<PAGE>
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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
----------------
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 2000
Commission file number 0-106-619
----------------
PINNACLE ENTERTAINMENT, INC.
(Formerly Hollywood Park, Inc.)
(Exact Name of Registrant as Specified in Its Charter)
<TABLE>
<S> <C>
Delaware 95-3667491
(State or Other Jurisdiction of (IRS Employer
Incorporation or Organization) Identification No.)
</TABLE>
330 North Brand Boulevard, Suite 1100, Glendale, California 91203
(Address of Principal Executive Offices)
(Zip Code)
(818) 662-5900
(Registrant's Telephone Number, Including Area Code)
----------------
Indicate by check mark whether registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months, and (2) has been subject to such filing
requirements for the past 90 days. YES [X] NO [_]
The number of outstanding shares of the registrant's common stock, as of
the close of business on August 8, 2000: 26,343,092.
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<PAGE>
PINNACLE ENTERTAINMENT, INC.
TABLE OF CONTENTS
PART I
<TABLE>
<C> <S> <C>
Item 1. Financial information
Consolidated Statements of Operations for the three and six
months ended June 30, 2000 and 1999............................ 1
Consolidated Balance Sheets as of June 30, 2000 and December 31,
1999........................................................... 2
Condensed Consolidated Statements of Cash Flows for the six
months ended June 30, 2000 and 1999............................ 3
Condensed Notes to Consolidated Financial Statements............ 4
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
Forward-Looking Statements and Risk Factors..................... 21
Factors Affecting Future Operating Results...................... 21
Results of Operations........................................... 27
Liquidity, Capital Resources and Other Factors Influencing
Future Results................................................. 30
Item 3. Quantitative and Qualitative Disclosures About Market Risk...... 32
PART II
Item 1. Litigation...................................................... 32
Item 4. Submission of Matters to a Vote of Security Holders............. 32
Item 5. Other Information............................................... 32
Item 6. Exhibits and Reports on Form 8-K................................ 33
Other Financial Information..................................... 34
Signatures...................................................... 35
</TABLE>
<PAGE>
Item 1. Financial Information
PINNACLE ENTERTAINMENT, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
For the three For the six
months ended June months ended June
30, 30,
------------------ ------------------
2000 1999 2000 1999
-------- -------- -------- --------
(in thousands, except per share
data--unaudited)
<S> <C> <C> <C> <C>
Revenues:
Gaming.................................. $132,442 $144,914 $265,595 $285,305
Racing.................................. 3,309 28,962 9,452 38,741
Food and beverage....................... 8,985 12,030 17,236 21,701
Hotel and recreational vehicle park..... 3,532 3,032 6,346 5,700
Truck stop and service station.......... 5,307 4,546 9,383 7,534
Other income............................ 6,449 6,045 14,609 12,546
-------- -------- -------- --------
160,024 199,529 322,621 371,527
-------- -------- -------- --------
Expenses:
Gaming.................................. 75,210 79,121 149,455 156,499
Racing.................................. 1,475 10,023 4,133 15,378
Food and beverage....................... 9,843 14,108 19,020 25,763
Hotel and recreational vehicle park..... 1,564 1,526 3,104 2,866
Truck stop and service station.......... 4,939 4,142 8,703 6,900
General and administrative.............. 27,246 37,966 57,959 73,112
Other................................... 3,689 4,823 6,053 7,277
Depreciation and amortization........... 11,664 13,835 24,255 27,202
Pre-opening costs, Belterra Casino
Resort................................. 3,713 802 5,456 1,509
Gain on disposition of assets, net...... (35,587) 0 (59,441) 0
Merger costs............................ 1,500 0 2,125 0
-------- -------- -------- --------
105,256 166,346 220,822 316,506
-------- -------- -------- --------
Operating income........................ 54,768 33,183 101,799 55,021
Interest expense, net................... 11,079 15,562 23,959 30,053
-------- -------- -------- --------
Income before minority interests and
income taxes........................... 43,689 17,621 77,840 24,968
Minority interests...................... 0 679 0 1,137
Income tax expense...................... 17,457 7,231 29,696 9,987
-------- -------- -------- --------
Net income.............................. $ 26,232 $ 9,711 $ 48,144 $ 13,844
======== ======== ======== ========
Net income per common share:
Net income--basic..................... $ 1.00 $ 0.38 $ 1.83 $ 0.54
Net income--diluted................... $ 0.96 $ 0.37 $ 1.76 $ 0.54
Number of shares--basic................. 26,303 25,871 26,281 25,836
Number of shares--diluted............... 27,345 26,129 27,326 25,836
</TABLE>
See accompanying condensed notes to the consolidated financial statements.
1
<PAGE>
PINNACLE ENTERTAINMENT, INC.
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
June 30, December 31,
2000 1999
----------- ------------
(unaudited)
(in thousands, except
share data)
<S> <C> <C>
ASSETS
------
Current Assets:
Cash and cash equivalents........................... $ 217,201 $ 123,362
Short term investments.............................. 0 123,428
Receivables, net.................................... 12,750 17,132
Prepaid expenses and other assets................... 18,055 13,118
Assets held for sale................................ 138,909 154,649
Current portion of notes receivable................. 5,785 5,785
---------- ----------
Total current assets............................ 392,700 437,474
Notes receivable...................................... 8,345 8,912
Net property, plant and equipment..................... 530,372 437,715
Goodwill, net of amortization......................... 85,876 87,481
Gaming licenses, net of amortization.................. 40,210 41,485
Debt issuance costs, net of amortization.............. 20,563 22,813
Other assets.......................................... 10,480 9,528
---------- ----------
$1,088,546 $1,045,408
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
Current Liabilities:
Accounts payable.................................... $ 21,723 $ 21,096
Accrued interest.................................... 24,564 26,080
Other accrued liabilities........................... 38,478 36,796
Accrued compensation................................ 14,591 16,073
Liabilities to be assumed by buyers of assets held
for sale........................................... 8,573 9,866
Federal and state income taxes...................... 28,715 28,315
Current portion of notes payable.................... 122,213 6,782
---------- ----------
Total current liabilities....................... 258,857 145,008
Notes payable, less current maturities................ 498,751 618,698
Deferred income taxes................................. 826 826
Stockholders' Equity:
Capital stock--
Preferred--$1.00 par value, authorized 250,000
shares; none issued and outstanding in 2000 and
1999............................................. 0 0
Common--$0.10 par value, authorized 40,000,000
shares; 26,306,323 and 26,234,699 shares issued
and outstanding in 2000 and 1999................. 2,631 2,624
Capital in excess of par value........................ 225,739 224,654
Retained earnings..................................... 101,742 53,598
---------- ----------
Total stockholders' equity...................... 330,112 280,876
---------- ----------
$1,088,546 $1,045,408
========== ==========
</TABLE>
See accompanying condensed notes to the consolidated financial statements.
2
<PAGE>
PINNACLE ENTERTAINMENT, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
For the six months
ended June 30,
--------------------
2000 1999
--------- ---------
(in thousands--
unaudited)
<S> <C> <C>
Cash flows from operating activities:
Net income.............................................. $ 48,144 $ 13,844
Adjustments to reconcile net income to net cash provided
by (used in) operating activities:
Depreciation and amortization......................... 24,255 27,202
Gain on disposition of assets......................... (59,441) 0
Decrease in other receivables......................... 4,020 978
Increase in prepaid expenses and other assets......... (6,588) (4,527)
Increase (decrease) in accounts payable............... 627 (5,504)
(Decrease) increase in accrued interest............... (1,516) 9,014
(Decrease) increase in other accrued liabilities...... (809) 21,047
(Decrease) increase in accrued compensation........... (1,482) 2,375
All other, net........................................ (2,353) 3,948
--------- ---------
Net cash provided by operating activities........... 4,857 68,377
--------- ---------
Cash flows from investing activities:
Additions to property, plant and equipment.............. (108,776) (19,705)
Receipts from sale of property, plant and equipment..... 76,528 679
Principal collected on notes receivable................. 567 4,744
Proceeds from (additions to) short term investments..... 123,428 (12,964)
--------- ---------
Net cash provided by (used in) investing
activities......................................... 91,747 (27,246)
--------- ---------
Cash flows from financing activities:
Proceeds from secured Bank Credit Facility.............. 0 17,000
Payment of secured Bank Credit Facility................. 0 (287,000)
Payment on notes payable................................ (3,650) (6,234)
Proceeds from issuance of 9.25% Notes................... 0 350,000
Common stock options exercised.......................... 885 1,672
Increase in debt issuance costs......................... 0 (15,309)
--------- ---------
Net cash (used in) provided by financing
activities......................................... (2,765) 60,129
--------- ---------
Increase in cash and cash equivalents................... 93,839 101,260
Cash and cash equivalents at beginning of the period.... 123,362 44,234
--------- ---------
Cash and cash equivalents at the end of the period...... $ 217,201 $ 145,494
========= =========
</TABLE>
See accompanying condensed notes to consolidated financial statements.
3
<PAGE>
PINNACLE ENTERTAINMENT, INC.
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 1--Summary of Significant Accounting Policies
Company Name Change. In February 2000, a newly formed wholly owned
subsidiary of Hollywood Park, Inc. merged into Hollywood Park, Inc. for the
sole purpose of changing Hollywood Park, Inc.'s name to Pinnacle
Entertainment, Inc. Pinnacle Entertainment, Inc. (the "Company" or "Pinnacle
Entertainment") is a diversified gaming company that owned and operated eight
casinos (four with hotels) in Nevada, Mississippi, Louisiana and Argentina as
of and for the six months ended June 30, 2000, two of which were sold on
August 8, 2000 (see Note 4). Pinnacle Entertainment receives lease income from
two card clubs, both in the Los Angeles metropolitan area; and through June
13, 2000, owned and operated a horse racing facility in Arizona (see Note 3).
