2. Remedies for Breach. If the Corporation, or its designees, shall at any
time determine in good faith that a Transfer has taken place in violation of
Section (C)(2) of this Article IV or that a Person intends to acquire or has
attempted to acquire Beneficial Ownership or Constructive Ownership of any
shares of Common Stock in violation of Section (C)(2) of this Article IV, the
Corporation shall take such action as it deems advisable to refuse to give
effect to or to prevent such Transfer or acquisition, including, but not
limited to, refusing to give effect to such Transfer on the stock transfer
books of the Corporation or instituting proceedings to enjoin such Transfer or
acquisition.
3. Notice of Restricted Transfer. Any Person who acquires or attempts to
acquire shares of Common Stock in violation of Section (C)(2) of this Article
IV, or any Person who owns shares of Common Stock that were converted into
shares of Excess Stock and transferred to a Trust pursuant to Sections (D)(1)
and (D)(4) of this Article IV, shall immediately give written notice to the
Corporation of such event and shall provide to the Corporation such other
information as the Corporation may request in order to determine the effect,
if any, of such Transfer or Non-Transfer Event, as the case may be, on the
Corporation's status as a REIT.
4. Ownership in Trust. Upon any Transfer or Non-Transfer Event that results
in Common Stock being converted into Excess Stock pursuant to Section (D)(1)
of this Article IV, such Excess Stock shall be, without further action by the
Corporation or the owner of such shares, transferred to a Trust to be held for
the exclusive benefit of the Beneficiary; provided separate Trusts with
separate Beneficiaries shall be created, and such Excess Stock shall be
allocated among the separate Trusts, to the extent necessary to prevent any
Trust from holding, and any Beneficiary from Beneficially Owning or
Constructively Owning, shares of Excess Stock in excess of the Ownership
Limit. The Corporation and the Operating Company shall name a Beneficiary for
each Trust pursuant to the terms of the Pairing Agreement. Any conversion of
shares of Common Stock into shares of
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Excess Stock and transfer to a Trust shall be effective as of the close of
trading on the Trading Day prior to the date of the Transfer or Non-Transfer
Event that results in the conversion. Shares of Excess Stock so held in trust
shall remain issued and outstanding shares of stock of the Corporation.
5. Dividend Rights. Each share of Excess Stock shall be entitled to the same
dividends and distributions (as to both timing and amount) as may be declared
by the Board of Directors in respect of each share of Common Stock. The
Trustee, as record holder of the shares of Excess Stock, shall be entitled to
receive all dividends and distributions and shall hold all such dividends or
distributions in trust for the benefit of the Beneficiary. The Prohibited
Owner with respect to such shares of Excess Stock shall repay to the Trust the
amount of any dividends or distributions received by it (i) that are
attributable to any shares of Common Stock that have been converted into
shares of Excess Stock and (ii) the record date of which was on or after the
date that such shares were converted into shares of Excess Stock. The
Corporation shall take all measures that it determines reasonably necessary to
recover the amount of any such dividend or distribution paid to a Prohibited
Owner, including, if necessary, withholding any portion of future dividends or
distributions payable on shares of Common Stock Beneficially Owned or
Constructively Owned by the Person who, but for the provisions of this Article
IV, would Constructively Own or Beneficially Own the shares of Common Stock
that were converted into shares of Excess Stock; and, as soon as reasonably
practicable following the Corporation's receipt or withholding thereof, shall
pay over to the Trust for the benefit of the Beneficiary the dividends so
received or withheld, as the case may be.
6. Rights upon Liquidation. In the event of any voluntary or involuntary
liquidation of, dissolution or winding up of, or any distribution of the
assets of, the Corporation, each holder of shares of Excess Stock shall be
entitled to receive, ratably with each other holder of shares of Common Stock,
that portion of the assets of the Corporation that is available for
distribution to the holders of Common Stock. The Trust shall distribute to the
Prohibited Owner the amounts received upon such liquidation, dissolution, or
winding up, or distribution; provided, however, that the Prohibited Owner
shall not be entitled to receive amounts in excess of, in the case of a
purported Transfer in which the Prohibited Owner gave value for shares of
Common Stock and which Transfer resulted in the conversion of the shares into
shares of Excess Stock, the price per share, if any, such Prohibited Owner
paid for the shares of Common Stock (which, in the case of Common Stock that
is paired, shall equal the price per Paired Share multiplied by the most
recent Valuation Percentage) and, in the case of a Non-Transfer Event or
Transfer in which the Prohibited Owner did not give value for such shares
(e.g., if the shares were received through a gift or devise) and which Non-
Transfer Event or Transfer, as the case may be, resulted in the conversion of
the shares into shares of Excess Stock, the price per share equal to the
Market Price on the date of such Non-Transfer Event or Transfer. Any remaining
amount in such Trust shall be distributed to the Beneficiary.
7. Voting Rights. Each share of Excess Stock shall entitle the holder to the
number of votes the holder would have, if such share of Excess Stock was a
share of Common Stock, on all matters submitted to a vote at any meeting of
stockholders. Except as otherwise required by law, the holders of shares of
Excess Stock shall vote together with the holders of Common Stock as a single
class on all such matters. The Trustee, as record holder of the Excess Stock,
shall be entitled to vote all shares of Excess Stock. Subject to applicable
law, any vote by a Prohibited Owner as a purported holder of shares of Common
Stock prior to the discovery by the Corporation that the shares of Common
Stock have been converted into shares of Excess Stock shall be rescinded and
shall be void ab initio with respect to such shares of Excess Stock, and the
Prohibited Owner shall be deemed to have given, as of the close of trading on
the Trading Day prior to the date of the purported Transfer or Non-Transfer
Event that results in the conversion of the shares of Common Stock into shares
of Excess Stock and the transfer of such shares to a Trust pursuant to
Sections (D)(1) and (D)(4) of this Article IV, an irrevocable proxy to the
Trustee to vote the shares of Excess Stock in the manner in which the Trustee,
in its sole and absolute discretion, desires.
8. Designation of Permitted Transferee.
a. The Trustee shall have the exclusive and absolute right to designate a
Permitted Transferee of any and all shares of Excess Stock if the Corporation
fails to exercise its option with respect to such shares pursuant to Section
(D)(10) hereof within the time period set forth therein. As soon as
practicable, but in an orderly fashion
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so as not to materially adversely affect the Market Price of the shares of
Excess Stock, the Trustee shall designate any Person as a Permitted
Transferee; provided, however, that (i) the Permitted Transferee so designated
purchases for valuable consideration (whether in a public or private sale) the
shares of Excess Stock and (ii) the Permitted Transferee so designated may
acquire such shares of Excess Stock without violating any of the restrictions
set forth in Section (C)(2) of this Article IV and without such acquisition
resulting in the conversion of the shares of Common Stock so acquired into
shares of Excess Stock and the transfer of such shares to a Trust pursuant to
Sections (D)(1) and (D)(4) of this Article IV.
b. Upon the designation by the Trustee of a Permitted Transferee in
accordance with the provisions of this Section (D)(8), the Trustee shall cause
to be transferred to the Permitted Transferee that number of shares of Excess
Stock acquired by the Permitted Transferee. Upon such transfer of the shares
of Excess Stock to the Permitted Transferee, such shares of Excess Stock shall
be automatically converted into an equal number of shares of Common Stock.
Upon the occurrence of such a conversion of shares of Excess Stock into an
equal number of shares of Common Stock, such shares of Excess Stock shall be
retired and canceled, without any action required by the Board of Directors of
the Corporation, and shall thereupon be restored to the status of authorized
but unissued shares of Excess Stock and may be reissued by the Corporation as
Excess Stock.
c. The Trustee shall (i) cause to be recorded on the stock transfer books of
the Corporation that the Permitted Transferee is the holder of record of such
number of shares of Common Stock, and (ii) distribute to the Beneficiary any
and all amounts held with respect to the shares of Excess Stock after making
payment to the Prohibited Owner pursuant to Section (D)(9) of this Article IV.
d. If the Transfer of shares of Excess Stock to a purported Permitted
Transferee shall violate any of the transfer restrictions set forth in Section
(C)(2) of this Article IV, such Transfer shall be void ab initio as to that
number of shares of Excess Stock that cause the violation of any such
restriction when such shares are converted into shares of Common Stock (as
described in clause (b) above) and the purported Permitted Transferee shall be
deemed to be a Prohibited Owner and shall acquire no rights in such shares of
Excess Stock or Common Stock. Such shares of Common Stock shall be
automatically converted into Excess Stock and transferred to the Trust from
which they were originally Transferred. Such conversion and transfer to the
Trust shall be effective as of the close of trading on the Trading Day prior
to the date of the Transfer to the purported Permitted Transferee and the
provisions of this Article IV shall apply to such shares, including, without
limitation, the provisions of Sections D(8) through (D)(10) with respect to
any future Transfer of such shares by the Trust.
9. Compensation to Record Holder of Shares of Stock that are Converted into
Shares of Excess Stock. Any Prohibited Owner shall be entitled (following
discovery of the shares of Excess Stock and subsequent designation of the
Permitted Transferee in accordance with Section (D)(8) of this Article IV or
following the acceptance of the offer to purchase such shares in accordance
with Section (D)(10) of this Article IV) to receive from the Trustee following
the sale or other disposition of such shares of Excess Stock the lesser of (i)
(a) in the case of a purported Transfer in which the Prohibited Owner gave
value for shares of Common Stock and which Transfer resulted in the conversion
of such shares into shares of Excess Stock, the price per share, if any, such
Prohibited Owner paid for the shares of Common Stock (which, in the case of
paired Excess Stock, shall be determined based on the Valuation Percentage)
and (b) in the case of a Non-Transfer Event or Transfer in which the
Prohibited Owner did not give value for such shares (e.g., if the shares were
received through a gift or devise) and which Non-Transfer Event or Transfer,
as the case may be, resulted in the conversion of such shares into shares of
Excess Stock, the price per share equal to the Market Price on the date of
such Non-Transfer Event or Transfer or (ii) the price per share (which, in the
case of paired Excess Stock, shall be determined based on the Valuation
Percentage) received by the Trustee from the sale or other disposition of such
shares of Excess Stock in accordance with this Section (D)(9) or Section
(D)(10) of this Article IV. Any amounts received by the Trustee in respect of
such shares of Excess Stock and in excess of such amounts to be paid the
Prohibited Owner pursuant to this Section (D)(9) shall be distributed to the
Beneficiary in accordance with the provisions of Section (D)(8) of this
Article IV. Each Beneficiary and Prohibited Owner shall waive any and all
claims that it may have against the Trustee and the Trust arising out of the
disposition of shares of Excess Stock, except for claims arising out of the
gross negligence or willful misconduct of, or any failure to make payments in
accordance with this Section (D) of this Article IV by, such Trustee or the
Corporation.
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10. Purchase Right in Excess Stock. Shares of Excess Stock shall be deemed
to have been offered for sale to the Corporation or its designee, at a price
per share equal to the lesser of (i) the price per share (which, in the case
of paired Common Stock, shall be determined based on the Valuation Percentage)
in the transaction that created such shares of Excess Stock (or, in the case
of devise, gift or Non-Transfer Event, the Market Price at the time of such
devise, gift or Non-Transfer Event) or (ii) the Market Price on the date the
Corporation, or its designee, accepts such offer. The Corporation shall have
the right to accept such offer for a period of 90 days following the later of
(a) the date of the Non-Transfer Event or purported Transfer which results in
such shares of Excess Stock or (b) the date on which the Corporation
determines in good faith that a Transfer or Non-Transfer Event resulting in
shares of Excess Stock has previously occurred, if the Corporation does not
receive a notice of such Transfer or Non-Transfer Event pursuant to Section
(D)(3) of this Article IV.
E. Remedies Not Limited. Nothing contained in this Article IV shall limit
the authority of the Corporation to take such other action as it deems
necessary or advisable to protect the Corporation and the interests of its
stockholders by preservation of the Corporation's status as a REIT and to
ensure compliance with the requirements of the Pairing Agreement and with the
restrictions set forth in Section C of this Article IV.
F. Ambiguity. In the case of an ambiguity in the application of any of the
provisions of this Article IV, including any definition contained in Section
(C)(1) of this Article IV, the Board of Directors shall have the power to
determine the application of the provisions of this Article IV with respect to
any situation based on the facts known to it.
G. Legend. The restrictions set forth in this Article IV shall be noted
conspicuously on any certificate representing Common Stock in accordance with
the requirements of the Delaware General Corporation Law.
H. Severability. Each provision of this Article IV shall be severable and an
adverse determination as to any such provision shall in no way affect the
validity of any other provision.
ARTICLE V
Any and all right, title, interest and claim in or to any dividends declared
by the corporation, whether in cash, stock, or otherwise, which are unclaimed
by the stockholder entitled thereto for a period of six years after the close
of business on the payment date, shall be and is deemed to be extinguished and
abandoned; and such unclaimed dividends in the possession of the corporation,
its transfer agents or other agents or depositories shall at such time become
the absolute property of the corporation, free and clear of any and all claims
of any persons whatsoever.
ARTICLE VI
In furtherance and not in limitation of the power conferred by statute, the
Board of Directors is expressly authorized to make, alter, amend or repeal the
by-laws of the corporation.
ARTICLE VII
Whenever a compromise or arrangement is proposed between this corporation
and its creditors or any class of them and/or between this corporation and its
stockholders or any class of them, any court of equitable jurisdiction within
the State of Delaware may, on the application in a summary way of this
corporation or of any creditor or stockholder thereof or on the application of
any receiver or receivers appointed for this corporation under the provisions
of Section 291 of Title 8 of the Delaware Code or on the application of
trustees in dissolution or of any receiver or receivers appointed for this
corporation under the provisions of Section 279 of Title 8 of the Delaware
Code order a meeting of the creditors or class of creditors, and/or of the
stockholders or class of stockholders of the corporation, as the case may be,
to be summoned in such manner as the said court directs. If a majority in
number representing three-fourths in value of the creditors or class of
creditors, and/or of the stockholders or class of stockholders of this
corporation, as the case may be, agree to any compromise or arrangement and to
any reorganization of this corporation as consequence of such compromise or
arrangement,
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the said compromise or arrangement and the said reorganization shall, if
sanctioned by the court to which the said application has been made, be
binding on all the creditors or class of creditors, and/or on all the
stockholders or class of stockholders, of this corporation, as the case may
be, and also on this corporation.
ARTICLE VIII
The corporation shall indemnify its officers and directors to the full
extent permitted by the Delaware General Corporation Law.
ARTICLE IX
Elections of directors need not be by written ballot unless the by-laws of
the corporation so provide.
ARTICLE X
The corporation reserves the right to amend, alter, change or repeal any
provision contained in this Certificate of Incorporation, in the manner now or
hereafter prescribed by statute, and all rights conferred upon stockholders
herein are granted subject to this reservation.