General. Pinnacle Entertainment owns and operates, through its Boomtown,
Inc. ("Boomtown") subsidiary, land-based and riverboat gaming operations in
Verdi, Nevada ("Boomtown Reno") and Harvey, Louisiana ("Boomtown New
Orleans"), respectively. Pinnacle Entertainment also owns and operates,
through its Casino Magic Corp. ("Casino Magic") subsidiary, dockside gaming
operations in Biloxi, Mississippi ("Casino Magic Biloxi"); riverboat gaming
operations in Bossier City, Louisiana ("Casino Magic Bossier City"); and two
land-based casinos in Argentina ("Casino Magic Argentina"). On August 8, 2000,
the Company completed the sale of one of its dockside gaming facilities in
Biloxi, Mississippi ("Boomtown Biloxi") and the dockside gaming facility in
Bay St. Louis, Mississippi ("Casino Magic Bay St. Louis") (see Note 4). In
October 1999, the Company purchased the 49% minority interest not owned by
Pinnacle Entertainment in Casino Magic Argentina (see Note 5). Pinnacle
Entertainment receives lease income from two card clubs--the Hollywood Park-
Casino and Crystal Park Hotel and Casino. Since September 1999, the Hollywood
Park-Casino has been leased from Churchill Downs California Company
("Churchill Downs"), a wholly owned subsidiary of Churchill Downs
Incorporated, and subleased to an unaffiliated third party operator (see Note
3). Prior to September 1999, the Hollywood Park-Casino was owned and operated
by the Company. The Crystal Park Hotel and Casino ("Crystal Park") is owned by
the Company and is leased to the same card club operator that now leases and
operates the Hollywood Park-Casino. In September 1999, the Company completed
the disposition of the Hollywood Park Race Track in Inglewood, California to
Churchill Downs (see Note 3). Prior to June 13, 2000, the Company owned and
operated Turf Paradise, Inc. ("Turf Paradise"), a horse racing facility in
Phoenix, Arizona. On June 13, 2000, the Company completed the sale of Turf
Paradise to a private investor (see Note 3). The Company began construction in
July 1999 on the Belterra Casino Resort, a hotel and riverboat casino resort
in Switzerland County, Indiana, in which the Company owns a 97% interest, with
the remaining 3% held by a non-voting local partner (see Note 6 and Note 12).
In April 2000, the Company entered into a definitive agreement with respect to
the Proposed Merger (defined below) whereby, if consummated, all the shares of
the Company would be acquired for cash (see Note 2).
The financial information included herein has been prepared in conformity
with generally accepted accounting principles as reflected in the Company's
consolidated Annual Report on Form 10-K as filed with the Securities and
Exchange Commission, for the year ended December 31, 1999. This Quarterly
Report on Form 10-Q does not include certain footnotes and financial
presentations normally presented annually and should be read in conjunction
with the Company's 1999 Annual Report on Form 10-K.
The information furnished herein is unaudited; however, in the opinion of
management it reflects all normal and recurring adjustments necessary to
present a fair statement of the financial results for the interim periods. It
should be understood that accounting measurements at interim dates inherently
involve greater reliance on estimates than at year end. The interim results of
operations are not indicative of the results for the full year, due to the
sale of significant operating assets in 1999 and 2000 and various asset sales.
4
<PAGE>
Principles of Consolidation. The consolidated financial statements include
the accounts of Pinnacle Entertainment and its majority owned subsidiaries.
All significant inter-company accounts and transactions have been eliminated.
The Company's significant subsidiaries include Boomtown, Inc. (and its
Boomtown casinos), Casino Magic Corp. (and its Casino Magic casinos), and
Belterra Casino Resort.
Gaming Licenses. In 1994, Casino Magic acquired a twelve-year concession
agreement to operate the two Casino Magic Argentina casinos, and capitalized
the costs related to obtaining the concession agreement. The costs are being
amortized over the life of the concession agreement. In 1996, Casino Magic
acquired a Louisiana gaming license to conduct the gaming operations of Casino
Magic Bossier City. Casino Magic allocated a portion of the purchase price to
the gaming license and is amortizing the cost over twenty-five years.
Accumulated amortization as of June 30, 2000 and December 31, 1999 was
$6,020,000 and $5,219,000, respectively.
Amortization of Debt Issuance Costs. Debt issuance costs incurred in
connection with long-term debt and bank financing are capitalized and
amortized to interest expense during the period the debt or loan commitments
are outstanding. Accumulated amortization as of June 30, 2000 and December 31,
1999 was $10,525,000 and $8,278,000, respectively. Amortization expense,
including the amortization of the fair market value write up associated with
the Casino Magic 13% Notes (see Note 9), was $659,000 and $643,000 for the
three months ended June 30, 2000 and 1999, respectively, and $1,311,000 and
$1,131,000 for the six months ended June 30, 2000 and 1999, respectively. Debt
issuance costs associated with the Casino Magic 13% Notes will be written off
concurrent with the August 15, 2000 redemption of such notes (see Note 9).
Goodwill. Goodwill consists of the excess of the acquisition cost over the
fair value of net assets acquired in business combinations and is being
amortized on a straight-line basis over 40 years. Accumulated amortization as
of June 30, 2000 and December 31, 1999 was $9,532,000 and $7,927,000,
respectively. Amortization expense was $804,000 and $757,000 for the three
months ended June 30, 2000 and 1999, respectively, and $1,605,000 and
$1,513,000 for the six months ended June 30, 2000 and 1999, respectively.
Racing Revenues and Expenses. The Company recorded pari-mutuel revenues,
admissions, food and beverage and other racing income associated with racing
on a daily basis, except for prepaid admissions, which were recorded ratably
over the racing season. Expenses associated with racing revenues were charged
against income in those periods in which racing revenues were recognized.
Other expenses were recognized as they occurred throughout the year.
Gaming Revenue and Promotional Allowances. Gaming revenues at the Boomtown
and Casino Magic properties consists of the difference between gaming wins and
losses, and at the Hollywood Park-Casino consisted of fees collected from
patrons on a per seat or per hand basis. Revenues in the accompanying
statements of operations exclude the retail value of food and beverage, hotel
rooms and other items provided to patrons on a complimentary basis. The
estimated cost of providing these promotional allowances (which is included in
gaming expenses) was $11,805,000 and $10,790,000 for the three months ended
June 30, 2000 and 1999, respectively, and $23,311,000 and $22,226,000 for the
six months ended June 30, 2000 and 1999, respectively.
Use of Estimates. The preparation of consolidated financial statements in
conformity with generally accepted accounting principles requires management
to make estimates and assumptions that affect (i) the reported amounts of
assets and liabilities, (ii) the disclosure of contingent assets and
liabilities at the date of consolidated financial statements, and (iii) the
reported amounts of revenues and expenses during the reporting period. The
Company uses estimates in evaluating the recoverability of property, plant and
equipment, other long-term assets, deferred tax assets and in determining
litigation and other obligations.
Property, Plant and Equipment. Additions to property, plant and equipment
are recorded at cost and projects in excess of $10,000,000 include interest on
funds borrowed to finance construction. Capitalized interest was $2,166,000
and $135,000 for the three months ended June 30, 2000 and 1999, respectively,
and $2,943,000 and $846,000 for the six months ended June 30, 2000 and 1999,
respectively.
5
<PAGE>
Pre-opening Costs. The Company's policy has been to expense pre-opening
costs as incurred. In April 1998, Statement of Position 98-5 Reporting on the
Costs of Start-Up Activities was issued and was effective for years after
December 31, 1998. Statement of Position 98-5 required that start-up
activities and organization costs be expensed as incurred.
Earnings per Share. Basic earnings per share are based on net income
divided by the weighted average common shares outstanding during the period.
Diluted earnings per share assume exercise of in-the-money stock options
outstanding at the beginning of the year or date of the issuance, unless they
are antidilutive.
Reclassifications. Certain reclassifications have been made to the 1999
amounts to be consistent with the year 2000 financial statement presentation.
Note 2--Proposed Merger
On March 8, 2000, the Company announced it had received a proposal pursuant
to which an affiliate of Harveys Casino Resorts ("Harveys") would acquire all
of the outstanding shares of common stock of Pinnacle Entertainment. The
Company's Board of Directors formed a special committee (which committee
excluded certain management board members) (the "Special Committee") to
evaluate and negotiate the proposal. Harveys is an affiliate of Colony
Capital, LLC, a private investment firm.
On April 17, 2000, the Company entered into a definitive agreement with PH
Casino Resorts ("PHCR"), a newly formed subsidiary of Harveys, and Pinnacle
Acquisition Corporation ("Pinnacle Acq Corp"), a newly formed subsidiary of
PHCR, pursuant to which PHCR would acquire by merger all of the outstanding
capital stock of Pinnacle Entertainment (the "PHCR Merger Agreement"). The
proposed merger received the unanimous approval of both the Special Committee
and the Board of Directors (with the management board members abstaining) of
the Company (the "Proposed Merger"). In the Proposed Merger, Pinnacle Acq Corp
would merge into Pinnacle Entertainment. In addition, in connection with the
Proposed Merger, Harveys (like the Company) would become a wholly owned
subsidiary of PHCR.