ARTICLE XI
No director of the Company shall be personally liable to the Company or its
shareholders for monetary damages for breach of fiduciary duty by such
director for corporate actions as a director; provided, however, that this
Article XI shall not eliminate or limit the liability of a director to the
extent provided by applicable law (1) for any breach of the director's duty of
loyalty to the Company or its shareholders, (2) for acts or omissions not in
good faith or which involve intentional misconduct or a knowing violation of
law, (3) under Section 174 of the General Corporation Law of Delaware, or (4)
for any transaction from which the director derived an improper personal
benefit. No amendment to repeal this Article XI shall apply to, or have any
effect on, the liability or alleged liability of any director of the Company
for or with respect to any acts or omissions of such director occurring prior
to such amendment or repeal.
ARTICLE XII
A. Definitions. For purposes of this Article XII, the following terms shall
have the meanings specified below:
1. "Affiliate" shall have the meaning ascribed to such term in Rule 12b-2
promulgated by the Securities and Exchange Commission ("SEC") under the
Securities Exchange Act of 1934, as amended (the "Exchange Act").
2. "Affiliated Companies" shall mean those companies directly or indirectly
affiliated or under common Ownership or Control with the Corporation,
including, without limitation, subsidiaries, holding companies and
intermediary companies (as those and similar terms are defined in the Gaming
Laws of the applicable Gaming Jurisdictions) that are registered or licensed
under applicable Gaming Laws.
3. "Gaming" or "Gaming Activities" shall mean the conduct of gaming and
gambling activities, or the use of gaming devices, equipment and supplies in
the operation of a casino, card club or other enterprise, including, without
limitation, slot machines, gaming tables, cards, dice, gaming chips, player
tracking systems, cashless wagering systems and related and associated
equipment and supplies.
4. "Gaming Authorities" shall mean all international, foreign, federal,
state and local regulatory and licensing bodies and agencies with authority
over Gaming within any Gaming Jurisdiction.
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5. "Gaming Jurisdictions" shall mean all jurisdictions, domestic and
foreign, and their political subdivisions, in which Gaming Activities are
lawfully conducted.
6. "Gaming Laws" shall mean all laws, statutes and ordinances pursuant to
which any Gaming Authority possesses regulatory and licensing authority over
Gaming within any Gaming Jurisdiction, and all rules and regulations
promulgated by such Gaming Authority thereunder.
7. "Gaming Licenses" shall mean all licenses, permits, approvals,
authorizations, registrations, findings of suitability, franchises and
entitlements issued by a Gaming Authority necessary for or relating to the
conduct of Gaming Activities.
8. "Ownership or Control" (and derivatives thereof) shall mean (i) ownership
of record, (ii) "beneficial ownership" as defined in Rule 13d-3 or Rule 16a-
1(a)(2) promulgated by the SEC under the Exchange Act, (iii) the power to
direct and manage, by agreement, contract, agency or other manner, the voting
or management rights or disposition of securities of the Corporation, and/or
(iv) definitions of ownership or control under applicable Gaming Laws.
9. "Person" shall mean an individual, partnership, corporation, limited
liability company, trust or any other entity.
10. "Redemption Date" shall mean the date by which the securities Owned or
Controlled by an Unsuitable Person are to be redeemed by the Corporation.
11. "Redemption Notice" shall mean that notice of redemption served by the
Corporation on an Unsuitable Person if a Gaming Authority requires the
Corporation, or the Corporation deems it necessary or advisable, to redeem
such Unsuitable Person's securities. Each Redemption Notice shall set forth
(i) the Redemption Date; (ii) the number of shares of securities to be
redeemed; (iii) the Redemption Price and the manner of payment therefor; (iv)
the place where certificates for such shares shall be surrendered for payment;
and (v) any other requirements of surrender of the certificates, including how
they are to be endorsed, if at all.
12. "Redemption Price" shall mean the per share price for the redemption of
any securities to be redeemed pursuant to this Article, which shall be that
price (if any) required to be paid by the Gaming Authority making the finding
of unsuitability, or if such Gaming Authority does not require a certain price
per share to be paid, that sum deemed reasonable by the Corporation (which may
include, in the Corporation's discretion, the original purchase price per
share of the securities); provided, however, the Redemption Price, unless the
Gaming Authority requires otherwise, shall in no event exceed (i) the closing
sales price of the securities on the national securities exchange on which
such shares are then listed on the date the notice of redemption is delivered
to the Unsuitable Person by the Corporation, or (ii) if such shares are not
then listed for trading on any national securities exchange, then the closing
sales price of such shares as quoted in the NASDAQ National Market System, or
(iii) if the shares are not then so quoted, then the mean between the
representative bid and the ask price as quoted by NASDAQ or another generally
recognized reporting system. The Redemption Price may be paid in cash, by
promissory note, or both, as required by the applicable Gaming Authority and,
if not so required, as the Corporation elects.
13. "Unsuitable Person" shall mean a Person who Owns or Controls any
securities of the Corporation or any securities of or interest in any
Affiliated Company (i) that is determined by a Gaming Authority to be
unsuitable to Own or Control such securities or unsuitable to be connected
with a Person engaged in Gaming Activities in that Gaming Jurisdiction, or
(ii) who causes the Corporation or any Affiliated Company to lose or to be
threatened with the loss of, or who, in the sole discretion of the Board of
Directors of the Corporation, is deemed likely to jeopardize the Corporation's
right to the use of or entitlement to, any Gaming License.
B. Compliance with Gaming Laws. The Corporation, all Persons Owning or
Controlling securities of the Corporation and any Affiliated Companies, and
each director and officer of the Corporation and any Affiliated Companies
shall comply with all requirements of the Gaming Laws in each Gaming
Jurisdiction in which the Corporation or any Affiliated Companies conduct
Gaming Activities. All securities of the Corporation shall be
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held subject to the requirements of such Gaming Laws, including any
requirement that (i) the holder file applications for Gaming Licenses with, or
provide information to, applicable Gaming Authorities, or (ii) that any
transfer of such securities may be subject to prior approval by Gaming
Authorities, and any transfer of securities of the Corporation in violation of
any such approval requirement shall not be permitted and the purported
transfer shall be void ab initio.
C. Finding of Unsuitability.
1. The securities of the Corporation Owned or Controlled by an Unsuitable
Person or an Affiliate of an Unsuitable Person shall be redeemable by the
Corporation, out of funds legally available therefor, by appropriate action of
the Board of Directors, to the extent required by the Gaming Authority making
the determination of unsuitability or to the extent deemed necessary or
advisable by the Corporation. If a Gaming Authority requires the Corporation,
or the Corporation deems it necessary or advisable, to redeem such securities,
the Corporation shall serve a Redemption Notice on the Unsuitable Person or
its Affiliate and shall purchase the securities on the Redemption Date and for
the Redemption Price set forth in the Redemption Notice. From and after the
Redemption Date, such securities shall no longer be deemed to be outstanding
and all rights of the Unsuitable Person or any Affiliate of the Unsuitable
Person therein, other than the right to receive the Redemption Price, shall
cease. The Unsuitable Person shall surrender the certificates for any
securities to be redeemed in accordance with the requirements of the
Redemption Notice. Notwithstanding the foregoing, so long as the Corporation
and Hollywood Park Operating Company are a paired stock real estate investment
trust and operating company, the Corporation may, in its sole discretion,
convert any securities that are redeemable pursuant to this Section (C)(1)
into shares of Excess Stock effective upon written notice to the Unsuitable
Person or its Affiliate, and such shares of Excess Stock shall be transferred
to a Trust for sale to a Permitted Transferee (as such terms are defined in
Article IV) in accordance with Sections (D)(4) through (9) of Article IV.
2. Commencing on the date that a Gaming Authority serves notice of a
determination of unsuitability or the loss or threatened loss of a Gaming
License upon the Corporation, and until the securities Owned or Controlled by
the Unsuitable Person or the Affiliate of an Unsuitable Person are Owned or
Controlled by Persons found by such Gaming Authority to be suitable to own
them, it shall be unlawful for the Unsuitable Person or any Affiliate of an
Unsuitable Person (i) to receive any dividend, payment, distribution or
interest with regard to the securities; (ii) to exercise, directly or
indirectly or through any proxy, trustee, or nominee, any voting or other
right conferred by such securities, and such securities shall not for any
purposes be included in the securities of the Corporation entitled to vote, or
(iii) to receive any remuneration in any form from the Corporation or an
Affiliated Company for services rendered or otherwise.
D. Issuance and Transfer of Securities. The Corporation shall not issue or
transfer any securities or any interest, claim or charge thereon or thereto
except in accordance with applicable Gaming Laws. The issuance or transfer of
any securities in violation thereof shall be ineffective until (i) the
Corporation shall cease to be subject to the jurisdiction of the applicable
Gaming Authorities, or (ii) the applicable Gaming Authorities shall, by
affirmative action, validate said issuance or transfer or waive any defect in
said issuance or transfer.
E. Indenture Restrictions. The Corporation shall cause to be placed in every
indenture or other operative document relating to publicly traded securities
(other than capital stock) of the Corporation a provision requiring that any
Person or Affiliate of a Person who holds the indebtedness represented by that
indenture and is found to be unsuitable to hold such interest shall have the
interest redeemed or shall dispose of the interest in the Corporation in the
manner set forth in the indenture or other document.
F. Notices. All notices given by the Corporation pursuant to this Article,
including Redemption Notices, shall be in writing and shall be deemed given
when delivered by personal service or telegram, facsimile, overnight courier
or first class mail, postage prepaid, to the Person's address as shown on the
Corporation's books and records.
G. Indemnification. Any Unsuitable Person and any Affiliate of an Unsuitable
Person shall indemnify the Corporation and its Affiliated Companies for any
and all costs, including attorneys' fees, incurred by the
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Corporation and its Affiliated Companies as a result of such Unsuitable
Person's or Affiliate's continuing Ownership or Control or failure to promptly
divest itself of any securities in the Corporation.
H. Fiduciary Obligations; Contractual Arrangements; Etc. Nothing contained
in this Article XII shall be construed (i) to relieve any Unsuitable Person
(or Affiliate of such Person) from any fiduciary obligation imposed by law,
(ii) to prohibit or affect any contractual arrangement which the Corporation
may make from time to time with any holder of securities of the Corporation to
purchase all or any part of shares of capital stock or other securities held
by them, or (iii) to be in derogation of any action, past or future, which has
been or may be taken by the Board of Directors or any holder of securities
with respect to the subject matter of this Article XII.
I. Injunctive Relief. The Corporation is entitled to injunctive relief in
any court of competent jurisdiction to enforce the provisions of this Article
and each holder of the securities of the Corporation shall be deemed to have
acknowledged, by acquiring the securities of the Corporation, that the failure
to comply with this Article will expose the Corporation to irreparable injury
for which there is no adequate remedy at law and that the Corporation is
entitled to injunctive relief to enforce the provisions of this Article.
J. Legend. The restrictions set forth in this Article XII shall be noted
conspicuously on any certificate representing securities of the Corporation in
accordance with the requirements of the Delaware General Corporation Law and
applicable Gaming Laws.
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APPENDIX B
RESTATED
CERTIFICATE OF INCORPORATION
OF
HOLLYWOOD PARK OPERATING COMPANY
A DELAWARE CORPORATION
ARTICLE I
The name of the corporation is Hollywood Park Operating Company (hereinafter
referred to as the "Corporation").
ARTICLE II
The address of the Corporation's registered office in the State of Delaware
is 30 Old Rudnick Lane, in the City of Dover, County of Kent. The name of the
Corporation's registered agent at such address is CorpAmerica, Inc.
ARTICLE III
The nature of the business to be conducted or promoted is to engage in any
lawful act or activity for which corporations may be organized under the
Delaware General Corporation Law, including, without limitation, the conduct
of controlled gambling.
ARTICLE IV
The amount of the total authorized capital stock of the Corporation is
165,000,000 shares which are divided into four classes as follows:
40,000,000 shares of Preferred Stock having a par value of $.01 per share
("Preferred Stock");
100,000,000 shares of Common Stock having a par value of $.01 per share
("Common Stock"); and
25,000,000 shares of Excess Common Stock having a par value of $.01 per
share ("Excess Stock").
Upon effectiveness of this Restated Certificate of Incorporation, each
presently issued and outstanding share of Common Stock shall be
automatically subdivided into [ * ] shares of Common Stock.
- --------
* A number equal to the number of outstanding shares of Hollywood Park, Inc.
Common Stock at the time of the Reorganization, divided by 100.
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The voting powers, designations, preferences and relative, participating,
optional or other special rights, and qualifications, limitations or
restrictions of the above classes of stock are as follows:
A. Preferred Stock
The Board of Directors is expressly authorized, from time to time, (1) to
fix the number of shares of one or more series of Preferred Stock; (2) to
determine the designation of any such series; and (3) to determine or alter,
without limitation or restriction, the voting powers, preferences and
relative, participating, optional or other rights, or the qualifications,
limitations or restrictions granted to or imposed upon any wholly unissued
series of Preferred Stock; provided, however, no shares of any series of
Preferred Stock may be authorized or issued unless (i) the certificate of
designations relating to such series contains restrictions on ownership and
transfer and conversion provisions applicable to such series comparable to
those set forth in Sections (C) and (D) of this Article IV, and (ii) a
corresponding series of Preferred Stock, to be issued in accordance with such
conversion provisions upon a violation of such restrictions on ownership and
transfer, is simultaneously authorized by filing of a certificate of
designations.
B. Common Stock
1. Each share of Common Stock shall be equal in respect of rights to
dividends, when and as declared, in the form of cash, stock or other property
of the Corporation. Subject to the rights of the holders of Preferred Stock,
the holders of the Common Stock shall be entitled to receive, to the extent
permitted by law, such dividends as may be declared from time to time by the
Board of Directors.
2. Subject to the rights of the holders of Preferred Stock and Excess Stock,
in the event of the voluntary or involuntary liquidation, dissolution,
distribution of assets or winding up of the Corporation, after distribution in
full of the preferential amount to be distributed to the holders of shares of
the Preferred Stock, holders of the Common Stock shall be entitled to receive
all the remaining assets of the Corporation of whatever kind available for
distribution to stockholders, ratably in proportion to the number of shares of
Common Stock held by them respectively. A consolidation, merger or
reorganization of the Corporation with any other corporation or corporations,
or a sale of all or substantially all of the assets of the Corporation, shall
not be considered a dissolution, liquidation or winding up of the Corporation
within the meaning of these provisions.
3. Except as may be otherwise required by law, each share of Common Stock
shall entitle the holder to one vote in respect of each matter voted by the
stockholders.
C. Restrictions on Ownership and Transfer of Common Stock
1. Definitions. For purposes of this Article IV, the following terms shall
have the meanings set forth below:
"Beneficial Ownership" shall mean, with respect to any Person, ownership of
shares of Common Stock equal to the sum of (i) the shares of Common Stock
directly or indirectly owned by such Person, (ii) the number of shares of
Common Stock treated as owned directly or indirectly by such Person through
the application of the constructive ownership rules of Section 544 of the
Internal Revenue Code of 1986, as amended (the "Code"), as modified by Section
856(h) of the Code, and (iii) the number of shares of Common Stock which such
Person is deemed to beneficially own pursuant to Rule 13d-3 under the
Securities Exchange Act of 1934, as amended (the "Exchange Act"). The terms
"Beneficial Owner," "Beneficially Owns" and "Beneficially Owned" shall have
correlative meanings.
"Beneficiary" shall mean, with respect to any Trust, one or more
organizations described in each of Section 170(b)(1)(A) (other than clauses
(vii) and (viii) thereof) and Section 170(c)(2) of the Code that are named by
the Corporation as the beneficiary or beneficiaries of such Trust, in
accordance with the provisions of Section (D)(4) of this Article IV.
"Constructive Ownership" shall mean ownership of shares of Common Stock by a
Person who is or would be treated as a direct or indirect owner of such shares
of Common Stock through the application of Section 318
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of the Code, as modified by Section 856(d)(5) of the Code. The terms
"Constructive Owner," "Constructively Owns" and "Constructively Owned" shall
have correlative meanings.
"Market Price" on any date shall mean the average of the Closing Price for
the five consecutive Trading Days ending on such date. The "Closing Price" on
any date shall mean the last sale price of the Common Stock, regular way, or,
in case no such sale takes place on such day, the average of the closing bid
and asked prices of the Common Stock, regular way, in either case as reported
in the principal consolidated transaction reporting system with respect to
securities listed or admitted to trading on the New York Stock Exchange or, if
the shares of Common Stock are not listed or admitted to trading on the New
York Stock Exchange, as reported in the principal consolidated transaction
reporting system with respect to securities listed on the principal national
securities exchange on which the shares of Common Stock are listed or admitted
to trading or, if the shares of Common Stock are not listed or admitted to
trading on any national securities exchange, the last quoted closing sales
price of the Common Stock, or if not so quoted, the average of the high bid
and low asked prices of the Common Stock in the over-the-counter market, as
reported by the Nasdaq Stock Market, Inc. or, if such system is no longer in
use, the principal other automated quotation system that may then be in use
or, if the shares of Common Stock are not quoted by any such organization, the
average of the closing bid and asked prices of such security as furnished by a
professional market maker selected by the Board of Directors making a market
in the shares of Common Stock. In the case of Common Stock that is paired,
"Market Price" shall mean the "Market Price" for Paired Shares multiplied by
the Valuation Percentage.
"Non-Transfer Event" shall mean an event other than a purported Transfer
that would cause any Person to Beneficially Own or Constructively Own shares
of Common Stock in excess of the Ownership Limit or that would result in a
violation of the ownership restrictions set forth in Sections (C)(2)(b)-(d) of
this Article IV, including, but not limited to, (i) the granting of any option
or entering into any agreement for the sale, transfer or other disposition of
shares of Common Stock or (ii) the sale, transfer, assignment or other
disposition of interests in any Person or of any securities or rights
convertible into or exchangeable for shares of Common Stock that results in
changes in Beneficial Ownership or Constructive Ownership of shares of Common
Stock.
"Ownership Limit" shall mean, with respect to the Common Stock, 9.8% of the
number of outstanding shares of the Common Stock and the Excess Stock. For
purposes of computing the percentage of shares of Common Stock that is
Beneficially Owned by any Person, any shares of Common Stock that are deemed
to be Beneficially Owned by such Person pursuant to Rule 13d-3 of the Exchange
Act but which are not outstanding shall be deemed to be outstanding.
"Paired Share" means a unit consisting of one share of Common Stock and one
share of the common stock, $.01 par value, of Realty that are paired pursuant
to the Pairing Agreement.
"Pairing Agreement" shall mean the 1998 Pairing Agreement by and between the
Corporation and Hollywood Park Realty Enterprises, Inc. ("Realty"), as amended
from time to time in accordance with the provisions thereof.
"Permitted Transferee" shall mean any Person designated as a Permitted
Transferee in accordance with the provisions of Section (D)(8) of this Article
IV.
"Person" shall mean (a) an individual or any corporation, partnership,
limited liability company, estate, trust, association, private foundation,
joint stock company or any other entity and (b) a "group" as that term is
defined for purposes of Rule 13d-5 of the Exchange Act.
"Prohibited Owner" shall mean, with respect to any purported Transfer or
Non-Transfer Event, any Person who is prevented from being or becoming the
owner of record title to shares of Common Stock by the provisions of Section
(D)(1) of this Article IV.
"Restriction Termination Date" shall mean (i) the first day on which the
Corporation is no longer a party to the Pairing Agreement, (ii) the first day
on which the Pairing Agreement terminates, (iii) the first day on which
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the Board of Directors of Realty publicly announces that Realty will not elect
to be taxed under the Code as a real estate investment trust (a "REIT"), or
(iv) if Realty has already elected to be taxed as a REIT, the later of (A) the
date as of which Realty voluntarily terminates such election or (B) the date
on which Realty submits such termination to the Internal Revenue Service.
"Trading Day" shall mean a day on which the principal national securities
exchange on which shares of Common Stock are listed or admitted to trading is
open for the transaction of business or, if shares of Common Stock are not
listed or admitted to trading on any national securities exchange, any day
other than a Saturday, a Sunday or a day on which banking institutions in the
State of New York are authorized or obligated by law or executive order to
close.
"Transfer" (as a noun) shall mean any sale, transfer, gift, assignment,
devise or other disposition of shares of Common Stock, whether voluntary or
involuntary, whether of record, constructively or beneficially and whether by
operation of law or otherwise. "Transfer" (as a verb) shall have the
correlative meaning.
"Trust" shall mean any separate trust created and administered in accordance
with the terms of Section (D) of this Article IV, for the exclusive benefit of
any Beneficiary.
"Trustee" shall mean any Person or entity unaffiliated with both the
Corporation and any Prohibited Owner designated by the Corporation to act as
trustee of any Trust, or any successor trustee thereof. The Trustee shall be
designated by the Corporation and Realty in accordance with the Pairing
Agreement.
"Valuation Percentage" shall mean a fraction (expressed as a percentage)
determined by dividing the value of a share of Common Stock most recently
determined under Section 2.5 of the Pairing Agreement by the value of a Paired
Share most recently determined under Section 2.5 of the Pairing Agreement. Any
holder of Common Stock, upon delivery of a written request to the Corporation,
shall be promptly notified by the Corporation of the Valuation Percentage then
in effect.
2. Restriction on Ownership and Transfer.
a. Except as provided in Section (C)(4) of this Article IV, until the
Restriction Termination Date, (i) no Person shall Beneficially Own or
Constructively Own outstanding shares of Common Stock in excess of the
Ownership Limit and (ii) any Transfer (whether or not the result of a
transaction entered into through the facilities of the New York Stock
Exchange) that, if effective, would result in any Person Beneficially Owning
or Constructively Owning shares of Common Stock in excess of the Ownership
Limit shall be void ab initio as to the Transfer of that number of shares of
Common Stock which would be otherwise Beneficially Owned or Constructively
Owned by such Person in excess of the Ownership Limit and the intended
transferee shall acquire no rights in such shares of Common Stock (which
shares of Common Stock shall be subject to the provisions of Section (D) of
this Article IV).
b. Until the Restriction Termination Date, any Transfer (whether or not the
result of a transaction entered into through the facilities of the New York
Stock Exchange) of shares of Common Stock that are paired pursuant to the
Pairing Agreement that, if effective, would result in Realty being "closely
held" within the meaning of Section 856(h) of the Code shall be void ab initio
as to the Transfer of that number of shares of Common Stock that are paired
pursuant to the Pairing Agreement that would cause Realty to be "closely held"
within the meaning of Section 856(h) of the Code, and the intended transferee
shall acquire no rights in such shares of Common Stock (which shares of Common
Stock shall be subject to the provisions of Section (D) of this Article IV).
c. Until the Restriction Termination Date, any Transfer (whether or not the
result of a transaction entered into through the facilities of the New York
Stock Exchange) of shares of Common Stock that, if effective, would cause
Realty to Constructively Own 10% or more of the ownership interests in a
tenant of the real property of Realty or any direct or indirect subsidiary
(whether a corporation, partnership, limited liability company or other
entity) of Realty (a "SUBSIDIARY"), within the meaning of Section 856(d)(2)(B)
of the Code, shall be void
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ab initio as to the Transfer of that number of shares of Common Stock that
would cause Realty to Constructively Own 10% or more of the ownership
interests in a tenant of the real property of Realty or a Subsidiary within
the meaning of Section 856(d)(2)(B) of the Code, and the intended transferee
shall acquire no rights in such shares of Common Stock (which shares of Common
Stock shall be subject to the provisions of Section (D) of this Article IV).
d. Until the Restriction Termination Date, any Transfer (whether or not the
result of a transaction entered into through the facilities of the New York
Stock Exchange) of shares of Common Stock that are paired pursuant to the
Pairing Agreement that, if effective, would result in the shares of capital
stock of Realty being beneficially owned (within the meaning of Section
856(a)(5) of the Code) by fewer than 100 persons within the meaning of Section
856(a)(5) of the Code shall be void ab initio and the intended transferee
shall acquire no rights in such shares of Common Stock (which shares of Common
Stock shall be subject to the provisions of Section (D) of this Article IV).
3. Owners Required To Provide Information. As long as any of the
restrictions contained in Section (C)(2) of this Article IV is in effect:
a. Every Beneficial Owner or Constructive Owner of more than 5%, or such
lower percentages as may be required pursuant to regulations under the Code,
of the outstanding shares of Common Stock shall, within 30 days after January
1 of each year, provide to the Corporation a written statement or affidavit
stating the name and address of such Beneficial Owner or Constructive Owner,
the number of shares of Common Stock Beneficially Owned or Constructively
Owned, and a description of how such shares are held. Each such Beneficial
Owner or Constructive Owner shall provide to the Corporation such additional
information as the Corporation may request to ensure compliance with the
restrictions in this Section C of this Article IV.
b. Each Person who is a Beneficial Owner or Constructive Owner of shares of
Common Stock and each Person (including the stockholder of record) who is
holding shares of Common Stock for a Beneficial Owner or Constructive Owner
shall provide to the Corporation a written statement or affidavit stating such
information as the Corporation may request to ensure compliance with the
restrictions set forth in this Section C of this Article IV.
4. Exception. The Board of Directors may exempt a Person from the Ownership
Limit, provided that (A) such exemption is permitted by and made in accordance
with the Pairing Agreement and (B) such Person agrees in writing that any
violation or attempted violation of the restrictions contained in Sections
(C)(2)(b) through (d) of this Article IV will result in the conversion of
shares of Common Stock Beneficially Owned or Constructively Owned by such
Person into shares of Excess Stock pursuant to Section (D)(1) of this Article
IV and provides such other representations and undertakings as the Board of
Directors may reasonably require.
5. New York Stock Exchange Transactions. Notwithstanding any provision
contained herein to the contrary, nothing in this Certificate shall preclude
the settlement of any transaction entered into through the facilities of the
New York Stock Exchange.
D. Excess Stock
1. Conversion into Excess Stock.
a. If, notwithstanding the other provisions contained in this Article IV,
during the period that any of the restrictions contained in Section (C)(2) of
this Article IV is in effect, there is a purported Transfer or Non-Transfer
Event such that any Person would either Beneficially Own or Constructively Own
shares of Common Stock in excess of the Ownership Limit, then, (i) except as
otherwise provided in Section (C)(4) of this Article IV, with respect to any
such purported transfer, the purported transferee shall be deemed to be a
Prohibited Owner and shall acquire no right or interest (or, in the case of a
Non-Transfer Event, the Person holding record title to the shares of Common
Stock Beneficially Owned or Constructively Owned by such Beneficial Owner or
Constructive Owner by reason of such Non-Transfer Event, shall cease to own
any right or interest) in such
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number of shares of Common Stock which would cause such Beneficial Owner or
Constructive Owner to Beneficially Own or Constructively Own shares of Common
Stock (rounded up to the nearest whole share) in excess of the Ownership
Limit, (ii) such number of shares of Common Stock in excess of the Ownership
Limit shall be automatically converted into an equal number of shares of
Excess Stock, (iii) such shares of Excess Stock shall be transferred to a
Trust in accordance with Section (D)(4) of this Article IV and (iv) the
Prohibited Owner (or, if different, the record owner) shall submit
certificates formerly representing such number of shares of Common Stock to
the Corporation for registration in the name of the Trustee of the Trust. Such
conversion into Excess Stock and transfer to a Trust shall be effective as of
the close of trading on the Trading Day prior to the date of the Transfer or
Non-Transfer Event, as the case may be.
b. If, notwithstanding the other provisions contained in this Article IV,
during the period that any of the restrictions contained in Section (C)(2) of
this Article IV is in effect, there is a purported Transfer or Non-Transfer
Event that, if effective, would (i) result in the capital stock of Realty
being beneficially owned (within the meaning of Section 856(a)(5) of the Code)
by fewer than 100 persons within the meaning of Section 856(a)(5) of the Code,
(ii) result in Realty being "closely held" within the meaning of Section
856(h) of the Code or (iii) cause Realty to Constructively Own 10% or more of
the ownership interest in a tenant of Realty's or a Subsidiary's real property
within the meaning of Section 856(d)(2)(B) of the Code, then (w) the purported
transferee shall be deemed to be a Prohibited Owner and shall acquire no right
or interest (or, in the case of a Non-Transfer Event, the Person holding
record title of the shares of Common Stock with respect to which such Non-
Transfer Event occurred, shall cease to own any right or interest) in such
number of shares of Common Stock (rounded up to the nearest whole share), the
ownership of which by such purported transferee or record holder would (A)
result in the shares of capital stock of Realty being beneficially owned
(within the meaning of Section 856(a)(5) of the Code) by fewer than 100
persons within the meaning of Section 856(a)(5) of the Code, (B) result in
Realty being "closely held" within the meaning of Section 856(h) of the Code
or (C) cause Realty to Constructively Own 10% or more of the ownership
interests in a tenant of Realty's or a Subsidiary's real property within the
meaning of Section 856(d)(2)(B) of the Code, (x) such number of shares of
Common Stock shall be automatically converted into an equal number of shares
of Excess Stock, (y) such shares of Excess Stock shall be automatically
transferred to a Trust in accordance with Section (D)(4) of this Article IV
and (z) the Prohibited Owner shall submit certificates formerly representing
such number of shares of Common Stock to the Corporation for registration in
the name of the Trustee of the Trust. Such conversion into Excess Stock and
transfer to a Trust shall be effective as of the close of trading on the
Trading Day prior to the date of the Transfer or Non-Transfer Event, as the
case may be.
c. Upon the occurrence of such a conversion of shares of Common Stock into
an equal number of shares of Excess Stock, such shares of Common Stock shall
be retired and canceled, without any action required by the Board of Directors
of the Corporation, and shall thereupon be restored to the status of
authorized but unissued shares of Common Stock and may be reissued by the
Corporation as that particular class or series of Equity Stock.