Upon closing of the Proposed Merger, PHCR will acquire all of the
outstanding stock of Pinnacle Entertainment for $24 per fully diluted share in
cash, plus up to an additional $1 per fully diluted share in cash, which
amount is contingent upon the sale of the Company's 97 acres of surplus land
in Inglewood, California for net after tax proceeds of at least $40,750,000 by
December 31, 2001 (see Note 4).
In the event the 97 acres are sold prior to December 31, 2001 for after tax
proceeds of less than $40,750,000 but more than $13,054,000, the $1 per fully
diluted share will be reduced proportionately. In the event the 97 acres are
not sold by December 31, 2001, or have been sold, but at a price less than or
equal to $13,054,000, then Pinnacle Entertainment stockholders will not be
entitled to any additional payment. PHCR's obligation to pay the contingent
portion of the merger consideration will be secured by an irrevocable letter
of credit in the maximum amount of the obligation. As described in Note 4, the
Company has signed an agreement to sell the 97 acres at a price which
management believes will entitle shareholders to the additional $1 payment per
share. There can be no assurances, however, that such sale of the 97 acres
will be completed, or if completed, that the sales price will exceed
$13,054,000.
Consummation of the merger is subject to, among other things, (a) senior
management rolling over $50,000,000 of Pinnacle Entertainment equity to PHCR
and maintaining an on-going role within PHCR; (b) regulatory approvals in the
various jurisdictions in which the Company and Harveys conduct gaming
operations; (c) approval by a majority of the Company's stockholders; (d)
completion of PHCR's financing for the transaction (for which customary bank
commitment and high yield "highly confident" letters have been received by
PHCR); and (e) satisfaction of other conditions precedent, including
completion of the Company's pending casino asset sales (which sales were
completed on August 8, 2000--see Note 4) and the opening of the Belterra
Casino Resort (currently under construction--see Note 6) substantially in
accordance with its current budget not later than September 15, 2000 (see Note
12 regarding the Miss Belterra accident and
6
<PAGE>
related delay in opening which will result in the condition not being
satisfied). The Proposed Merger is expected to close in the fourth quarter of
2000.
As of June 30, 2000, the Company has incurred costs and expenses of
$2,125,000 in connection with the Proposed Merger, including estimated
professional fees in connection with the Special Committee and Board of
Directors' evaluation of the Proposed Merger, estimated fees associated with
the preparation and filing of the preliminary proxy material with the
Securities and Exchange Commission (the "SEC"), estimated fees payable to
members of the Special Committee, as well as other transactional expenses.
Additional costs have been and will continue to be incurred after June 30,
2000 relating to the Proposed Merger. In the event the Proposed Merger is
terminated, under certain circumstances a termination fee of $25,000,000 may
be payable by the Company to Pinnacle Acq Corp, which circumstances are
defined in the PHCR Merger Agreement previously filed with the SEC.
Note 3--Assets Sold
On June 13, 2000, the Company completed the sale of Turf Paradise,
including all 275 acres at the Phoenix, Arizona horse racing facility, to a
private investor for $53,000,000 in cash. The property, plant and equipment
and related accumulated depreciation were included as "Assets held for sale"
as of March 31, 2000 and December 31, 1999. The after tax gain from this sale
was approximately $21,262,000.
The condensed results of operations before taxes for Turf Paradise from
January 1, 2000 to June 13, 2000 (the date of sale) and for the three and six
months ended June 30, 1999 were:
<TABLE>
<CAPTION>
For the
two months & For the
13 days three months
ended ended
June 13, 2000 June 30, 1999
------------- -------------
(in thousands--unaudited)
<S> <C> <C>
Revenues......................................... $3,722 $3,499
Expenses......................................... 2,978 2,920
------ ------
Operating income............................... 744 579
Interest income.................................. (22) 0
------ ------
Income before income taxes................... $ 766 $ 579
====== ======
</TABLE>
<TABLE>
<CAPTION>
For the
five months & For the
13 days six months
ended ended
June 13, 2000 June 30, 1999
------------- -------------
(in thousands--unaudited)
<S> <C> <C>
Revenues......................................... $10,665 $10,285
Expenses......................................... 7,628 7,420
------- -------
Operating income............................... 3,037 2,865
Interest income.................................. (49) 0
------- -------
Income before income taxes................... $ 3,086 $ 2,865
======= =======
</TABLE>
7
<PAGE>
On March 24, 2000, the Company announced it had completed the sale of
approximately 42 acres of surplus land in Inglewood, California to Home Depot,
Inc. for $24,200,000 in cash. The 42 acres of surplus land was included in
"Assets held for sale" as of December 31, 1999. The after tax gain from this
sale was approximately $15,322,000.
On September 10, 1999, the Company completed the dispositions of the
Hollywood Park Rack Track and Hollywood Park-Casino to Churchill Downs for
$117,000,000 cash and $23,000,000 cash, respectively. Churchill Downs acquired
the race track, 240 acres of related real estate and the Hollywood Park-
Casino. The Company then entered into a 10-year leaseback of the Hollywood
Park-Casino at an annual lease rate of $3,000,000 per annum, with a 10-year
renewal option. The Company then subleased the facility to a third party
operator for a lease payment of $6,000,000 per year. The sublease is for a
one-year period.
The disposition of the Hollywood Park Race Track and related real estate
was accounted for as a sale and resulted in a pre-tax gain of $61,522,000. The
disposition of the Hollywood Park-Casino was accounted for as a financing
transaction and therefore not recognized as a sale for accounting purposes as
the Company subleased the Hollywood Park-Casino to a third-party operator.
During the third quarter of 1999, under the provisions of SFAS No. 121, the
Company determined that it would not be able to recover the net book value of
the Hollywood Park-Casino on an undiscounted cash flow basis. The Company
recorded an impairment write-down of the long-lived assets comprising the
Hollywood Park-Casino of $20,446,000 representing the difference between its
net book value of $43,400,000 and estimated fair value. Fair value was
determined based on an independent appraisal. Due to competitive conditions in
the California casino market, sublease rentals were projected to decline over
the ten-year lease term. Pursuant to accounting guidelines, the Company
recorded a long-term debt obligation of $23,000,000 for the Hollywood Park-
Casino (see Note 9). The Hollywood Park-Casino building will continue to be
depreciated over its estimated useful life. The estimated tax liability on the
sales transactions to Churchill Downs is approximately $22,000,000 and will be
paid in 2000.
Due to the disposition of the Hollywood Park Race Track and Hollywood Park-
Casino in September 1999, there are no results of operations for the three and
six months ended June 30, 2000 for these facilities (as discussed above,
effective with the disposition of the Hollywood Park-Casino, the Company
receives only lease income from the operator of the facility).
The condensed results of operations before taxes for the Hollywood Park
Race Track and Hollywood Park-Casino for the three and six months ended June
30, 1999 were:
<TABLE>
<CAPTION>
For the For the
three months six months
ended ended
June 30, 1999 June 30, 1999
------------- -------------
(in thousands--unaudited)
<S> <C> <C>
Revenues......................................... $43,737 $63,227
Expenses......................................... 30,461 51,626
------- -------
Operating income............................... 13,276 11,601
Interest expense(a).............................. 0 0
------- -------
Income before income taxes..................... $13,276 $11,601
======= =======
</TABLE>
--------
(a) No interest expense was specifically identified for these operations.
8
<PAGE>
Note 4--Assets Held For Sale
Assets held for sale at June 30, 2000 and December 31, 1999 consisted of
the following, and excluded the related goodwill and deferred income taxes
associated with such assets:
<TABLE>
<CAPTION>
At June 30, 2000
-----------------------------
Net Property
Plant &
Equipment Other Total
------------ ------- --------
(in thousands--unaudited)
<S> <C> <C> <C>
Casino Magic Bay St. Louis & Boomtown Biloxi
Casinos..................................... $114,656 $ 6,591 $121,247
Other (primarily 1 parcel of undeveloped land
in California).............................. 17,662 0 17,662
-------- ------- --------
$132,318 $ 6,591 $138,909
======== ======= ========
<CAPTION>
At December 31, 1999
-----------------------------
Net Property
Plant &
Equipment Other Total
------------ ------- --------
(in thousands)
<S> <C> <C> <C>
Casino Magic Bay St. Louis & Boomtown Biloxi
Casinos..................................... $115,731 $ 5,876 $121,607
Turf Paradise Race Track..................... 10,873 4,359 15,232
Other (primarily 2 parcels of undeveloped
land in California)......................... 17,810 0 17,810
-------- ------- --------
$144,414 $10,235 $154,649
======== ======= ========
</TABLE>
Sales transactions for these assets were pending or the properties were
actively being marketed as of June 30, 2000 and December 31, 1999. As
discussed below, on August 8, 2000, the Company completed the casino sales.
Until the sales transactions were completed, the Company operated the casinos
held for sale. In addition, certain liabilities were assumed by the buyers of
these assets. Such liabilities, consisting primarily of accrued liabilities
and accounts payable, have been classified as "Liabilities to be assumed by
buyers of assets held for sale" on the accompanying Consolidated Balance
Sheets. Goodwill net of amortization at June 30, 2000 and December 31, 1999
includes approximately $13,157,000 and $13,331,000, respectively, related to
the pending casino sales.
Casinos in Mississippi. On December 10, 1999, the Company announced it had
entered into definitive agreements with subsidiaries of Penn National Gaming,
Inc. ("Penn National") to sell its Casino Magic Bay St. Louis, Mississippi,
and Boomtown Biloxi, Mississippi, casino operations for $195,000,000 in cash.
Subsidiaries of Penn National agreed to purchase all of the operating assets
and certain liabilities and related operations of the Casino Magic Bay St.
Louis and Boomtown Biloxi properties, including the 590 acres of land at
Casino Magic Bay St. Louis and the leasehold rights at Boomtown Biloxi.
On August 8, 2000, the Company completed the casino sales to Penn National
and received $195,000,000 in cash.
Race Track in Arizona. On June 13, 2000, the Company completed the sale of
Turf Paradise--see Note 3.
Other. On April 18, 2000, the Company announced it had entered into an
agreement with Casden Properties Inc. for the sale of the remaining 97 acres
of surplus land in Inglewood, California for $63,050,000 in cash. The sale of
the 97 acres is subject to a number of conditions, including the receipt by
Casden Properties Inc. of certain entitlements to develop the property. On
July 31, 2000, the Company announced
9
<PAGE>
Casden Properties had completed its due diligence phase of the transaction and
is moving forward with entitlements necessary to complete the transaction. The
sale is expected to take six to nine months to close and is expected to
generate after tax net cash proceeds in excess of $41,000,000. No assurances
can be given that the sale of the Inglewood land will be completed on such
terms, or at all.
The Company owns other land parcels in Missouri, which it is actively
seeking to sell.
Condensed results of operations before taxes for the Casino Magic Bay St.
Louis and Boomtown Biloxi casinos for the three and six months ended June 30,
2000 and 1999 are as follows:
<TABLE>
<CAPTION>
For the three
months ended
June 30,
---------------
2000 1999
------- -------
(in thousands--
unaudited)
<S> <C> <C>
Revenues.................................................... $39,311 $39,613
Expenses.................................................... 32,015 33,130
------- -------
Operating income.......................................... 7,296 6,483
Interest expense (income), net.............................. 37 (13)
------- -------
Income before income taxes................................ $ 7,259 $ 6,496
======= =======
<CAPTION>
For the six
months ended
June 30,
---------------
2000 1999
------- -------
(in thousands--
unaudited)
<S> <C> <C>
Revenues(a)................................................. $80,806 $80,375
Expenses.................................................... 66,087 66,400
------- -------
Operating income.......................................... 14,719 13,975
Interest expense, net....................................... 82 62
------- -------
Income before income taxes................................ $14,637 $13,913
======= =======
</TABLE>
--------
(a) Revenues for the six months ended June 30, 2000 include proceeds from the
settlement of a 1998 business interruption claim of approximately
$1,204,000, which amount was recorded in the three months ended March 31,
2000.
Note 5--Acquisitions
Casino Magic Argentina. On October 8, 1999, the Company purchased the 49%
minority interest not owned by the Company in Casino Magic Argentina for
$16,500,000 in cash. The $12,300,000 purchase price paid in October 1999 in
excess of the then minority interest is being amortized over the extended
concession agreement period, as described below. The Casino Magic Argentina
operations consist of two casinos in the Province of Neuquen, Argentina. The
Company operates the two casinos under an exclusive concession contract with
the Province that is currently scheduled to expire in December 2006. The
Company and the province are in discussions to extend such concession contract
for an additional ten years. In return for such extension, Casino Magic
Argentina would commit to invest, within 33 months of signing, $15,000,000 for
the development of a new casino facility and related amenities.
10
<PAGE>
Note 6--Expansion and Development
Belterra Casino Resort. In July 1999, the Company broke ground on the
Belterra Casino Resort. The project is located in Switzerland County, Indiana,
which is approximately 35 miles southwest of Cincinnati, Ohio and will be the
gaming site most readily accessible to major portions of northern and central
Kentucky, including the city of Lexington.
The Company plans to spend approximately $200,000,000 ($127,000,000 of
which has been spent as of June 30, 2000) in total costs (including land, pre-
opening expenses, organizational expenses and community grants) on the
Belterra Casino Resort, which will feature a 15-story, 308-room hotel, a
cruising riverboat casino (the Miss Belterra) with approximately 1,800 gaming
positions, an 18-hole championship golf course, a 1,500 seat entertainment
facility, four restaurants, retail areas and other amenities.
See Note 12 regarding the July 31, 2000 Miss Belterra riverboat accident
and related impact on the project and to the PHCR Merger Agreement. A
condition to the PHCR Merger Agreement, relating to the opening of the
Belterra Casino Resort, will not be satisfied.
Lake Charles. In November 1999, the Company filed an application for the
fifteenth and final gaming license to be issued by the Louisiana Gaming
Control Board. In July 2000, the Company was one of three groups who presented
their proposed projects to the Louisiana Gaming Control Board. The Company's
application is seeking the approval to operate a cruising riverboat casino,
hotel and golf course resort complex in Lake Charles, Louisiana. The Louisiana
Gaming Control Board has not awarded such license and there are no assurances
such license will be issued to the Company or any other applicant. At the July
2000 meeting, the Louisiana Gaming Control Board indicated that another
meeting to address the applications for the license will be held at such time
as the Louisiana State Police have completed their suitability investigations
of the applicants; however, the Louisiana Gaming Control Board did not
indicate when the next meeting would be convened.
In connection with the application, Pinnacle Entertainment entered into an
option agreement with the Lake Charles Harbor and Terminal District (the
"District") to lease 225 acres of unimproved land from the District upon which
such resort complex would be constructed. The initial lease option was for a
six-month period which ended in January 2000, with three six-month renewal
options (the first two of which the Company has exercised), at a cost of
$62,500 per six-month option. If the lease option is exercised, the annual
rental payment would be $815,000, with a maximum annual increase of 5%. The
term of the lease would be for a total of up to 70 years, with an initial term
of 10 years and six consecutive renewal options of 10 years each. The lease
would require the Company to develop certain on- and off- site improvements at
the location. If awarded the license by the Louisiana Gaming Control Board,
the Company anticipates building a resort similar in design and scope to the
Belterra Casino Resort currently under construction in Indiana.
Note 7--Short Term Investments
At June 30, 2000, the Company did not hold any short term investments.
However, included in "Cash and cash equivalents" on the Consolidated Balance
Sheet at June 30, 2000 is $156,262,000 of commercial paper and other cash
equivalents with original maturities of less than 90 days.
At December 31, 1999, short term held to maturity investments consisted of
investments in commercial paper of $123,428,000. The commercial paper
consisted of investment grade instruments issued by major corporations and
financial institutions that are highly liquid and have original maturities
between three months and one year. Commercial paper held as short term
investments is carried at amortized cost which approximates market value.
Interest income was $3,013,000 and $1,545,000 for the three months ended
June 30, 2000 and 1999, respectively and $6,234,000 and $2,443,000 for the six
months ended June 30, 2000 and 1999, respectively.
11
<PAGE>
Note 8--Property, Plant and Equipment
Property, plant and equipment held at June 30, 2000 and December 31, 1999
consisted of the following:
<TABLE>
<CAPTION>
June 30, December 31,
2000(a) 1999(a)
----------- ------------
(unaudited)
(in thousands)
<S> <C> <C>
Land and land improvements.......................... $ 72,427 $ 71,052
Buildings........................................... 254,217 253,126
Equipment........................................... 139,803 134,701
Vessel and barges................................... 66,416 65,580
Construction in progress............................ 132,490 32,813
-------- --------
665,353 557,272
Less accumulated depreciation....................... 134,981 119,557
-------- --------
$530,372 $437,715
======== ========
</TABLE>
--------
(a) Excludes $186,811,000 of assets and $54,493,000 of accumulated
depreciation at June 30, 2000 and $213,992,000 of assets and $69,578,000
of accumulated depreciation at December 31, 1999, related to assets
classified as held for sale (see Note 4).
Note 9--Secured and Unsecured Notes Payable
Notes payable at June 30, 2000 and December 31, 1999 consisted of the
following:
<TABLE>
<CAPTION>
June 30, December 31,
2000 1999
----------- ------------
(unaudited)
(in thousands)
<S> <C> <C>
Unsecured 9.25% Notes............................... $350,000 $350,000
Unsecured 9.5% Notes................................ 125,000 125,000
Casino Magic 13% Notes(a)........................... 118,878 119,814
Hollywood Park-Casino debt obligation............... 21,655 22,566
Other secured notes payable......................... 3,799 5,785
Other unsecured notes payable....................... 1,632 2,315
-------- --------
620,964 625,480
Less current maturities............................. 122,213 6,782
-------- --------
$498,751 $618,698
======== ========
</TABLE>
--------
(a) Includes a write up to fair market value (net of amortization), as of the
October 15, 1998 acquisition of Casino Magic, of $6,003,000 and
$6,939,000, as of June 30, 2000 and December 31, 1999, respectively, as
required under the purchase method of accounting for a business
combination.
Secured Notes Payable, Bank Credit Facility. Under the terms of the 1998
bank credit facility with a syndicate of banks, expiring in 2003 (the "Bank
Credit Facility"), the Company chose in May of 1999 to reduce the amount
available under the facility from $300,000,000 (with an option to increase to
$375,000,000), to $200,000,000 (with an option to increase to $300,000,000).
The Bank Credit Facility also provides for letters of credit up to $30,000,000
and swing line loans of up to $10,000,000.
In February 1999, the Company repaid all amounts outstanding under the Bank
Credit Facility with proceeds from the issuance of the 9.25% Notes (see
below). Since February 1999, the Bank Credit Facility has remained unused and
therefore, at June 30, 2000, and December 31, 1999, there was no outstanding
balance under the Bank Credit Facility.