2. Remedies for Breach. If the Corporation, or its designees, shall at any
time determine in good faith that a Transfer has taken place in violation of
Section (C)(2) of this Article IV or that a Person intends to acquire or has
attempted to acquire Beneficial Ownership or Constructive Ownership of any
shares of Common Stock in violation of Section (C)(2) of this Article IV, the
Corporation shall take such action as it deems advisable to refuse to give
effect to or to prevent such Transfer or acquisition, including, but not
limited to, refusing to give effect to such Transfer on the stock transfer
books of the Corporation or instituting proceedings to enjoin such Transfer or
acquisition.
3. Notice of Restricted Transfer. Any Person who acquires or attempts to
acquire shares of Common Stock in violation of Section (C)(2) of this Article
IV, or any Person who owns shares of Common Stock that were converted into
shares of Excess Stock and transferred to a Trust pursuant to Sections (D)(1)
and (D)(4) of this Article IV, shall immediately give written notice to the
Corporation of such event and shall provide to the Corporation such other
information as the Corporation may request in order to determine the effect,
if any, of
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such Transfer or Non-Transfer Event, as the case may be, on the Corporation's
compliance with the Pairing Agreement, including the effect on Realty's status
as a real estate investment trust.
4. Ownership in Trust. Upon any Transfer or Non-Transfer Event that results
in Common Stock being converted into Excess Stock pursuant to Section (D)(1)
of this Article IV, such Excess Stock shall be, without further action by the
Corporation or the owner of such shares, transferred to a Trust to be held for
the exclusive benefit of the Beneficiary; provided separate Trusts with
separate Beneficiaries shall be created, and such Excess Stock shall be
allocated among the separate Trusts, to the extent necessary to prevent any
Trust from holding, and any Beneficiary from Beneficially Owning or
Constructively Owning, shares of Excess Stock in excess of the Ownership
Limit. The Corporation and Realty shall name a Beneficiary for each Trust
pursuant to the terms of the Pairing Agreement. Any conversion of shares of
Common Stock into shares of Excess Stock and transfer to a Trust shall be
effective as of the close of trading on the Trading Day prior to the date of
the Transfer or Non-Transfer Event that results in the conversion. Shares of
Excess Stock so held in trust shall remain issued and outstanding shares of
stock of the Corporation.
5. Dividend Rights. Each share of Excess Stock shall be entitled to the same
dividends and distributions (as to both timing and amount) as may be declared
by the Board of Directors in respect of each share of Common Stock. The
Trustee, as record holder of the shares of Excess Stock, shall be entitled to
receive all dividends and distributions and shall hold all such dividends or
distributions in trust for the benefit of the Beneficiary. The Prohibited
Owner with respect to such shares of Excess Stock shall repay to the Trust the
amount of any dividends or distributions received by it (i) that are
attributable to any shares of Common Stock that have been converted into
shares of Excess Stock and (ii) the record date of which was on or after the
date that such shares were converted into shares of Excess Stock. The
Corporation shall take all measures that it determines reasonably necessary to
recover the amount of any such dividend or distribution paid to a Prohibited
Owner, including, if necessary, withholding any portion of future dividends or
distributions payable on shares of Common Stock Beneficially Owned or
Constructively Owned by the Person who, but for the provisions of this Article
IV, would Constructively Own or Beneficially Own the shares of Common Stock
that were converted into shares of Excess Stock; and, as soon as reasonably
practicable following the Corporation's receipt or withholding thereof, shall
pay over to the Trust for the benefit of the Beneficiary the dividends so
received or withheld, as the case may be.
6. Rights upon Liquidation. In the event of any voluntary or involuntary
liquidation of, dissolution or winding up of, or any distribution of the
assets of, the Corporation, each holder of shares of Excess Stock shall be
entitled to receive, ratably with each other holder of shares of Common Stock,
that portion of the assets of the Corporation that is available for
distribution to the holders of Common Stock. The Trust shall distribute to the
Prohibited Owner the amounts received upon such liquidation, dissolution, or
winding up, or distribution; provided, however, that the Prohibited Owner
shall not be entitled to receive amounts in excess of, in the case of a
purported Transfer in which the Prohibited Owner gave value for shares of
Common Stock and which Transfer resulted in the conversion of the shares into
shares of Excess Stock, the price per share, if any, such Prohibited Owner
paid for the shares of Common Stock (which, in the case of Common Stock that
is paired, shall equal the price per Paired Share multiplied by the most
recent Valuation Percentage) and, in the case of a Non-Transfer Event or
Transfer in which the Prohibited Owner did not give value for such shares
(e.g., if the shares were received through a gift or devise) and which Non-
Transfer Event or Transfer, as the case may be, resulted in the conversion of
the shares into shares of Excess Stock, the price per share equal to the
Market Price on the date of such Non-Transfer Event or Transfer. Any remaining
amount in such Trust shall be distributed to the Beneficiary.
7. Voting Rights. Each share of Excess Stock shall entitle the holder to the
number of votes the holder would have, if such share of Excess Stock was a
share of Common Stock, on all matters submitted to a vote at any meeting of
stockholders. Except as otherwise required by law, the holders of shares of
Excess Stock shall vote together with the holders of Common Stock as a single
class on all such matters. The Trustee, as record holder of the Excess Stock,
shall be entitled to vote all shares of Excess Stock. Subject to applicable
law, any vote by a Prohibited Owner as a purported holder of shares of Common
Stock prior to the discovery by the Corporation that the shares of Common
Stock have been converted into shares of Excess Stock shall be rescinded and
shall be void ab initio with respect to such shares of Excess Stock, and the
Prohibited Owner shall be deemed
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to have given, as of the close of trading on the Trading Day prior to the date
of the purported Transfer or Non-Transfer Event that results in the conversion
of the shares of Common Stock into shares of Excess Stock and the transfer of
such shares to a Trust pursuant to Sections (D)(1) and (D)(4) of this Article
IV, an irrevocable proxy to the Trustee to vote the shares of Excess Stock in
the manner in which the Trustee, in its sole and absolute discretion, desires.
8. Designation of Permitted Transferee.
a. The Trustee shall have the exclusive and absolute right to designate a
Permitted Transferee of any and all shares of Excess Stock if the Corporation
fails to exercise its option with respect to such shares pursuant to Section
(D)(10) hereof within the time period set forth therein. As soon as
practicable, but in an orderly fashion so as not to materially adversely
affect the Market Price of the shares of Excess Stock, the Trustee shall
designate any Person as a Permitted Transferee; provided, however, that (i)
the Permitted Transferee so designated purchases for valuable consideration
(whether in a public or private sale) the shares of Excess Stock and (ii) the
Permitted Transferee so designated may acquire such shares of Excess Stock
without violating any of the restrictions set forth in Section (C)(2) of this
Article IV and without such acquisition resulting in the conversion of the
shares of Common Stock so acquired into shares of Excess Stock and the
transfer of such shares to a Trust pursuant to Sections (D)(1) and (D)(4) of
this Article IV.
b. Upon the designation by the Trustee of a Permitted Transferee in
accordance with the provisions of this Section (D)(8), the Trustee shall cause
to be transferred to the Permitted Transferee that number of shares of Excess
Stock acquired by the Permitted Transferee. Upon such transfer of the shares
of Excess Stock to the Permitted Transferee, such shares of Excess Stock shall
be automatically converted into an equal number of shares of Common Stock.
Upon the occurrence of such a conversion of shares of Excess Stock into an
equal number of shares of Common Stock, such shares of Excess Stock shall be
retired and canceled, without any action required by the Board of Directors of
the Corporation, and shall thereupon be restored to the status of authorized
but unissued shares of Excess Stock and may be reissued by the Corporation as
Excess Stock.
c. The Trustee shall (i) cause to be recorded on the stock transfer books of
the Corporation that the Permitted Transferee is the holder of record of such
number of shares of Common Stock, and (ii) distribute to the Beneficiary any
and all amounts held with respect to the shares of Excess Stock after making
payment to the Prohibited Owner pursuant to Section (D)(9) of this Article IV.
d. If the Transfer of shares of Excess Stock to a purported Permitted
Transferee shall violate any of the transfer restrictions set forth in Section
(C)(2) of this Article IV, such Transfer shall be void ab initio as to that
number of shares of Excess Stock that cause the violation of any such
restriction when such shares are converted into shares of Common Stock (as
described in clause (b) above) and the purported Permitted Transferee shall be
deemed to be a Prohibited Owner and shall acquire no rights in such shares of
Excess Stock or Common Stock. Such shares of Common Stock shall be
automatically converted into Excess Stock and transferred to the Trust from
which they were originally Transferred. Such conversion and transfer to the
Trust shall be effective as of the close of trading on the Trading Day prior
to the date of the Transfer to the purported Permitted Transferee and the
provisions of this Article IV shall apply to such shares, including, without
limitation, the provisions of Sections D(8) through (D)(10) with respect to
any future Transfer of such shares by the Trust.
9. Compensation to Record Holder of Shares of Stock that are Converted into
Shares of Excess Stock. Any Prohibited Owner shall be entitled (following
discovery of the shares of Excess Stock and subsequent designation of the
Permitted Transferee in accordance with Section (D)(8) of this Article IV or
following the acceptance of the offer to purchase such shares in accordance
with Section (D)(10) of this Article IV) to receive from the Trustee following
the sale or other disposition of such shares of Excess Stock the lesser of (i)
(a) in the case of a purported Transfer in which the Prohibited Owner gave
value for shares of Common Stock and which Transfer resulted in the conversion
of such shares into shares of Excess Stock, the price per share, if any, such
Prohibited Owner paid for the shares of Common Stock (which, in the case of
paired Excess Stock, shall be determined based on the Valuation Percentage)
and (b) in the case of a Non-Transfer Event or Transfer in which the
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Prohibited Owner did not give value for such shares (e.g., if the shares were
received through a gift or devise) and which Non-Transfer Event or Transfer,
as the case may be, resulted in the conversion of such shares into shares of
Excess Stock, the price per share equal to the Market Price on the date of
such Non-Transfer Event or Transfer or (ii) the price per share (which, in the
case of paired Excess Stock, shall be determined based on the Valuation
Percentage) received by the Trustee from the sale or other disposition of such
shares of Excess Stock in accordance with this Section (D)(9) or Section
(D)(10) of this Article IV. Any amounts received by the Trustee in respect of
such shares of Excess Stock and in excess of such amounts to be paid the
Prohibited Owner pursuant to this Section (D)(9) shall be distributed to the
Beneficiary in accordance with the provisions of Section (D)(8) of this
Article IV. Each Beneficiary and Prohibited Owner shall waive any and all
claims that it may have against the Trustee and the Trust arising out of the
disposition of shares of Excess Stock, except for claims arising out of the
gross negligence or willful misconduct of, or any failure to make payments in
accordance with this Section (D) of this Article IV by, such Trustee or the
Corporation.
10. Purchase Right in Excess Stock. Shares of Excess Stock shall be deemed
to have been offered for sale to the Corporation or its designee, at a price
per share equal to the lesser of (i) the price per share (which, in the case
of paired Common Stock, shall be determined based on the Valuation Percentage)
in the transaction that created such shares of Excess Stock (or, in the case
of devise, gift or Non-Transfer Event, the Market Price at the time of such
devise, gift or Non-Transfer Event) or (ii) the Market Price on the date the
Corporation, or its designee, accepts such offer. The Corporation shall have
the right to accept such offer for a period of 90 days following the later of
(a) the date of the Non-Transfer Event or purported Transfer which results in
such shares of Excess Stock or (b) the date on which the Corporation
determines in good faith that a Transfer or Non-Transfer Event resulting in
shares of Excess Stock has previously occurred, if the Corporation does not
receive a notice of such Transfer or Non-Transfer Event pursuant to Section
(D)(3) of this Article IV.
E. Remedies Not Limited. Nothing contained in this Article IV shall limit
the authority of the Corporation to take such other action as it deems
necessary or advisable to protect the Corporation and the interests of its
stockholders to ensure compliance with the requirements of the Pairing
Agreement and with the restrictions set forth in Section C of this Article IV.
F. Ambiguity. In the case of an ambiguity in the application of any of the
provisions of this Article IV, including any definition contained in Section
(C)(1) of this Article IV, the Board of Directors shall have the power to
determine the application of the provisions of this Article IV with respect to
any situation based on the facts known to it.
G. Legend. The restrictions set forth in this Article IV shall be noted
conspicuously on any certificate representing Common Stock in accordance with
the requirements of the Delaware General Corporation Law.
H. Severability. Each provision of this Article IV shall be severable and an
adverse determination as to any such provision shall in no way affect the
validity of any other provision.
ARTICLE V
Any and all right, title, interest and claim in or to any dividends declared
by the Corporation, whether in cash, stock, or otherwise, which are unclaimed
by the stockholder entitled thereto for a period of six years after the close
of business on the payment date, shall be and is deemed to be extinguished and
abandoned; and such unclaimed dividends in the possession of the Corporation,
its transfer agents or other agents or depositories shall at such time become
the absolute property of the Corporation, free and clear of any and all claims
of any persons whatsoever.
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ARTICLE VI
In furtherance and not in limitation of the power conferred by statute, the
Board of Directors is expressly authorized to make, alter, amend or repeal the
By-laws of the Corporation.
ARTICLE VII
[This ARTICLE is intentionally omitted]
ARTICLE VIII
The Corporation shall indemnify its officers and directors to the fullest
extent permitted by the Delaware General Corporation Law.
ARTICLE IX
Elections of directors need not be by written ballot unless the By-laws of
the Corporation so provide.
ARTICLE X
The Corporation reserves the right to amend, alter, change or repeal any
provision contained in this Certificate of Incorporation, in the manner now or
hereafter prescribed by statute, and all rights conferred upon stockholders
herein are granted subject to this reservation.
ARTICLE XI
A director of the Corporation shall not be personally liable to the
Corporation or its stockholders for monetary damages for breach of fiduciary
duty as a director, except for liability (i) for any breach of the director's
duty of loyalty to the Corporation or its stockholders, (ii) for acts or
omissions not in good faith or which involve intentional misconduct or a
knowing violation of law, (iii) under Section 174 of the Delaware General
Corporation Law, or (iv) for any transaction from which the director derived
an improper personal benefit. If the Delaware General Corporation Law is
amended to authorize corporate action further eliminating or limiting the
personal liability of directors, then the liability of a director of the
Corporation shall be eliminated or limited to the fullest extent permitted by
the Delaware General Corporation Law, as so amended. Any repeal or
modification of this provision shall not adversely affect any right or
protection of a director of the Corporation existing at the time of such
repeal or modification.