Interest rates on borrowings under the Bank Credit Facility are determined
by adding a margin, which is based upon the Company's debt to cash flow ratio
(as defined in the Bank Credit Facility), to either the LIBOR rate or Prime
Rate (at the Company's option). The Company also pays a quarterly commitment
fee on the
12
<PAGE>
unused balance of the Bank Credit Facility. The Bank Credit Facility allows
for interest rate swap agreements or other interest rate protection
agreements, to a maximum notional amount of $300,000,000. Presently, the
Company does not use such financial instruments.
Unsecured 9.25% and 9.5% Notes. In February of 1999 the Company issued
$350,000,000 of 9.25% Senior Subordinated Notes due 2007 (the "9.25% Notes"),
the proceeds of which were used to pay the outstanding borrowings on the Bank
Credit Facility, fund current capital expenditures, and other general
corporate purposes.
In August of 1997 the Company issued $125,000,000 of 9.5% Senior
Subordinated Notes due 2007 (the "9.5% Notes"). On January 29, 1999, the
Company received the required number of consents to modify selected covenants
associated with the 9.5% Notes. Among other things, the modifications lowered
the required minimum consolidated coverage ratio for debt assumption and
increased the size of allowed borrowings under the Bank Credit Facility. The
Company paid a consent fee of $50.00 per $1,000 principal amount of the 9.5%
Notes, which, combined with other transactional expenses, is being amortized
over the remaining term of the 9.5% Notes.
The 9.25% and 9.5% Notes are redeemable, at the option of the Company, in
whole or in part, on the following dates, at the following premiums to face
value:
<TABLE>
<CAPTION>
9.25% Notes redeemable: 9.5% Notes redeemable:
-------------------------------------- ---------------------------------
after February 14, at a premium of after July 31, at a premium of
------------------ --------------- -------------- ---------------
<S> <C> <C> <C>
2003 104.625% 2002 104.750%
2004 103.083% 2003 102.375%
2005 101.542% 2004 101.188%
2006 100.000% 2005 100.000%
2007 maturity 2006 100.000%
2007 maturity
</TABLE>
Both the 9.25% and 9.5% Notes are unsecured obligations of the Company,
guaranteed by all material restricted subsidiaries of the Company, as defined
in the indentures. The subsidiaries which do not guarantee the debt include
certain Casino Magic subsidiaries, principally Casino Magic of Louisiana,
Corp. (Casino Magic Bossier City) and the Casino Magic Argentina subsidiaries.
The indentures governing the 9.25% and 9.5% Notes, as well as the Bank Credit
Facility, contain certain covenants limiting the ability of the Company and
its restricted subsidiaries to incur additional indebtedness, issue preferred
stock, pay dividends or make certain distributions, repurchase equity
interests or subordinated indebtedness, create certain liens, enter into
certain transactions with affiliates, sell assets, issue or sell equity
interests in its subsidiaries, or enter into certain mergers and
consolidations. In connection with the redemption of the Casino Magic 13%
Notes (as discussed below), Casino Magic of Louisiana, Corp. will become a
restricted subsidiary under the indentures governing the 9.25% and 9.5% Notes.
Casino Magic 13% Notes. In August of 1996, Casino Magic of Louisiana, Corp.
(Casino Magic Bossier City) issued $115,000,000 of 13% First Mortgage Notes
due 2003 (the "Casino Magic 13% Notes"), with contingent interest equal to 5%
of Casino Magic Bossier City's adjusted consolidated cash flow (as defined by
the indenture). The Casino Magic 13% Notes are secured by a first priority
lien and security interest in substantially all of the assets of Casino Magic
Bossier City.
In December of 1998, the Company completed the post Casino Magic Merger
change of control purchase offer whereby $2,125,000 of principal amount of the
Casino Magic 13% Notes was tendered to the Company at a price of 101% of face
value.
13
<PAGE>
The indenture governing the Casino Magic 13% Notes contains certain
covenants limiting the subsidiaries that own Casino Magic Bossier City from
engaging in lines of business other than the current gaming operations at
Bossier City and incidental related activities, to borrow funds or otherwise
become liable for additional debt, to pay dividends, issue preferred stock,
make investments and certain types of payments, to grant liens on its
property, enter into mergers or consolidations, or to enter into certain
specified transactions with affiliates.
On August 15, 2000, the Company will redeem all $112,875,000 of the
outstanding Casino Magic 13% Notes at the redemption price of 106.5%. Upon
deposit of principal, premium and accrued interest for such redemption, Casino
Magic of Louisiana will satisfy all conditions required to discharge its
obligations under the indenture. Because the Company has elected to redeem
these Notes in August 2000, they have been classified as having a current
maturity as of June 30, 2000. The Company anticipates recording an after tax
extraordinary loss on the early retirement of such bonds of approximately
$2,644,000, including the early termination premium of $7,337,000 and
remaining unamortized debt issuance costs of approximately $2,464,000, off-set
by the unamortized premium established in purchase accounting of the write up
to fair market value of $5,769,000. Following the redemption, Casino Magic
Bossier City will become a guarantor of the Bank Credit Facility, the 9.25%
Notes and the 9.5% Notes.
Hollywood Park-Casino Debt Obligation. In connection with the disposition
of the Hollywood Park-Casino to Churchill Downs (see Note 3), the Company
recorded a long-term lease finance obligation of $23,000,000. Annual lease
payments to Churchill Downs of $3,000,000 will be applied as principal and
interest on the finance debt. The debt is being amortized over 10 years (the
initial lease term with Churchill Downs).
Note 10--Litigation
Poulos Lawsuit. A class action lawsuit was filed on April 26, 1994, in the
United States District Court, Middle District of Florida (the "Poulos
Lawsuit"), naming as defendants 41 manufacturers, distributors and casino
operators of video poker and electronic slot machines, including Casino Magic.
The lawsuit alleges that the defendants have engaged in a course of fraudulent
and misleading conduct intended to induce people to play such games based on
false beliefs concerning the operation of the gaming machines and the extent
to which there is an opportunity to win. The suit alleges violations of the
Racketeer Influenced and Corrupt Organization Act, as well as claims of common
law fraud, unjust enrichment and negligent misrepresentation, and seeks
damages in excess of $6 billion. On May 10, 1994, a second class action
lawsuit was filed in the United States District Court, Middle District of
Florida (the "Ahern Lawsuit"), naming as defendants the same defendants who
were named in the Poulos Lawsuit and adding as defendants the owners of
certain casino operations in Puerto Rico and the Bahamas, who were not named
as defendants in the Poulos Lawsuit. The claims in the Ahern Lawsuit are
identical to the claims in the Poulos Lawsuit. Because of the similarity of
parties and claims, the Poulos Lawsuit and Ahern Lawsuit were consolidated
into one case file in the United States District Court, Middle District of
Florida. On December 9, 1994 a motion by the defendants for change of venue
was granted, transferring the case to the United States District Court for the
District of Nevada, in Las Vegas. In an order dated April 17, 1996, the court
granted motions to dismiss filed by Casino Magic and other defendants and
dismissed the Complaint without prejudice. The plaintiffs then filed an
amended Complaint on May 31, 1996 seeking damages against Casino Magic and
other defendants in excess of $1 billion and punitive damages for violations
of the Racketeer Influenced and Corrupt Organizations Act and for state common
law claims for fraud, unjust enrichment and negligent misrepresentation.
Casino Magic and other defendants have moved to dismiss the amended Complaint.
The Company believes that the claims are without merit and does not expect
that the lawsuit will have a materially adverse effect on the financial
condition or results of operations of the Company.
Casino America Litigation. On or about September 6, 1996, Casino America,
Inc. commenced litigation in the Chancery Court of Harrison County,
Mississippi, Second Judicial District, against Casino Magic, and James Edward
Ernst, its then Chief Executive Officer, seeking injunctive relief and
unspecified compensatory damages in an amount to be proven at trial as well as
punitive damages. The plaintiff claims, among other things, that the
defendants (i) breached the terms of an agreement they had with the plaintiff;
(ii) tortiously
14
<PAGE>
interfered with certain of the plaintiff's business relations; and (iii)
breached covenants of good faith and fair dealing they allegedly owed to the
plaintiff. On or about October 8, 1996, the defendants interposed an answer,
denying the allegations contained in the Complaint. On June 26, 1998,
defendants filed a motion for summary judgment. Thereafter, plaintiffs, in
July of 1998, filed a motion to reopen discovery. Both of these motions are
pending. On November 30, 1999, the matter was transferred to the Circuit Court
for the Second Judicial District, Harrison County, Mississippi. No trial date
has been set. While the Company cannot predict the outcome of this action, it
believes plaintiff's claims are without merit and intends to vigorously defend
this action.
Bus Litigation. On May 9, 1999, a bus owned and operated by Custom Bus
Charters, Inc. was involved in an accident in New Orleans, Louisiana while en
route to Casino Magic in Bay St. Louis, Mississippi. To date, multiple deaths
and numerous injuries are attributed to this accident and the Company's
subsidiaries, Casino Magic Corp. and / or Mardi Gras Casino Corp., together
with several other defendants, have been named in fifty-four (54) lawsuits,
each seeking unspecified damages due to the deaths and injuries sustained in
this accident. While the Company cannot predict the outcome of the litigation,
the Company believes Casino Magic is not liable for any damages arising from
this accident and the Company and its insurers intend to vigorously defend
these actions.
Skrmetta Lawsuit. A suit was filed on August 14, 1998 in the Circuit Court
of Harrison County, Mississippi by the ground lessor of property underlying
the Boomtown Biloxi land based improvements in Biloxi, Mississippi (the
"Project"). The lawsuit alleges that the plaintiff agreed to exchange the
first two years' ground rentals for an equity position in the Project based
upon defendants' purported assurances that a hotel would be constructed as a
component of the Project. Plaintiff seeks recovery in excess of $4,000,000
plus punitive damages. At trial of the matter in March 2000, the judge granted
the Company's motion to dismiss the case. On April 26, 2000, plaintiff
appealed the court's dismissal to the Mississippi Supreme Court.
Purported Class Action Lawsuits. On March 14, 2000, Harbor Finance Partners
filed a purported class action lawsuit in the Chancery Court of the State of
Delaware against the Company and each of its directors, claiming that the
defendants breached their fiduciary duty to the stockholders of the Company by
agreeing to negotiate exclusively with Harveys Casino Resorts, a majority
owned company of Colony Capital, LLC (see Note 2). On June 2, 2000, the action
was dismissed without prejudice.
On March 21, 2000, a similar purported class action lawsuit was filed by
Leta Hilliard in the Superior Court of the State of California. The lawsuit
claims that the Company and its directors failed to undertake an appropriate
process for evaluating the Company's worth and eliciting bids from third
parties, and that the price for the stock is inadequate. The Company intends
to vigorously defend this action and believes that the plaintiff's claims are
without merit. The parties in the Hilliard lawsuit have filed a stipulation in
which the plaintiff agreed to file and serve a First Amended Complaint on or
before September 15, 2000 and the defendants agreed to respond thereto within
sixty days of such filing.
Casino Magic Bay St. Louis Wrongful Death Litigation. On February 18, 2000,
three Casino Magic Bay St. Louis patrons, after leaving the casino property,
were involved in a vehicular accident which resulted in the death of two of
the individuals and injury to the third. On April 13, 2000, a lawsuit was
filed on behalf of the injured individual and one of the deceased individuals
against Casino Magic Bay St. Louis seeking compensatory damages in the amount
of $2,000,000 and punitive damages in the amount of $10,000,000. The suit
alleges, among other things, that Casino Magic Bay St. Louis employees
negligently served alcoholic beverages to the three individuals and the acts
and omissions of the Casino Magic Bay St. Louis employees were the proximate
cause of the accident. While the Company cannot predict the outcome of this
action, it believes that the plaintiffs' claims are without merit and intends
to vigorously defend this action.
The Company is party to a number of other pending legal proceedings in the
ordinary course of business, though management does not expect that the
outcome of such proceedings, either individually or in the aggregate, will
have a material effect on the Company's financial condition or results of
operations.
15
<PAGE>
Note 11--Consolidating Condensed Financial Information
The Company's subsidiaries (excluding Casino Magic of Louisiana, Corp.,
Casino Magic Argentina and certain non-material subsidiaries) have fully and
unconditionally guaranteed the payment of all obligations under the 9.25%
Notes and the 9.5% Notes. Separate financial statements and other disclosures
regarding the subsidiary guarantors are not included herein because management
has determined that such information is not material to investors. In lieu
thereof, the Company includes the following:
Pinnacle Entertainment, Inc.
Consolidating Condensed Financial Information
For the three and six months ended June 30, 2000 and 1999 and balance sheets
as of June 30, 2000 and December 31, 1999
(in thousands--unaudited)
<TABLE>
<CAPTION>
(a) (b)
Wholly Consolidating Pinnacle
Pinnacle Wholly Owned Owned and Entertainment,
Entertainment, Guarantor Non-Guarantor Eliminating Inc.
Inc. Subsidiaries Subsidiaries Entries Consolidated
-------------- ------------ ------------- ------------- --------------
<S> <C> <C> <C> <C> <C>
Balance Sheet
As of June 30, 2000
Current assets.......... $183,950 $170,167 $ 38,583 $ 0 $ 392,700
Property, plant and
equipment, net......... 55,354 388,001 87,017 0 530,372
Other non-current
assets................. 26,524 40,318 42,911 55,721 165,474
Investment in
subsidiaries........... 427,237 114,203 0 (541,440) 0
Inter-company........... 205,285 149,075 31,489 (385,849) 0
-------- -------- -------- --------- ----------
$898,350 $861,764 $200,000 $(871,568) $1,088,546
======== ======== ======== ========= ==========
Current liabilities..... $ 79,595 $ 52,376 $126,886 $ 0 $ 258,857
Notes payable, long
term................... 495,724 3,027 0 0 498,751
Other non-current
liabilities............ (7,081) 0 20,113 (12,206) 826
Inter-company........... 0 359,351 26,499 (385,850) 0
Equity.................. 330,112 447,010 26,502 (473,512) 330,112
-------- -------- -------- --------- ----------
$898,350 $861,764 $200,000 $(871,568) $1,088,546
======== ======== ======== ========= ==========
Statement of Operations
For the three months
ended June 30, 2000
Revenues:
Gaming................ $ 0 $ 91,936 $ 40,506 $ 0 $ 132,442
Racing................ 3,309 0 0 0 3,309
Food and beverage..... 335 7,679 971 0 8,985
Equity in
subsidiaries......... 19,111 3,834 0 (22,945) 0
Other................. 1,578 13,051 659 0 15,288
-------- -------- -------- --------- ----------
24,333 116,500 42,136 (22,945) 160,024
Expenses:
Gaming................ 0 50,471 24,739 0 75,210
Racing................ 1,475 0 0 0 1,475
Food and beverage..... 304 8,519 1,020 0 9,843
Administrative and
other................ 6,557 30,552 5,542 0 42,651
Gain on disposition of
assets............... (35,923) 336 0 0 (35,587)
Depreciation and
amortization......... 943 7,846 2,506 369 11,664
-------- -------- -------- --------- ----------
(26,644) 97,724 33,807 369 105,256
-------- -------- -------- --------- ----------
Operating income
(loss)................. 50,977 18,776 8,329 (23,314) 54,768
Interest expense, net... 9,665 (2,655) 4,069 0 11,079
-------- -------- -------- --------- ----------
Income (loss) before
minority interests
and taxes.............. 41,312 21,431 4,260 (23,314) 43,689
Income tax expense...... 17,031 0 426 0 17,457
-------- -------- -------- --------- ----------
Net income (loss)... $ 24,281 $ 21,431 $ 3,834 $ (23,314) $ 26,232
======== ======== ======== ========= ==========
</TABLE>
16
<PAGE>
Pinnacle Entertainment, Inc.
Consolidating Condensed Financial Information
For the three and six months ended June 30, 2000 and 1999 and balance sheets
as of June 30, 2000 and December 31, 1999
(in thousands--unaudited)
<TABLE>
<CAPTION>
(a) (b)
Wholly Consolidating Pinnacle
Pinnacle Wholly Owned Owned Non- and Entertainment,
Entertainment, Guarantor Guarantor Eliminating Inc.
Inc. Subsidiaries Subsidiaries Entries Consolidated
-------------- ------------ ------------ ------------- --------------
<S> <C> <C> <C> <C> <C>
Statement of Operations
For the six months ended
June 30, 2000
Revenues:
Gaming................ $ 0 $182,493 $83,102 $ 0 $265,595
Racing................ 9,452 0 0 0 9,452
Food and beverage..... 1,056 14,200 1,980 0 17,236
Equity in
subsidiaries......... 43,269 9,209 0 (52,478) 0
Other................. 3,157 25,611 1,570 0 30,338
-------- -------- ------- -------- --------
56,934 231,513 86,652 (52,478) 322,621
======== ======== ======= ======== ========
Expenses:
Gaming................ 0 100,621 48,834 0 149,455
Racing................ 4,133 0 0 0 4,133
Food and beverage..... 892 16,061 2,067 0 19,020
Administrative and
other................ 12,813 58,599 11,988 0 83,400
Gain on disposition of
assets............... (59,777) 336 0 0 (59,441)
Depreciation and
amortization......... 1,945 16,566 5,006 738 24,255
-------- -------- ------- -------- --------
(39,994) 192,183 67,895 738 220,822
-------- -------- ------- -------- --------
Operating income
(loss)................. 96,928 39,330 18,757 (53,216) 101,799
Interest expense, net... 19,367 (3,939) 8,531 0 23,959
-------- -------- ------- -------- --------
Income (loss) before
minority interests and
taxes.................. 77,561 43,269 10,226 (53,216) 77,840
Income tax expense...... 28,679 0 1,017 0 29,696
-------- -------- ------- -------- --------
Net income (loss)... $ 48,882 $ 43,269 $ 9,209 $(53,216) $ 48,144
======== ======== ======= ======== ========
Statement of Cash Flows
For the six months ended
June 30, 2000
Net cash provided by
(used in) operating
activities............. $(90,438) $ 84,587 $ 9,965 $ 743 $ 4,857
Net cash provided by
(used in) investing
activities............. 175,750 (83,187) (816) 0 91,747
Net cash provided by
(used in) financing
activities............. (670) (1,738) (357) 0 (2,765)
</TABLE>
17
<PAGE>
Pinnacle Entertainment, Inc.