ARTICLE XII
A. Definitions. For purposes of this Article XII, the following terms shall
have the meanings specified below:
1. "Affiliate" shall have the meaning ascribed to such term in Rule 12b-2
promulgated by the Securities and Exchange Commission ("SEC") under the
Securities Exchange Act of 1934, as amended (the "Exchange Act").
2. "Affiliated Companies" shall mean those companies directly or indirectly
affiliated or under common Ownership or Control with the Corporation,
including, without limitation, subsidiaries, holding companies and
intermediary companies (as those and similar terms are defined in the Gaming
Laws of the applicable Gaming Jurisdictions) that are registered or licensed
under applicable Gaming Laws.
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3. "Gaming" or "Gaming Activities" shall mean the conduct of gaming and
gambling activities, or the use of gaming devices, equipment and supplies in
the operation of a casino, card club or other enterprise, including, without
limitation, slot machines, gaming tables, cards, dice, gaming chips, player
tracking systems, cashless wagering systems and related and associated
equipment and supplies.
4. "Gaming Authorities" shall mean all international, foreign, federal,
state and local regulatory and licensing bodies and agencies with authority
over Gaming within any Gaming Jurisdiction.
5. "Gaming Jurisdictions" shall mean all jurisdictions, domestic and
foreign, and their political subdivisions, in which Gaming Activities are
lawfully conducted.
6. "Gaming Laws" shall mean all laws, statutes and ordinances pursuant to
which any Gaming Authority possesses regulatory and licensing authority over
Gaming within any Gaming Jurisdiction, and all rules and regulations
promulgated by such Gaming Authority thereunder.
7. "Gaming Licenses" shall mean all licenses, permits, approvals,
authorizations, registrations, findings of suitability, franchises and
entitlements issued by a Gaming Authority necessary for or relating to the
conduct of Gaming Activities.
8. "Ownership or Control" (and derivatives thereof) shall mean (i) ownership
of record, (ii) "beneficial ownership" as defined in Rule 13d-3 or Rule 16a-
1(a)(2) promulgated by the SEC under the Exchange Act, (iii) the power to
direct and manage, by agreement, contract, agency or other manner, the voting
or management rights or disposition of securities of the Corporation, and/or
(iv) definitions of ownership or control under applicable Gaming Laws.
9. "Person" shall mean an individual, partnership, corporation, limited
liability company, trust or any other entity.
10. "Redemption Date" shall mean the date by which the securities Owned or
Controlled by an Unsuitable Person are to be redeemed by the Corporation.
11. "Redemption Notice" shall mean that notice of redemption served by the
Corporation on an Unsuitable Person if a Gaming Authority requires the
Corporation, or the Corporation deems it necessary or advisable, to redeem
such Unsuitable Person's securities. Each Redemption Notice shall set forth
(i) the Redemption Date; (ii) the number of shares of securities to be
redeemed; (iii) the Redemption Price and the manner of payment therefor; (iv)
the place where certificates for such shares shall be surrendered for payment;
and (v) any other requirements of surrender of the certificates, including how
they are to be endorsed, if at all.
12. "Redemption Price" shall mean the per share price for the redemption of
any securities to be redeemed pursuant to this Article, which shall be that
price (if any) required to be paid by the Gaming Authority making the finding
of unsuitability, or if such Gaming Authority does not require a certain price
per share to be paid, that sum deemed reasonable by the Corporation (which may
include, in the Corporation's discretion, the original purchase price per
share of the securities); provided, however, the Redemption Price, unless the
Gaming Authority requires otherwise, shall in no event exceed (i) the closing
sales price of the securities on the national securities exchange on which
such shares are then listed on the date the notice of redemption is delivered
to the Unsuitable Person by the Corporation, or (ii) if such shares are not
then listed for trading on any national securities exchange, then the closing
sales price of such shares as quoted in the NASDAQ National Market System, or
(iii) if the shares are not then so quoted, then the mean between the
representative bid and the ask price as quoted by NASDAQ or another generally
recognized reporting system. The Redemption Price may be paid in cash, by
promissory note, or both, as required by the applicable Gaming Authority and,
if not so required, as the Corporation elects.
13. "Unsuitable Person" shall mean a Person who Owns or Controls any
securities of the Corporation or any securities of or interest in any
Affiliated Company (i) that is determined by a Gaming Authority to be
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unsuitable to Own or Control such securities or unsuitable to be connected
with a Person engaged in Gaming Activities in that Gaming Jurisdiction, or
(ii) who causes the Corporation or any Affiliated Company to lose or to be
threatened with the loss of, or who, in the sole discretion of the Board of
Directors of the Corporation, is deemed likely to jeopardize the Corporation's
right to the use of or entitlement to, any Gaming License.
B. Compliance with Gaming Laws. The Corporation, all Persons Owning or
Controlling securities of the Corporation and any Affiliated Companies, and
each director and officer of the Corporation and any Affiliated Companies
shall comply with all requirements of the Gaming Laws in each Gaming
Jurisdiction in which the Corporation or any Affiliated Companies conduct
Gaming Activities. All securities of the Corporation shall be held subject to
the requirements of such Gaming Laws, including any requirement that (i) the
holder file applications for Gaming Licenses with, or provide information to,
applicable Gaming Authorities, or (ii) that any transfer of such securities
may be subject to prior approval by Gaming Authorities, and any transfer of
securities of the Corporation in violation of any such approval requirement
shall not be permitted and the purported transfer shall be void ab initio.
C. Finding of Unsuitability.
1. The securities of the Corporation Owned or Controlled by an Unsuitable
Person or an Affiliate of an Unsuitable Person shall be redeemable by the
Corporation, out of funds legally available therefor, by appropriate action of
the Board of Directors, to the extent required by the Gaming Authority making
the determination of unsuitability or to the extent deemed necessary or
advisable by the Corporation. If a Gaming Authority requires the Corporation,
or the Corporation deems it necessary or advisable, to redeem such securities,
the Corporation shall serve a Redemption Notice on the Unsuitable Person or
its Affiliate and shall purchase the securities on the Redemption Date and for
the Redemption Price set forth in the Redemption Notice. From and after the
Redemption Date, such securities shall no longer be deemed to be outstanding
and all rights of the Unsuitable Person or any Affiliate of the Unsuitable
Person therein, other than the right to receive the Redemption Price, shall
cease. The Unsuitable Person shall surrender the certificates for any
securities to be redeemed in accordance with the requirements of the
Redemption Notice. Notwithstanding the foregoing, so long as the Corporation
and Hollywood Park Realty Enterprises, Inc. are a paired stock real estate
investment trust and operating company, the Corporation may, in its sole
discretion, convert any securities that are redeemable pursuant to this
Section (C)(1) into shares of Excess Stock effective upon written notice to
the Unsuitable Person or its Affiliate, and such shares of Excess Stock shall
be transferred to a Trust for sale to a Permitted Transferee (as such terms
are defined in Article IV) in accordance with Sections (D)(4) through (9) of
Article IV.
2. Commencing on the date that a Gaming Authority serves notice of a
determination of unsuitability or the loss or threatened loss of a Gaming
License upon the Corporation, and until the securities Owned or Controlled by
the Unsuitable Person or the Affiliate of an Unsuitable Person are Owned or
Controlled by Persons found by such Gaming Authority to be suitable to own
them, it shall be unlawful for the Unsuitable Person or any Affiliate of an
Unsuitable Person (i) to receive any dividend, payment, distribution or
interest with regard to the securities; (ii) to exercise, directly or
indirectly or through any proxy, trustee, or nominee, any voting or other
right conferred by such securities, and such securities shall not for any
purposes be included in the securities of the Corporation entitled to vote, or
(iii) to receive any remuneration in any form from the Corporation or an
Affiliated Company for services rendered or otherwise.
D. Issuance and Transfer of Securities. The Corporation shall not issue or
transfer any securities or any interest, claim or charge thereon or thereto
except in accordance with applicable Gaming Laws. The issuance or transfer of
any securities in violation thereof shall be ineffective until (i) the
Corporation shall cease to be subject to the jurisdiction of the applicable
Gaming Authorities, or (ii) the applicable Gaming Authorities shall, by
affirmative action, validate said issuance or transfer or waive any defect in
said issuance or transfer.
E. Indenture Restrictions. The Corporation shall cause to be placed in every
indenture or other operative document relating to publicly traded securities
(other than capital stock) of the Corporation a provision requiring that any
Person or Affiliate of a Person who holds the indebtedness represented by that
indenture and is found to
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be unsuitable to hold such interest shall have the interest redeemed or shall
dispose of the interest in the Corporation in the manner set forth in the
indenture or other document.
F. Notices. All notices given by the Corporation pursuant to this Article,
including Redemption Notices, shall be in writing and shall be deemed given
when delivered by personal service or telegram, facsimile, overnight courier
or first class mail, postage prepaid, to the Person's address as shown on the
Corporation's books and records.
G. Indemnification. Any Unsuitable Person and any Affiliate of an Unsuitable
Person shall indemnify the Corporation and its Affiliated Companies for any
and all costs, including attorneys' fees, incurred by the Corporation and its
Affiliated Companies as a result of such Unsuitable Person's or Affiliate's
continuing Ownership or Control or failure to promptly divest itself of any
securities in the Corporation.
H. Fiduciary Obligations; Contractual Arrangements; Etc. Nothing contained
in this Article XII shall be construed (i) to relieve any Unsuitable Person
(or Affiliate of such Person) from any fiduciary obligation imposed by law,
(ii) to prohibit or affect any contractual arrangement which the Corporation
may make from time to time with any holder of securities of the Corporation to
purchase all or any part of shares of capital stock or other securities held
by them, or (iii) to be in derogation of any action, past or future, which has
been or may be taken by the Board of Directors or any holder of securities
with respect to the subject matter of this Article XII.
I. Injunctive Relief. The Corporation is entitled to injunctive relief in
any court of competent jurisdiction to enforce the provisions of this Article
and each holder of the securities of the Corporation shall be deemed to have
acknowledged, by acquiring the securities of the Corporation, that the failure
to comply with this Article will expose the Corporation to irreparable injury
for which there is no adequate remedy at law and that the Corporation is
entitled to injunctive relief to enforce the provisions of this Article.
J. Legend. The restrictions set forth in this Article XII shall be noted
conspicuously on any certificate representing securities of the Corporation in
accordance with the requirements of the Delaware General Corporation Law and
applicable Gaming Laws.
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APPENDIX C
BY-LAW PROVISIONS OF
HOLLYWOOD PARK REALTY ENTERPRISES, INC.
Section 7.2 Transfer of Stock. Subject to the restrictions on transfer of
stock described in Section 7.6 of these by-laws and Article IV of the
Corporation's Certificate of Incorporation, as amended from time to time (the
"Certificate"), upon surrender to any transfer agent of the Corporation of a
certificate of shares of the Corporation duly endorsed or accompanied by
proper evidence of succession, assignment or authority to transfer, it shall
be the duty of the Corporation to issue a new certificate to the person
entitled thereto, cancel the old certificate and record the transaction upon
its books.
Section 7.6 Pairing. Until the limitations on transfer set forth in the 1998
Pairing Agreement (the "Pairing Agreement"), by and between the Corporation
and Hollywood Park Operating Company ("Operating Company"), as amended from
time to time in accordance with the provisions thereof, shall be terminated:
(a) The shares of common stock, par value $.01, and preferred stock, par
value $.01, of the Corporation and Operating Company (collectively, "Equity
Stock") that are paired pursuant to the Pairing Agreement shall not be
transferable, and shall not be transferred on the stock transfer books of
the Corporation, unless (i) a simultaneous transfer is made by the same
transferor to the same transferee or (ii) arrangements have been made with
Operating Company for the acquisition by the transferee, of a like number
of shares of the same class or series of Equity Stock of Operating Company
and such shares are paired with one another.
(b) Each certificate evidencing ownership of shares of Equity Stock of
the Corporation that are paired pursuant to the Pairing Agreement and
issued and not canceled prior to the effectiveness of the Pairing Agreement
shall be deemed to evidence a like number of shares of the same class or
series of Equity Stock of Operating Company.
(c) A legend shall be placed on the face of each certificate evidencing
ownership of shares of Equity Stock of the Corporation that are paired
pursuant to the Pairing Agreement referring to the restrictions on transfer
set forth herein.
(d) Notwithstanding the foregoing, the Corporation may issue or transfer
shares of its Equity Stock to Operating Company without regard to the
restrictions of this Section 7.6.
(e) To the extent that a paired share of common stock or preferred stock
of the Corporation is converted into, respectively, (i) a share of excess
common stock of the Corporation in accordance with the provisions of
Article IV of the Certificate or (ii) a share of preferred stock of the
Corporation designated as excess preferred stock (together with excess
common stock, "Excess Stock") in accordance with comparable provisions of
any certificate of designations governing the Corporation's preferred
stock, such share of Excess Stock of the Corporation, together with the
corresponding share of Excess Stock of Operating Company, which has been
converted from a share of Equity Stock of Operating Company in accordance
with the Certificate of Incorporation (or the applicable certificate of
designations of the preferred stock) of Operating Company and the Pairing
Agreement, shall be automatically transferred to a trust established by the
Corporation and Operating Company for such purpose in accordance with
Article IV of the Certificate (or comparable provisions of the applicable
certificate of designations of the Corporations' preferred stock).
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APPENDIX D
BY-LAW PROVISIONS OF
HOLLYWOOD PARK OPERATING COMPANY
Section 7.2 Transfer of Stock. Subject to the restrictions on transfer of
stock described in Section 7.6 of these by-laws and Article IV of the
Corporation's Certificate of Incorporation, as amended from time to time (the
"Certificate"), upon surrender to any transfer agent of the Corporation of a
certificate of shares of the Corporation duly endorsed or accompanied by
proper evidence of succession, assignment or authority to transfer, it shall
be the duty of the Corporation to issue a new certificate to the person
entitled thereto, cancel the old certificate and record the transaction upon
its books.
Section 7.6 Pairing. Until the limitations on transfer set forth in the 1998
Pairing Agreement (the "Pairing Agreement"), by and between the Corporation
and Hollywood Park Realty Enterprises, Inc. ("Realty"), as amended from time
to time in accordance with the provisions thereof, shall be terminated:
(a) The shares of common stock, par value $.01, and preferred stock, par
value $.01, of the Corporation and Realty (collectively, "Equity Stock")
that are paired pursuant to the Pairing Agreement shall not be
transferable, and shall not be transferred on the stock transfer books of
the Corporation, unless (i) a simultaneous transfer is made by the same
transferor to the same transferee or (ii) arrangements have been made with
Realty for the acquisition by the transferee, of a like number of shares of
the same class or series of Equity Stock of Realty and such shares are
paired with one another.