Consolidating Condensed Financial Information
For the three and six months ended June 30, 2000 and 1999 and balance sheets
as of June 30, 2000 and December 31, 1999
(in thousands--unaudited)
<TABLE>
<CAPTION>
Hollywood
Park
Operating
Pinnacle Co. (a) (b) (c)
Entertainment, (Co-Obligor Non Wholly Consolidating Pinnacle
Inc. Guarantor 9.5% Notes/ Wholly Owned Wholly Owned Owned And Entertainment,
(Parent Guarantor Guarantor Non-Guarantor Non-Guarantor Eliminating Inc.
Obligor) 9.25% Notes) Subsidiaries Subsidiaries Subsidiaries Entries Consolidated
-------------- ------------ ------------ ------------- ------------- ------------- --------------
<S> <C> <C> <C> <C> <C> <C> <C>
Statement of Operations
For the three months
ended June 30, 1999
Revenues:
Gaming................. $12,398 $ 0 $ 93,496 $33,721 $ 5,299 $ 0 $144,914
Racing................. 0 25,831 3,131 0 0 0 28,962
Food and beverage...... 1,537 0 9,507 641 345 0 12,030
Equity in
subsidiaries.......... 27,138 194 22,163 0 0 (49,495) 0
Other.................. 1,055 536 11,248 777 7 0 13,623
------- ------- -------- ------- ------- -------- --------
42,128 26,561 139,545 35,139 5,651 (49,495) 199,529
------- ------- -------- ------- ------- -------- --------
Expenses:
Gaming................. 6,550 0 50,278 20,898 1,395 0 79,121
Racing................. 0 8,694 1,329 0 0 0 10,023
Food and beverage...... 2,589 0 10,382 759 378 0 14,108
Administrative and
other................. 6,636 5,222 30,888 4,952 1,561 0 49,259
Depreciation and
amortization.......... 1,130 1,029 8,844 2,065 395 372 13,835
------- ------- -------- ------- ------- -------- --------
16,905 14,945 101,721 28,674 3,729 372 166,346
------- ------- -------- ------- ------- -------- --------
Operating income
(loss)................ 25,223 11,616 37,824 6,465 1,922 (49,867) 33,183
Interest expense....... 8,992 2,180 (84) 4,541 (67) 0 15,562
------- ------- -------- ------- ------- -------- --------
Income (loss) before
minority interests and
taxes................. 16,231 9,436 37,908 1,924 1,989 (49,867) 17,621
Minority interests..... 0 0 0 0 0 679 679
Income tax expense..... 6,485 0 0 0 746 0 7,231
------- ------- -------- ------- ------- -------- --------
Net income (loss)...... $ 9,746 $ 9,436 $ 37,908 $ 1,924 $ 1,243 $(50,546) $ 9,711
======= ======= ======== ======= ======= ======== ========
Statement of Operations
For the six months
ended June 30, 1999
Revenues:
Gaming................. $24,254 $ 0 $184,715 $66,119 $10,217 $ 0 $285,305
Racing................. 0 29,673 9,068 0 0 0 38,741
Food and beverage...... 2,763 0 16,964 1,289 685 0 21,701
Equity in
subsidiaries.......... 42,003 56 44,275 0 0 (86,334) 0
Other.................. 2,349 1,451 20,321 1,583 76 0 25,780
------- ------- -------- ------- ------- -------- --------
71,369 31,180 275,343 68,991 10,978 (86,334) 371,527
------- ------- -------- ------- ------- -------- --------
Expenses:
Gaming................. 13,050 0 99,697 40,957 2,795 0 156,499
Racing................. 0 11,586 3,792 0 0 0 15,378
Food and beverage...... 5,018 0 18,570 1,495 680 0 25,763
Administrative and
other................. 12,540 8,727 57,749 9,634 3,014 0 91,664
Depreciation and
amortization.......... 2,251 2,059 17,428 3,954 767 743 27,202
------- ------- -------- ------- ------- -------- --------
32,859 22,372 197,236 56,040 7,256 743 316,506
------- ------- -------- ------- ------- -------- --------
Operating income
(loss)................ 38,510 8,808 78,107 12,951 3,722 (87,077) 55,021
Interest expense....... 15,874 5,432 (315) 9,129 (67) 0 30,053
------- ------- -------- ------- ------- -------- --------
Income (loss) before
minority interests and
Taxes................. 22,636 3,376 78,422 3,822 3,789 (87,077) 24,968
Minority interests..... 0 0 0 0 0 1,137 1,137
Income tax expense..... 8,728 0 10 0 1,249 0 9,987
------- ------- -------- ------- ------- -------- --------
Net income (loss)...... $13,908 $ 3,376 $ 78,412 $ 3,822 $ 2,540 $(88,214) $ 13,844
======= ======= ======== ======= ======= ======== ========
</TABLE>
18
<PAGE>
<TABLE>
<CAPTION>
Hollywood
Park
Operating
Pinnacle Co. (a) (b) (c)
Entertainment, (Co-Obligor Non Wholly Consolidating Pinnacle
Inc. Guarantor 9.5% Notes/ Wholly Owned Wholly Owned Owned And Entertainment,
(Parent Guarantor Guarantor Non-Guarantor Non-Guarantor Eliminating Inc.
Obligor) 9.25% Notes) Subsidiaries Subsidiaries Subsidiaries Entries Consolidated
-------------- ------------ ------------ ------------- ------------- ------------- --------------
<S> <C> <C> <C> <C> <C> <C> <C>
Statement of Cash Flows
For the six months
ended June 30, 1999
Net cash provided by
(used in) operating
Activities............ $ 4,895 $25,217 $ 21,069 $15,798 $1,398 $ 0 $ 68,377
Net cash provided by
(used in) investing
Activities............ (10,429) (770) (14,739) (1,079) (229) 0 (27,246)
Net cash provided by
(used in) financing
Activities............ 70,009 (5,770) 3,545 (7,655) 0 0 60,129
</TABLE>
<TABLE>
<CAPTION>
(a) (b)
Consolidating Pinnacle
Pinnacle Wholly Owned Wholly Owned and Entertainment,
Entertainment, Guarantor Non-Guarantor Eliminating Inc.
Inc. Subsidiaries Subsidiaries Entries Consolidated
-------------- ------------ ------------- ------------- --------------
<S> <C> <C> <C> <C> <C>
Balance Sheet
As of December 31, 1999
Current assets.......... $220,216 $188,330 $ 28,928 $ 0 $ 437,474
Property, plant and
equipment, net......... 36,671 311,165 89,879 0 437,715
Other non-current
assets................. 28,369 40,788 44,599 56,463 170,219
Investment in
subsidiaries........... 340,840 86,215 0 (427,055) 0
Inter-company........... 239,469 173,002 31,493 (443,964) 0
-------- -------- -------- --------- ----------
$865,565 $799,500 $194,899 $(814,556) $1,045,408
======== ======== ======== ========= ==========
Current liabilities..... $ 75,933 $ 52,159 $ 16,916 $ 0 $ 145,008
Notes payable, long
term................... 502,421 3,393 112,884 0 618,698
Other non-current
liabilities............ (7,165) 83 20,114 (12,206) 826
Inter-company........... 13,500 406,437 24,031 (443,968) 0
Equity.................. 280,876 337,428 20,954 (358,382) 280,876
-------- -------- -------- --------- ----------
$865,565 $799,500 $194,899 $(814,556) $1,045,408
======== ======== ======== ========= ==========
</TABLE>
--------
(a) The following subsidiaries are treated as guarantors on both the 9.5%
Notes and 9.25% Notes for all periods presented: Turf Paradise, Inc.
(through June 13, 2000), Hollywood Park Food Services, Inc. (through
September 10, 1999), Hollywood Park Fall Operating Company (through
September 10, 1999) and, with respect to the 9.25% Notes, Hollywood Park
Operating Company (through September 10, 1999) (it was a co-obligor on the
9.5% Notes through September 10, 1999). The following subsidiaries were
treated as guarantors for periods beginning on June 30, 1997, when the
Boomtown Merger was consummated: Boomtown, Inc., Boomtown Hotel & Casino,
Inc., Bay View Yacht Club, Inc., Louisiana--I Gaming, Louisiana Gaming
Enterprises, Inc., and Boomtown Hoosier, Inc. The following subsidiaries
were treated as guarantors for periods beginning on October 15, 1998, when
the Casino Magic Merger was consummated: Casino Magic Corp., Mardi Gras
Casino Corp., Biloxi Casino Corp., Bay St. Louis Casino Corp., Casino
Magic Finance Corp., Casino Magic American Corp., and Casino One
Corporation. HP Casino, Inc., HP Yakama, Inc., and HP Consulting, Inc.,
were treated as guarantors beginning in 1997 when these subsidiaries began
operations. HP/Compton, Inc. was treated as a guarantor beginning in
October 1996 when this subsidiary began operations. Crystal Park Hotel and
Casino Development Company, LLC and Mississippi--I Gaming L.P. were
treated as wholly owned guarantors for periods beginning in January 1998
and October 1998, respectively, when the Company acquired the outstanding
minority interests therein and they became wholly owned subsidiaries.
19
<PAGE>
(b) The following wholly owned subsidiaries are not guarantors on either the
9.5% Notes or the 9.25% Notes and became subsidiaries of the Company on
October 15, 1998, when the Casino Magic Merger was consummated: Jefferson
Casino Corporation, Casino Magic of Louisiana, Corp., and Casino Magic
Management Services, Corp. In October 1999, Casino Magic Neuquen S.A. and
its subsidiary Casino Magic Support Services, became wholly owned
subsidiaries of the Company but remain non-guarantors of the 9.5% Notes
and 9.25% Notes.