(b) Each certificate evidencing ownership of shares of Equity Stock of
the Corporation that are paired pursuant to the Pairing Agreement and
issued and not canceled prior to the effectiveness of the Pairing Agreement
shall be deemed to evidence a like number of shares of the same class or
series of Equity Stock of Realty.
(c) A legend shall be placed on the face of each certificate evidencing
ownership of shares of Equity Stock of the Corporation that are paired
pursuant to the Pairing Agreement referring to the restrictions on transfer
set forth herein.
(d) Notwithstanding the foregoing, the Corporation may issue or transfer
shares of its Equity Stock to Realty without regard to the restrictions of
this Section 7.6.
(e) To the extent that a paired share of common stock or preferred stock
of the Corporation is converted into, respectively, (i) a share of excess
common stock of the Corporation in accordance with the provisions of
Article IV of the Certificate or (ii) a share of preferred stock of the
Corporation designated as excess preferred stock (together with excess
common stock, "Excess Stock") in accordance with comparable provisions of
any certificate of designations governing the Corporation's preferred
stock, such share of Excess Stock of the Corporation, together with the
corresponding share of Excess Stock of Realty, which has been converted
from a share of Equity Stock of Realty in accordance with the Certificate
of Incorporation (or the applicable certificate of designations of the
preferred stock) of Realty and the Pairing Agreement, shall be
automatically transferred to a trust established by the Corporation and
Realty for such purpose in accordance with Article IV of the Certificate
(or comparable provisions of the applicable certificate of designations of
the Corporations' preferred stock).
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APPENDIX E
HOLLYWOOD PARK OPERATING COMPANY
1998 STOCK OPTION PLAN
1. Purpose.
The purpose of this 1998 Stock Option Plan (the "Plan") of Hollywood Park
Operating Company, a Delaware corporation (the "Company"), is to secure for
the Company and its stockholders the benefits arising from stock ownership by
selected key employees, directors, consultants, advisors, and service
providers of the Company or its subsidiaries, as the Committee (as hereinafter
defined) may from time to time determine. The Plan will provide a means
whereby such persons may purchase paired shares of the Common Stock of the
Company and of the Common Stock of the Hollywood Park Realty Enterprises, Inc.
("HP Realty") upon the exercise of options granted hereunder.
2. Administration.
2.1 The Plan shall be administered by a committee of the Board of Directors
of the Company (the "Board") consisting of two or more directors of the
Company (the "Committee") who are both "non-employee directors" within the
meaning of Rule 16b-3 ("Rule 16b-3") promulgated under the Securities Exchange
Act of 1934, as amended (the "Exchange Act") and "outside directors" within
the meaning of Section 162(m) of the Internal Revenue Code of 1986, as amended
(the "Code"). Any action of the Committee with respect to administration of
the Plan shall be taken by a majority vote or unanimous written consent of its
members.
2.2 Subject to the express provisions of the Plan, the Committee shall have
the full, absolute and unconditional discretion and authority (i) to construe
and interpret the Plan, (ii) to define the terms used herein, (iii) to
prescribe, amend and rescind rules and regulations relating to the Plan, (iv)
to determine the individuals to whom and the time or times at which options
shall be granted, the terms and provisions of the option agreements (which
need not be identical), whether any such option shall include an incentive
stock option component, the number of shares to be subject to each option, the
option price, the number of installments, if any, in which each option may be
exercised, and the duration of each option, (v) to approve and determine the
duration of leaves of absence which may be granted to participants without
constituting a termination of their employment or providing of services for
the purposes of the Plan, and (vi) to make all other determinations necessary
or advisable for the administration of the Plan. All determinations and
interpretations made by the Committee shall be binding and conclusive on all
participants in the Plan and their legal representatives and beneficiaries.
3. Options to Purchase Paired Shares; Shares Subject to the Plan.
3.1 Each option granted under this Plan shall consist of two component stock
options: an option to purchase shares of the common stock of the Company
("Company Common Stock"), and an option to purchase an equal number of the
shares of the Common Stock of HP Realty ("HP Realty Common Stock"). Except as
otherwise specifically permitted in this Plan, each component option shall be
subject to the same terms and conditions as the other component option. Each
component option may be exercised, terminated, cancelled, forfeited,
transferred or otherwise disposed of, or lapse, only as, when, and to the same
extent as the other component option. Upon the exercise of an option, the
Company will issue the shares of the Company Common Stock covered by the
exercise directly to the optionholder, and will purchase from HP Realty, for
delivery to the optionholder, the equal number of shares of HP Realty Common
Stock covered by the exercise. The shares of Company Common Stock purchased on
the exercise of an option shall be paired with the shares of HP Realty Common
Stock purchased on such exercise under the 1998 Pairing Agreement between the
Company and HP Realty (the "Pairing Agreement").
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3.2 The Committee may designate certain component options to purchase
Company Common Stock as incentive stock options under Section 422 of the Code.
All other options (including all component options to purchase HP Realty
Common Stock) shall constitute non-qualified stock options. Subject to
adjustment as provided in Section 16 hereof, the aggregate number of shares of
Company Common Stock which may be issued upon exercise of all options under
the Plan shall not exceed 900,000 shares less the aggregate number of shares
covered by all options granted and not cancelled (whether or not exercised)
under the 1996 Stock Option Plan of HP Realty (formerly Hollywood Park, Inc.)
as of the date this Plan first becomes effective under Section 18. If any
option granted under the Plan shall expire or terminate for any reason,
without having been exercised in full, the unpurchased shares subject thereto
shall again be available for options to be granted under the Plan. All options
granted under the Plan shall be granted within 10 years from the earlier of
its adoption by the Board of the Company or its approval by the holders of the
outstanding voting stock of the Company in accordance with Section 18. No
option shall be granted in violation of any restriction set forth in the
Company's Restated Certificate of Incorporation, and any purported grant of an
option in violation of such restrictions shall be null and void from the date
of such purported grant. Any acquisition of Common Stock by an optionholder or
any person related to an optionholder (as determined under the provisions of
the Company's Restated Certificate of Incorporation) shall be subject to all
restrictions and conditions set forth in the Company's Restated Certificate of
Incorporation.
4. Maximum Annual Grants for Each Participant.
No participant may receive grants during any fiscal year of the Company or
portion thereof of options to purchase more than 90,000 shares of Company
Common Stock, adjusted, if necessary, pursuant to Section 16. If an option is
cancelled, the cancelled option continues to be counted against the maximum
number of shares for which options may be granted to a participant during any
such fiscal year or portion thereof. If the exercise price of an option is
reduced after the grant of the option, the repricing of the option shall be
treated as a cancellation of the option and the grant of a new option for
purposes of applying the limitation imposed by this Section 4. This Section 4
is intended to comply with the requirements of Treasury Regulation (S)1.162-
27(e)(2)(vi), and shall be interpreted as required to accomplish such
compliance.
5. Eligibility and Participation.
5.1 All key employees, directors, consultants, advisors, of the Company or
of any "Subsidiary Corporation" (as defined in Section 424(f) of the Code), or
other persons who render services to the Company or a Subsidiary Corporation
(including employees of HP Realty who also render services to the Company or
to a Subsidiary Corporation) shall be eligible for selection to participate in
the Plan, except that only regular employees of the Company or a Subsidiary
Corporation may receive incentive stock options under the Plan. An individual
who has been granted an option may, if such individual is otherwise eligible,
be granted an additional option or options if the Committee shall so
determine, subject to the other provisions of the Plan. Such options may be
granted in lieu of outstanding options previously granted under this Plan or
may be in addition to such options.
5.2 Nothing contained in this Plan (or in any option granted pursuant to
this Plan) shall confer upon any optionholder who is an employee any right to
continue in the employ of the Company or of any Subsidiary Corporation, or
interfere in any way with the right of the Company or any Subsidiary
Corporation to terminate his employment at any time or to increase or decrease
his compensation from the rate in existence at the time of the granting of an
option. Nothing contained in this Plan (or in any option granted pursuant to
this Plan) shall affect any contractual rights of an optionholder who is an
employee.
5.3 Nothing contained in this Plan (or in any option granted pursuant to
this Plan) shall confer upon any optionholder who is not an employee the right
to continue serving as a director, consultant, advisor, or service provider to
or of the Company or any Subsidiary Corporation, or interfere in any way with
the right of the Company or any Subsidiary Corporation to remove a director,
consultant, advisor, or service provider. Nothing contained in this Plan (or
in any option granted pursuant to this Plan) shall affect any contractual
rights of an optionholder who is a director, consultant, advisor, or service
provider.
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6. Duration of Options.
Each option shall expire on such date as the Committee may determine, and
shall be subject to earlier termination as provided herein; provided, however,
that (a) each option shall expire in any event within 10 years of the date on
which such option is granted, and (b) component options to purchase shares of
Company Common Stock which are incentive stock options (and the corresponding
component options to purchase shares of HP Realty Common Stock) granted to an
employee owning more than 10% of the total combined voting power of all
classes of stock of the Company or its parent corporation or any Subsidiary
Corporation (a "10% Shareholder") shall expire in any event within five years
of the date of grant. The restrictions set forth in the Company's Restated
Certificate of Incorporation currently prohibit any person from becoming a 10%
Shareholder, and the provisions of this Plan regarding 10% Shareholders are
included only to govern cases which may arise if such restrictions lapse,
terminate, or are deleted by amendment from the Restated Certificate of
Incorporation.
7. Purchase Price.
7.1 The purchase price of the Company Common Stock and HP Realty Common
Stock covered by each option shall be determined by the Committee, but (a) the
exercise price of an option which includes an incentive stock option component
shall be not less than 100% of the fair market value (as determined under
Section 9) of the Company Common Stock and HP Realty Common Stock covered by
such option on the date such option is granted, and (b) the exercise price of
an option which includes an incentive stock option component and which is
granted to a 10% Shareholder shall not be less than 110% of the fair market
value (as determined under Section 9) of the Company Common Stock and HP
Realty Common Stock covered by such option on the date such option is granted.
7.2 The purchase price of the shares upon exercise of an option shall be
paid in full at the time of exercise in cash or by check payable to the order
of the Company, or, subject in each case to the approval of the Committee in
its sole discretion, (i) by delivery of paired shares of Company Common Stock
and HP Realty Common Stock already owned by, and in the possession of the
optionholder, (ii) by a five-year, full- recourse promissory note, bearing
interest at a rate to be determined by the Committee in its discretion, made
by optionholder in favor of the Company, secured by the shares issuable upon
exercise or other property, or (iii) through a "cashless exercise," in any
case complying with applicable law (including, without limitation, state and
federal margin requirements), or any combination thereof. Paired shares of
Company Common Stock and HP Realty Common Stock used to satisfy the exercise
price of an option shall be valued at their fair market value determined (in
accordance with Section 9) on the date of exercise. Upon the delivery by an
optionholder to the Company of paired shares of Company Common Stock and HP
Realty Common Stock to satisfy the exercise price of an option (or to satisfy
a withholding tax liability if permitted by the Committee under Section 10),
the Company shall immediately sell the shares of the HP Realty Common Stock to
HP Realty.
8. Exercise of Options.
8.1 Subject to the restriction set forth in Section 8.2, each option granted
under this Plan shall be exercisable, and the total number of shares subject
thereto shall be purchasable, in such installments (which need not be equal)
during the period prior to its expiration date as the Committee shall
determine. Unless otherwise determined by the Committee, if the optionholder
shall not in any given installment period purchase all of the shares which the
optionholder is entitled to purchase in such installment period, then the
optionholder's right to purchase any shares not purchased in such installment
period shall continue until the expiration date or earlier termination of the
optionholder's option. No option or installment thereof may be exercised
except in respect of whole shares, and fractional share interest shall be
disregarded except that they may be accumulated in accordance with the
preceding sentence. No partial exercise of any option may be for less than 100
shares.
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8.2 The aggregate fair market value (determined at the time the options are
granted) of the shares of Company Common Stock covered by incentive stock
option components granted to any one employee under this Plan or any other
incentive stock option plan of the Company which may become exercisable for
the first time in any one calendar year shall not exceed $100,000; provided,
however, that if the Code or the regulations thereunder shall permit a greater
amount of incentive stock options to vest in any calendar year, then such
higher limit shall be applicable, subject to the provisions of the specific
option agreement.
9. Fair Market Value of Common Stock.
The fair market value of paired shares of Company Common Stock and HP Realty
Common Stock shall be determined for purposes of the Plan by reference to the
closing price on the principal stock exchange on which such paired shares are
then listed, or if such paired shares are not then listed on a stock exchange,
by reference to the closing price (if a National Market issue) or the mean
between the bid and asked price (if other over-the-counter issue) of a paired
share as supplied by the National Association of Securities Dealers through
NASDAQ (or its successor in function), in each case as reported by The Wall
Street Journal, for the business day the option is granted or exercised, or on
the next preceding day on which such stock is traded or listed if none of such
stock was traded on the day such option was granted or exercised. If, for any
reason, no such price is available, the Committee shall determine the fair
market value of paired shares in such other manner as the Committee may deem
appropriate. If it becomes necessary to determine the fair market value of
shares of HP Realty Common Stock separately from the fair market value of
Company Common Stock, or vice versa, the Committee shall make such
determination in accordance with the provisions of the Pairing Agreement.
10. Withholding Tax.
The Company shall have the right to take whatever steps the Committee deems
necessary or appropriate to comply with all applicable federal, state, local,
and employment tax withholding requirements, and the Company's obligations to
deliver shares upon the exercise of options under this Plan shall be
conditioned upon compliance with all such withholding tax requirements.
Without limiting the generality of the foregoing, upon (i) the disposition by
an employee or other person of paired shares of Company Common Stock and HP
Realty Common Stock acquired pursuant to the exercise of an option containing
an incentive stock option component granted pursuant to the Plan within two
years of the granting of the option or within one year after exercise of the
option, or (ii) the exercise of options, the Company shall have the right to
withhold taxes from any other compensation or other amounts which it may owe
to the employee or other person, or to require such employee or such other
person to pay to the Company the amount of any taxes which the Company may be
required to withhold with respect to such shares. Without limiting the
generality of the foregoing, the Committee in its discretion may authorize a
participant to satisfy all or part of any withholding tax liability by (A)
having the Company withhold from the shares which would otherwise be issued on
the exercise of an option that number of shares having a fair market value as
of the date the withholding tax liability arises equal to or less than the
amount of the withholding tax liability, or (B) by delivering to the Company
previously-owned and unencumbered paired shares of Company Common Stock and HP
Realty Common Stock having a fair market value as of the date the withholding
tax liability arises equal to or less than the amount of the withholding tax
liability.
11. Non-Transferability.
11.1 An option granted under the Plan which includes an incentive stock
option component shall, by its terms, be non-transferable by the optionholder,
either voluntarily or by operation of law, other than by will or the laws of
descent and distribution, and shall be exercisable during the optionholder's
lifetime only by the optionholder, regardless of any community property
interest therein of the spouse of the optionholder, or such spouse's
successors in interest. If the spouse of the optionholder shall have acquired
a community property interest in such option, the optionholder, or the
optionholder's permitted successors in interest, may exercise the option on
behalf of the spouse of the optionholder or such spouse's successors in
interest.
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11.2 An option granted under the Plan which does not include an incentive
stock option component shall, by its terms, be non-transferable by the
optionholder, either voluntarily or by operation of law, other than by will or
the laws of descent and distribution or pursuant to a "qualified domestic
relations order" as defined in Section 414(p) of the Code, and shall be
exercisable during the optionholder's lifetime only by the optionholder, or, to
the extent permitted by the Committee or by the terms of the option agreement,
the spouse of the optionholder who obtained the option pursuant to such a
qualified domestic relations order described herein or pursuant to Section 13.
11.3 At the discretion of the Committee, any option agreement may contain
restrictions on transfer of the shares issuable upon exercise of the option,
including a right of first refusal and/or a right of repurchase by the Company.
11.4 Notwithstanding the foregoing, to the extent that the Committee so
authorizes at the time an option which does not include an incentive stock
option component is granted or amended, such option may be assigned, in
connection with the optionholder's estate plan, in whole or in part, during the
optionholder's lifetime to one or more members of the optionholder's immediate
family or to a trust established exclusively for one or more of such immediate
family members. Rights under the assigned portion may be exercised by the
person or persons who acquire a proprietary interest in such option pursuant to
the assignment. The terms applicable to the assigned portion shall be the same
as those in effect for the option immediately before such assignment and shall
be set forth in such documents issued to the assignee as the Committee deems
appropriate. For purposes of this Section 11, the term "immediate family" means
an individual's spouse, children, stepchildren, grandchildren and parents.
11.5 Any option transferred pursuant to a qualified domestic relations order,
or to members of the immediate family or to a trust for their benefit, pursuant
to this Section 11 shall continue to be subject to the provisions governing the
grant to the original grantee, including without limitation, the provisions
governing exercisability, vesting and termination (which shall be determined by
reference to the employment or service-providing status of the original
grantee), unless the option agreement or the Committee provides otherwise.
12. Termination of Employment or Services Rendered.
If an optionholder ceases to be employed by the Company or any of its
Subsidiary Corporations, or ceases to render services to the Company or any of
its Subsidiary Corporations in any capacity, for any reason other than the
optionholder's death or permanent disability (within the meaning of Section
22(e)(3) of the Code), the optionholder's options shall be exercisable for a
period of three months (unless otherwise specified by the Committee in an
individual stock option agreement) after the date the optionholder ceases to be
an employee or service provider of the Company or any of its Subsidiary
Corporations (unless by its terms it sooner expires) to the extent exercisable
on the date of such cessation of employment or providing of service and shall
thereafter expire and be void and of no further force or effect. A leave of
absence approved in writing by the Committee shall not be deemed a termination
of employment or of the providing of services for the purposes of this
Section 12, but no option may be exercised during any such leave of absence,
except during the first three months thereof.
11. Death or Permanent Disability of Option Holder.
If an optionholder dies or becomes permanently disabled (within the meaning
of Section 22(e)(3) of the Code) while the optionholder is employed by the
Company or any of its Subsidiary Corporations, the optionholder's options shall
be exercisable for a period of 12 months (unless otherwise specified by the
Committee in an individual stock option agreement) after the date of such death
or permanent disability (unless by its terms it sooner expires) to the extent
exercisable on the date of death or permanent disability and shall thereafter
expire and be void and of no further force or effect. During such period after
death, such options may, to the extent that they remained unexercised (but
exercisable by the optionholder according to their terms) on the date of such
death, be exercised by the person or persons to whom the optionholder's rights
under the options shall pass by the optionholder's will or by the laws of
descent and distribution.
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14. Shares to be Issued in Compliance with Securities Laws and Exchange
Rules.
At the discretion of the Committee, any option agreement may provide that
the optionholder (and any transferee), by accepting such option, represents
and agrees that none of the shares purchased upon exercise of the option will
be acquired with a view to any sale, transfer or distribution of said shares
in violation of the Securities Act of 1933, as amended (the "Securities Act"),
and the rules and regulations promulgated thereunder, or any applicable state
"blue sky" laws, and the person entitled to exercise the same shall furnish
evidence satisfactory to the Company (including a written and signed
representation) to that effect in form and substance satisfactory to the
Company, including an indemnification of the Company in the event of any
violation of the Securities Act or state blue sky laws by such person. The
Company shall use its reasonable efforts to take all necessary and appropriate
action to assure that the shares issuable upon the exercise of any option or
Stock Purchase Right shall be issued in full compliance with the Securities
Act, state blue sky laws and all applicable listing requirements of any
principal securities exchange on which shares of the same class are listed. No
shares shall be sold, issued or delivered upon the exercise of any option
unless and until there shall have been full compliance with any then-
applicable requirements of the Securities Act (whether by registration or
satisfaction of exemption conditions), all applicable listing requirements of
any national securities exchange on which shares of the same class are then
listed, and any other requirements of law or of any regulatory bodies having
jurisdiction over such sale, issuance and delivery.
15. Privileges of Stock Ownership.
No person entitled to exercise any option granted under the Plan shall have
any of the rights or privileges of a stockholder of the Company in respect of
any shares of stock issuable upon exercise of such option until such
optionholder has become the holder of record of such shares. No adjustment
shall be made for dividends or distributions of rights in respect of such
shares if the record date is prior to the date on which such optionholder
becomes the holder of record, except as set forth in Paragraph 16 hereof.
16. Adjustments.
16.1 If (a) the outstanding shares of the Company Common Stock are
increased, decreased, changed into or exchanged for a different number or kind
of shares or securities of the Company or of any successor corporation, and
there is a corresponding increase, decrease, change, or exchange in the HP
Realty Common Stock, through reorganization, recapitalization,
reclassification, stock dividend, stock split, reverse stock split, merger,
spin-off, consolidation, combination, exchange of shares, or other similar
transaction, or (b) by reason of the termination of the Pairing Agreement or
otherwise, the Company Common Stock ceases to be paired with the HP Realty
Common Stock, the Committee shall make an appropriate and proportionate
adjustment in the maximum number and kind of shares as to which options may be
granted under this Plan, including the maximum number that may be granted
hereunder or to any one participant. A corresponding adjustment changing the
number or kind of shares allocated to unexercised options or portions thereof,
which shall have been granted prior to any such change, shall likewise be
made, to the end that the optionee's proportionate interest shall be
maintained as before the occurrence of such events. Any such adjustment in the
outstanding options shall be made without change in the aggregate purchase
price applicable to the unexercised portion of the option but with a
corresponding adjustment in the price for each share or other unit of any
security covered by the option, provided, however, that each such adjustment
in the number and kind of shares subject to outstanding options which include
incentive stock option components, including any adjustment in the option
price, shall be made in such a manner as not to constitute a "modification" as
defined in Section 424(h) of the Code.
16.2 Upon the happening of a "Corporate Transaction" (as defined below), the
Plan shall terminate, all options theretofore granted hereunder shall
terminate, unless the Committee provides, in its discretion, in the individual
option agreements, or otherwise in writing in connection with such Corporate
Transaction, for one or more of the following alternatives: (i) for the
options theretofore granted to become immediately exercisable notwithstanding
the provisions of Section 8; (ii) for the assumption by the successor
corporation of the options theretofore granted, or the substitution by such
corporation for such options of new options covering the stock of
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the successor corporation, or a parent or subsidiary thereof, with appropriate
adjustments as to the number and kind of shares and prices; (iii) for the
continuance of the Plan by such successor corporation, in which event the Plan
and the options theretofore granted shall continue in the manner and under the
terms so provided; or (iv) for the payment in cash or stock in lieu of and in
complete satisfaction of such options. A "Corporate Transaction" shall mean
the occurrence of any of the following:
(A) Any "Person" or "Group" (as such terms are defined in Section 13(d)
of the Exchange Act and the rules and regulations promulgated thereunder)
is or becomes the "Beneficial Owner" (within the meaning of Rule 13d-3
under the Exchange Act), directly or indirectly, of securities of the
Company, or of any entity resulting from a merger or consolidation
involving the Company, representing more than fifty percent (50%) of the
combined voting power of the then outstanding securities of the Company or
such entity.
(B) The individuals who, as of the date hereof, are members of the Board
(the "Existing Directors"), cease, for any reason, to constitute more than
fifty percent (50%) of the number of authorized directors of the Company as
determined in the manner prescribed in the Company's Certificate of
Incorporation and Bylaws; provided, however, that if the election, or
nomination for election, by the Company's stockholders of any new director
was approved by a vote of at least fifty percent (50%) of the Existing
Directors, such new director shall be considered an Existing Director;
provided further, however, that no individual shall be considered an
Existing Director if such individual initially assumed office as a result
of either an actual or threatened "Election Contest" (as described in Rule
14a-11 promulgated under the Exchange Act) or other actual or threatened
solicitation of proxies by or on behalf of anyone other than the Board (a
"Proxy Contest"), including by reason of any agreement intended to avoid or
settle any Election Contest or Proxy Contest.
(C) The consummation of (x) a merger, consolidation or reorganization to
which the Company is a party, whether or not the Company is the Person
surviving or resulting therefrom, or (y) a sale, assignment, lease,
conveyance or other disposition of all or substantially all of the assets
of the Company, in one transaction or a series of related transactions, to
any Person other than the Company, where any such transaction or series of
related transactions as is referred to in clause (x) or clause (y) above in
this subparagraph (C) (a "Transaction") does not otherwise result in a
"Corporate Transaction" pursuant to subparagraph (A) of this definition of
"Corporate Transaction"; provided, however, that no such Transaction shall
constitute a "Corporate Transaction" under this subparagraph (C) if the
Persons who were the stockholders of the Company immediately before the
consummation of such Transaction are the Beneficial Owners, immediately
following the consummation of such Transaction, of fifty percent (50%) or
more of the combined voting power of the then outstanding voting securities
of the Person surviving or resulting from any merger, consolidation or
reorganization referred to in clause (x) above in this subparagraph (C) or
the Person to whom the assets of the Company are sold, assigned, leased,
conveyed or disposed of in any transaction or series of related
transactions referred in clause (y) above in this subparagraph (C).
16.3 Adjustments under this Section 16 shall be made by the Committee, whose
determination as to what adjustments shall be made, and the extent thereof,
shall be final, binding and conclusive. No fractional shares of stock shall be
issued under the Plan upon any such adjustment.
17. Amendment and Termination of Plan.
17.1 The Board may at any time suspend or terminate the Plan. The Board may
also at any time amend or revise the terms of the Plan, provided that no such
amendment or revision shall, unless appropriate stockholder approval of such
amendment or revision is obtained, increase the maximum number of shares in
the aggregate which may be sold pursuant to options granted under the Plan,
except as permitted under the provisions of Section 16, or change the minimum
exercise price of options which include incentive stock option components set
forth in Section 7 (provided, however, that the Committee may, without
stockholder approval, cancel and regrant at a lower price any or all options
granted under the Plan), or increase the maximum term of options which include
incentive stock option components provided for in Section 6, or permit the
granting of options to
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anyone other than as provided in Sections 4 and 5, or otherwise materially
increase the benefits accruing to participants under the Plan.
17.2 Notwithstanding any other provision of this Plan to the contrary, no
amendment, revision, suspension or termination of the Plan shall in any way
modify, amend, alter or impair any rights or obligations under any option
theretofore granted under the Plan, without (a) specific action of the Board
or the Committee, and (b) the written, signed consent of the optionholder of
the affected option; provided, however, that the Board or the Committee may
unilaterally amend this Plan or any option, without the consent of the
optionholder, if such amendment is necessary or desirable to comply with the
Securities Act, state blue sky laws, or applicable listing requirements of any
principal securities exchange on which shares of the same class of securities
for which the options are exercisable are listed, to preserve the status of
options as incentive stock options, or to preserve the tax deductibility to
the Company of any awards made under this Plan.
18. Effective Date of Plan.
This Plan shall be effective when each of the following has occurred: (i) it
has been both adopted by the Board and approved by the holders of the
outstanding voting stock of the Company, provided that both of such events
occur within 12 months of each other and (ii) the Pairing Agreement has become
effective. The Plan shall be deemed approved by the holders of the outstanding
voting stock of the Company (a) by the affirmative vote of the holders of a
majority of the voting shares of the Company present, or represented, and
entitled to vote at a meeting duly held in accordance with the Delaware
General Corporation Law, or (b) by the execution of a unanimous written
consent duly executed in accordance with the Delaware General Corporation Law
by the holders of all the outstanding voting shares of the Company.
19. Governing Law.
The Plan shall be governed for all purposes by the laws of the State of
Delaware, and any issue arising in connection with the interpretation or
enforcement of the Plan or of the terms or conditions of any option granted
under the Plan shall be resolved in accordance therewith.
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APPENDIX F
HOLLYWOOD PARK OPERATING COMPANY
1998 DIRECTORS DEFERRED COMPENSATION PLAN
1. Eligibility. Each member of the Board of Directors of Hollywood Park
Operating Company (the "Corporation") is eligible to participate in the Plan.
2. Participation. (a) Time of Election. Six months prior to the beginning of
a calendar year, commencing with calendar year 1999, each eligible Director
may elect to participate in the Plan by directing that all or any part of the
compensation (including fees payable for services as chairman or a member of a
committee of the Board) which otherwise would have been payable currently for
services rendered as a Director ("Compensation") during such calendar year and
succeeding calendar years shall be credited to a deferred compensation account
(the "Director's Account"). Any person who shall become a Director during any
calendar year, and who was not a Director of the Corporation prior to the
beginning of such calendar year, may elect, within 30 days after the
Director's term begins, to defer payment of all or any part of the Director's
Compensation earned during the remainder of such calendar year and for
succeeding calendar years; provided, however, that such election shall only be
implemented six months after the date such election is filed with the
Corporation pursuant to Section 2(b). Notwithstanding the foregoing, with
respect to calendar year 1998, each eligible Director may elect within two
weeks after the effective date of this Plan (as described in Paragraph 6,
below) to defer the Director's Compensation beginning six months after such
election.
(b) Form and Duration of Election. An election to participate in the Plan
shall be made by written notice signed by the Director and filed with the
Secretary of the Corporation. Such election shall specify the amount of the
Director's Compensation to be deferred and specify an allocation of the
deferred Compensation between cash and "Paired Shares" as herein provided.
For purposes of this Plan, "Paired Shares" shall mean shares of the common
stock of the Corporation and shares of the common stock of Hollywood Park
Realty Enterprises, Inc. ("Hollywood Park Realty") which are subject to the
1998 Pairing Agreement between this Corporation and Hollywood Park Realty
(the "Pairing Agreement"). Such election shall continue until the Director
terminates such election by signed written notice filed with the Secretary
of the Corporation. Any such termination shall become effective six months
after notice is given and only with respect to Compensation payable
thereafter. Amounts credited to the Director's Account prior to the
effective date of termination shall not be affected by such termination and
shall be distributed only in accordance with the terms of the Plan.
If a Director participates in both this Plan and the Hollywood Park
Realty Enterprises, Inc. Deferred Compensation Plan (the "Hollywood Park
Realty Plan"), such Director must make identical elections (including
terminations) under each plan.
(c) Renewal. A Director who has terminated his election to participate
may thereafter file another election to participate for the calendar year
subsequent to the filing of such election and succeeding calendar years,
subject to Section 2(a) hereof.
3. The Director's Account. All compensation which a Director has elected to
defer under the Plan shall be credited, at the Director's election, to the
Director's Account as follows:
(a) As of the date the Director's Compensation would otherwise be
payable, the Director's Account will be credited with an amount of cash
equal to the amount of such Compensation which the Director elected to
defer and to be allocated to cash.
(b) As of the date the Director's Compensation would otherwise be
payable, there shall be credited to the Director's Account the number of
full and fractional "Paired Shares" obtained by dividing the amount of such
Compensation which the Director elected to defer and to be allocated to
Paired Shares by the average of the closing price of a Paired Share on the
principal stock exchange on which such Paired Shares are then listed, or,
if they are not then listed on a stock exchange, the average of the closing
price of
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a Paired Share on the NASDAQ National Market System, on the last ten
business days of the calendar quarter or month, as the case may be, for
which such Compensation is payable.
(c) At the end of each calendar quarter there shall be credited to the
Director's Account the number of full and/or fractional Paired Shares
obtained by dividing the dividends which would have been paid on the Paired
Shares credited to the Director's Account as of the dividend record date,
if any, occurring during such calendar quarter if such shares had been
shares of issued and outstanding Paired Shares on such date, by the closing
price of a Paired Share on the principal stock exchange on which such
Paired Shares are then listed, or, if Paired Shares are not then listed on
a stock exchange, the closing price of a Paired Share on the NASDAQ
National Market System, on the date such dividend(s) is paid. In the case
of stock dividends, there shall be credited to the Director's Account the
number of full and/or fractional shares of Paired Shares which would have
been issued with respect to the Paired Shares credited to the Director's
Account as of the dividend record date if such Paired Shares had been
shares of issued and outstanding Paired Shares on such date.
(d) No fractional share interests credited to a Director's Account shall
be distributed pursuant to Section 4 hereof. Instead, any fractional Paired
Shares remaining at the time the final distribution is made pursuant to
paragraph 4 herein shall be converted into a cash credit by multiplying the
number of fractional shares by the average of the closing price of a Paired
Share on the principal stock exchange on which Paired Shares are then
listed, or, if they are not then listed on any stock exchange, the average
of the closing price of a Paired Share on the NASDAQ National Market
System, on the last ten business days prior to the date of the final
distribution from the Director's Account.
(e) Cash amounts credited to the Director's Account pursuant to
subparagraph (a) above shall accrue interest commencing from the date the
cash amounts are credited to the Director's Account at a rate per annum to
be determined from time to time by the Board of Directors (the "Board").
Amounts credited to the Director's Account shall continue to accrue
interest until distributed in accordance with the Plan.
The Director shall not have any interest in the cash or Paired Shares
credited to the Director's Account until distributed in accordance with the
Plan.
4. Distribution from Accounts. (a) Form of Election. At the time a Director
makes a participation election pursuant to paragraphs 2(a) or 2(c), the
Director shall also file with the Secretary of the Corporation a signed
written election with respect to the method of distribution of the aggregate
amount of cash and Paired Shares credited to the Director's Account pursuant
to such participation election. A Director may elect to receive such amount in
one lump-sum payment or in a number of approximately equal quarterly
installments (provided the payout period does not exceed 15 years). The lump-
sum payment or the first installment shall be paid as of the first business
day of the calendar quarter immediately following the cessation of the
Director's service as a Director of the Corporation. Subsequent installments
shall be paid as of the first business day of each succeeding calendar quarter
until the entire amount credited to the Director's Account shall have been
paid. A cash payment will be made with the final distribution for any fraction
of a Paired Share in accordance with paragraph 3(d) hereof.
(b) Adjustment of Method of Distribution. A Director participating in the
Plan may, prior to the beginning of any calendar year, file another written
notice with the Secretary of the Corporation electing to change the method
of distribution of the aggregate amount of cash and Paired Shares credited
to the Director's Account for services rendered as a Director commencing
with such calendar year. Amounts credited to the Director's Account prior
to the effective date of such change shall not be affected by such change
and shall be distributed only in accordance with the election in effect at
the time such amounts were credited to the Director's Account.
5. Distribution on Death. If a Director should die before all amounts
credited to the Director's Account shall have been paid in accordance with the
election referred to in paragraph 4, the balance in such Account as of the
date of the Director's death shall be paid promptly following the Director's
death to the beneficiary
F-2
<PAGE>
designated in writing by the Director. Such balance shall be paid to the
estate of the Director if (a) no such designation has been made, or (b) the
designated beneficiary shall have predeceased the Director and no further
designation has been made.
6. Effective Date. This Plan shall become effective when it has been
approved by the Board and the Pairing Agreement has become effective. The
provisions of this Plan dealing with a Director's election of the allocation
of all or a portion of his deferred Compensation to Paired Shares, the
crediting of Paired Shares to Directors' Accounts, and the distribution of
Paired Shares, however, shall not become effective until approved by either
(a) the affirmative vote of the holders of a majority of the voting shares of
the Corporation present, or represented, and entitled to vote at a meeting
duly held in accordance with the Delaware General Corporation Law, or (b) the
execution of a unanimous written consent duly executed in accordance with the
Delaware General Corporation Law by the holders of the outstanding voting
shares of the Company.
7. Shares Issuable. The maximum number of Paired Shares which may be issued
pursuant to this Plan is 125,000.
8. Limitation on Distributions. Notwithstanding anything to the contrary in
this Plan, the maximum number of Paired Shares which can be issued pursuant to
this Plan and the Hollywood Park Realty Plan in any fiscal year is one percent
(1%) of the outstanding number of Paired Shares at the beginning of such
fiscal year, except to the extent that a greater distribution is authorized by
the Board (as defined below). If distributions would exceed this amount,
distributions to each Director shall be reduced on a pro rata basis. Paired
Shares not distributed in any fiscal year because of this Section 8 shall be
distributed as soon as possible in the next fiscal year, within the limits of
this Section 8.
9. Miscellaneous. (a) The right of a Director to receive any amount in the
Director's Account shall not be transferable or assignable by the Director,
except by a beneficiary designation under Section 5, by will or by the laws of
descent and distribution, or pursuant to a qualified domestic relations order
as defined by the Internal Revenue Code of 1986, as amended, or Title I of the
Employee Retirement Income Security Act, or the rules thereunder, and no part
of such amount shall be subject to attachment or other legal process.
(b) The Corporation shall not be required to reserve or otherwise set
aside funds or Paired Shares for the payment of its obligations hereunder.
The Corporation shall make available as and when required a sufficient
number of Paired Shares to meet the needs of the Plan, either by the
issuance of new shares of the common stock of the Corporation coupled with
the purchase of shares of the common stock of Hollywood Park Realty under
the Pairing Agreement, or the purchase of Paired Shares on the open market
or through private purchases, as the Corporation may determine.
(c) The establishment and maintenance of, or allocation and credits, to
the Director's Account shall not vest in the Director or his beneficiary
any right, title or interest in and to any specific assets of the
Corporation. A Director shall not have any dividend or voting rights or any
other rights of a stockholder (except as expressly set forth in paragraph 3
with respect to dividends and as provided in subparagraph (g) below) until
the Paired Shares credited to a Director's Account are distributed. The
rights of a Director to receive payments under this Plan shall be no
greater than the right of an unsecured general creditor of this
Corporation.
(d) The Plan shall be administered by the Board. The Board shall have the
full discretion and power to interpret the provisions of the Plan, to
prescribe, amend and rescind rules and regulations relating to the Plan, to
compute amounts to be credited to and distributed from Directors' Accounts,
and to make all other determinations it deems necessary or advisable to
administer the Plan, with all such determinations being final and binding;
provided, however, that the Board will not have the power to take any
action relating to eligibility for participation in the Plan or the number
of Paired Shares to be issued to each participating Director.
F-3
<PAGE>
(e) The Board may at any time terminate the Plan or amend the Plan in any
manner it deems advisable and in the best interests of the Corporation;
provided, however, that (i) no amendment or termination shall impair the
rights of a Director with respect to amounts then credited to the
Director's Account, and (ii) no amendment (other than a termination) shall
accelerate any payments or distributions under the Plan (except with regard
to bona fide financial hardships).
(f) Each Director participating in the Plan will receive an annual
statement indicating the amount of cash and number of Paired Shares
credited to the Director's Account as of the end of the preceding calendar
year.
(g) If adjustments are made to outstanding shares of Paired Shares, or if
outstanding shares of Paired Shares are converted into or exchanged for,
other securities or property, as a result of stock dividends, stock splits,
reverse stock splits, recapitalizations, reclassifications, mergers, split-
ups, reorganizations, consolidations and the like (including the
termination of the Pairing Agreement or the unpairing of the Paired
Shares), an appropriate adjustment (as determined in good faith by the
Board) will also be made in the number and kind of shares or property
credited to the Director's Account, so that, when distributions are made
pursuant to this Plan, the Director will receive the number and kind of
securities or property to which a holder of Paired Shares would have been
entitled upon such event.
In addition, if outstanding Paired Shares are converted into or exchanged
for another security, all references to "Paired Shares" in this Plan shall be
deemed to be references to such other security.
F-4
<PAGE>
PROXY
HOLLYWOOD PARK, INC.
PROXY FOR ANNUAL MEETING OF STOCKHOLDERS TO BE HELD APRIL 13, 1998
The undersigned hereby acknowledges receipt of the Notice of Annual Meeting
of Stockholders of Hollywood Park, Inc. ("Hollywood Park") dated February 13,
1998 and the accompanying Proxy Statement relating to the above-referenced
Annual Meeting, and hereby appoints R.D. Hubbard or, in his absence, Warren B.
Williamson, and each of them, with full power of substitution in each, as
attorneys and proxies of the undersigned.
Said proxies are hereby given authority to represent and vote all shares of
common stock of Hollywood Park, Inc. which the undersigned may be entitled to
vote at the Annual Meeting of Stockholders of Hollywood Park, to be held at
9:00 a.m., local time, on Monday, April 13, 1998, at the New York Palace, 455
Madison Avenue, New York, New York, and at any and all adjournments or
postponements thereof (the "Annual Meeting") on behalf of the undersigned on
the matters set forth on the reverse side hereof and in the manner designated
thereon.
THIS PROXY IS SOLICITED BY THE BOARD OF DIRECTORS OF HOLLYWOOD PARK, AND
WHEN PROPERLY EXECUTED, THE SHARES REPRESENTED HEREBY WILL BE VOTED IN
ACCORDANCE WITH THE INSTRUCTIONS IN THIS PROXY. IF NO DIRECTION IS MADE, THIS
PROXY WILL BE VOTED FOR ALL PROPOSALS AND FOR THE ELECTION OF ALL NOMINEES
NAMED AS DIRECTORS OF HOLLYWOOD PARK ON THE REVERSE SIDE HEREOF. THE
UNDERSIGNED HEREBY AUTHORIZES THE PROXIES TO VOTE THIS PROXY ACCORDING TO THE
DISCRETION OF THE PROXIES ON ANY OTHER MATTER THAT MAY PROPERLY COME BEFORE
THE ANNUAL MEETING OR ANY POSTPONEMENT OR ADJOURNMENT THEREOF.
PLEASE COMPLETE, DATE, SIGN AND RETURN THIS PROXY CARD PROMPTLY IN THE
ENCLOSED ENVELOPE
(See reverse side)
<PAGE>
- -------------------------------------------------------------------------------
Please mark
[X] your votes
as shown
The Board of Directors recommends a vote "FOR" Items 1 through 6.
1. To approve and adopt the Reorganization Amendments, which are necessary to
effect the reorganization of Hollywood Park into a paired share REIT and
operating company structure.
FOR AGAINST ABSTAIN
[_] [_] [_]
2. To approve and adopt the Hollywood Park Operating Company 1998 Stock Option
Plan.
FOR AGAINST ABSTAIN
[_] [_] [_]
3. To approve and adopt the Hollywood Park Operating Company 1998 Directors
Deferred Compensation Plan.
FOR AGAINST ABSTAIN
[_] [_] [_]
4. To approve and adopt the Supermajority Elimination Amendment, which would
remove the requirement in Hollywood Park's Certificate of Incorporation that
certain transactions be approved by 70% of Hollywood Park's outstanding stock.
FOR AGAINST ABSTAIN
[_] [_] [_]
5. To approve and adopt the Gaming Amendment to Hollywood Park's Certificate
of Incorporation, intended to expand the protection of Hollywood Park's gaming
licenses.
FOR AGAINST ABSTAIN
[_] [_] [_]
6. To elect Eleven (11) Directors: NOMINEES: R.D. Hubbard, Harry Ornest, J.R.
Johnson, Timothy J. Parrott, Richard Goeglein, Peter L. Harris, Robert T.
Manfuso, Lynn P. Reitnouer, Herman Sarkowsky, Warren B. Williamson and
Delbert W. Yocam
FOR all of the WITHHOLD
nominees AUTHORITY
listed at left to vote for all
(except as nominees
withheld in the listed at left
space below)
[_]
[_]
INSTRUCTION: To withhold authority to vote for any individual nominee, write
that nominee's name in the space provided:
- -------------------------------------------------------------------------------
Dated: __________________________________________________________________, 1998
___________________ ___________________
(Signature) (Title)
- -------------------------------------------------------------------------------
(Signature if held jointly)
Note: Please date and sign exactly as your name(s) appears on this proxy card.
If shares are registered in more than one name, all such persons should sign.
A corporation should sign in its full corporate name by a duly authorized
officer, stating his title. When signing as attorney, executor, administrator,
trustee or guardian, please sign in your official capacity and give your full
title as such. If a partnership, please sign in the partnership name by an
authorized person.
- --------------------------------------------------------------------------------
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