(c) The following subsidiaries are not guarantors on either the 9.5% notes or
the 9.25% Notes and became subsidiaries (though non-wholly owned) of the
Company on October 15, 1998, when the Casino Magic Merger was consummated
and became wholly-owned subsidiaries in October 1999: Casino Magic Neuquen
S.A. and its subsidiary, Casino Magic Support Services S.A.
Note 12--Subsequent Events
On July 31, 2000, the Company's Miss Belterra riverboat casino was struck
by a barge on the Mississippi River near Caruthersville, Missouri en route to
its berthing site at the Belterra Casino Resort in Southern Indiana. There
were no serious injuries to the persons on the boat or barge. As a result of
the accident, there will be a delay in the scheduled August 21, 2000 opening
of Belterra Casino Resort.
As previously disclosed, under the Merger Agreement, it is a condition to
PHCR and Pinnacle Acq Corp's obligations to consummate the merger that all
material phases of the Belterra Casino Resort, other than the golf course and
performance theater, shall have been substantially completed and opened to the
public by not later than September 15, 2000 and that the costs associated with
the Belterra Casino Resort shall not exceed $207,000,000. As a result of the
accident, Belterra Casino Resort's opening will be delayed until after
September 15, 2000 and therefore, this condition to Pinnacle Acq Corp's
obligations under the Merger Agreement will not be satisfied. PHCR and
Pinnacle Acq Corp have notified the Company that they are reserving all rights
with respect to the conditions in the Merger Agreement, including the
condition in the Merger Agreement regarding the Belterra Casino Resort.
On August 11, 2000, the Miss Belterra arrived at a drydock in New Orleans,
Louisiana, and the damage to the boat is in the process of being assessed and
repair plans, both in terms of time and cost, are being developed. The Company
currently expects that the Belterra Casino Resort will open in the fourth
quarter of 2000. The Company has property damage, liability and business
interruption insurance applicable to the accident, subject to various
deductibles. The Company has not yet submitted any claims to its insurance
carriers and does not know the amount, if any, other than deductibles, that
will not be reimbursed by its insurance carriers. The Company intends to have
discussions with PHCR and Pinnacle Acq Corp regarding a possible waiver of, or
agreement to modify, the condition in the Merger Agreement regarding Belterra
Casino Resort when the extent of the damage and the length of delay have been
ascertained.
On August 8, 2000, the Company completed the casino sales to Penn National
and received $195,000,000 in cash (see Note 4).
20
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
Forward-Looking Statements and Risk Factors
Except for the historical information contained herein, the matters
addressed in this Quarterly Report on Form 10-Q may constitute "forward-
looking statements" within the meaning of Section 27A of the Securities Act of
1933, as amended, and Section 21E of the Securities and Exchange Act of 1934,
as amended. Such forward-looking statements are subject to a variety of risks
and uncertainties that could cause actual results to differ materially from
those anticipated by the Company's management. Factors that may cause actual
performance of the Company to differ materially from that contemplated by such
forward-looking statements include, among others: the failure to complete the
Proposed Merger with an affiliate of Harveys Casino Resorts (discussed below);
the failure to complete pending asset sale transactions (discussed below);
incur significant cost to complete or fail to complete (on time or otherwise)
or successfully operate planned expansion and development projects (including
the Belterra Casino Resort discussed below); the failure to obtain adequate
financing to meet strategic goals; the failure to obtain or retain gaming
licenses or regulatory approvals; increased competition by casino operators
who have more resources and have built or are building competitive casino
properties; severe weather conditions; the failure to meet the Company's debt
service obligations; and other adverse changes in the gaming markets in which
the Company operates (particularly in the southeastern United States). The
Private Securities Litigation Reform Act of 1995 (the "Act") provides certain
"safe harbor" provisions for forward-looking statements. All forward-looking
statements made in this Quarterly Report on Form 10-Q are made pursuant to the
Act. For more information on the potential factors which could affect the
Company's financial results, please review the Company's filings with the
Securities and Exchange Commission, including the Company's Annual Report on
Form 10-K for the year ended December 31, 1999.
Factors Affecting Future Operating Results
Proposed Merger. On March 8, 2000, the Company announced it had received a
proposal pursuant to which an affiliate of Harveys Casino Resorts ("Harveys")
would acquire all of the outstanding shares of common stock of Pinnacle
Entertainment. The Company's Board of Directors formed a special committee
(which committee excluded certain management board members) (the "Special
Committee") to evaluate and negotiate the proposal. Harveys is an affiliate of
Colony Capital, LLC, a private investment firm.
On April 17, 2000, the Company entered into a definitive agreement with PH
Casino Resorts ("PHCR"), a newly formed subsidiary of Harveys, and Pinnacle
Acquisition Corporation ("Pinnacle Acq Corp"), a newly formed subsidiary of
PHCR, pursuant to which PHCR would acquire by merger all of the outstanding
capital stock of Pinnacle Entertainment (the "PHCR Merger Agreement"). The
proposed merger received the unanimous approval of both the Special Committee
and the Board of Directors (with the management board members abstaining) of
the Company (the "Proposed Merger"). In the Proposed Merger, Pinnacle Acq Corp
would merge into Pinnacle Entertainment. In addition, in connection with the
Proposed Merger, Harveys (like the Company) would become a wholly owned
subsidiary of PHCR.
Upon closing of the Proposed Merger, PHCR will acquire all of the
outstanding stock of Pinnacle Entertainment for $24 per fully diluted share in
cash, plus up to an additional $1 per fully diluted share in cash, which
amount is contingent upon the sale of the Company's 97 acres of surplus land
in Inglewood, California for net after tax proceeds of at least $40,750,000 by
December 31, 2001 (see Note 4 to the Condensed Notes to Consolidated Financial
Statements).
In the event the 97 acres are sold prior to December 31, 2001 for after tax
proceeds of less than $40,750,000 but more than $13,054,000, the $1 per fully
diluted share will be reduced proportionately. In the event the 97 acres are
not sold by December 31, 2001, or have been sold, but at a price less than or
equal to $13,054,000, then Pinnacle Entertainment stockholders will not be
entitled to any additional payment. PHCR's obligation to
21
<PAGE>
pay the contingent portion of the merger consideration will be secured by an
irrevocable letter of credit in the maximum amount of the obligation. As
described in Note 4 to the Condensed Notes to Consolidated Financial
Statements, the Company has signed an agreement to sell the 97 acres at a
price which management believes will entitle shareholders to the additional $1
payment per share. There can be no assurance, however, that such sale of 97
acres will be completed.
Consummation of the merger is subject to, among other things, (a) senior
management rolling over $50,000,000 of Pinnacle Entertainment equity to PHCR
and maintaining an on-going role within PHCR; (b) regulatory approvals in the
various jurisdictions in which the Company and Harveys conduct gaming
operations; (c) approval by a majority of the Company's stockholders; (d)
completion of PHCR's financing for the transaction (for which customary bank
commitment and high yield "highly confident" letters have been received by
PHCR); and (e) satisfaction of other conditions precedent, including
completion of the Company's pending casino assets sales (which sales were
completed on August 8, 2000--see Note 4 to the Condensed Notes to Consolidated
Financial Statements) and the opening of the Belterra Casino Resort (currently
under construction--see Note 6 to the Condensed Notes to Consolidated
Financial Statements) substantially in accordance with its current budget not
later than September 15, 2000 (see Note 12 to the Condensed Notes to
Consolidated Financial Statements regarding the Miss Belterra accident and
related delay in opening, which will result in the condition not being
satisfied). The Proposed Merger is expected to close in the fourth quarter of
2000.
As of June 30, 2000, the Company has incurred costs and expenses of
$2,125,000 in connection with the Proposed Merger, including estimated
professional fees in connection with the Special Committee and Board of
Directors' evaluation of the Proposed Merger, estimated fees associated with
the preparation and filing of the preliminary proxy material with the
Securities and Exchange Commission (the "SEC"), estimated fees payable to
members of the Special Committee, as well as other transactional expenses.
Additional costs have been and will continue to be incurred after June 30,
2000 relating to the Proposed Merger. In the event the Proposed Merger is
terminated, under certain circumstances a termination fee of $25,000,000 may
be payable by the Company to Pinnacle Acq Corp, which circumstances are
defined in the PHCR Merger Agreement previously filed with the SEC.
On July 31, 2000, the Company's Miss Belterra riverboat casino was struck
by a barge on the Mississippi River near Caruthersville, Missouri en route to
its berthing site at the Belterra Casino Resort in Southern Indiana. There
were no serious injuries to the persons on the boat or barge. As a result of
the accident, there will be a delay in the scheduled August 21, 2000 opening
of Belterra Casino Resort.
As previously disclosed, under the Merger Agreement, it is a condition to
PHCR and Pinnacle Acq Corp's obligations to consummate the merger that all
material phases of the Belterra Casino Resort, other than the golf course and
performance theater, shall have been substantially completed and opened to the
public by not later than September 15, 2000 and that the costs associated with
the Belterra Casino Resort shall not exceed $207,000,000. As a result of the
accident, Belterra Casino Resort's opening will be delayed until after
September 15, 2000 and therefore, this condition to Pinnacle Acq Corp's
obligations under the Merger Agreement will not be satisfied. PHCR and
Pinnacle Acq Corp have notified the Company that they are reserving all rights
with respect to the conditions in the Merger Agreement, including the
condition in the Merger Agreement regarding the Belterra Casino Resort.
On August 11, 2000, the Miss Belterra arrived at a drydock in New Orleans,
Louisiana, and the damage to the boat is in the process of being assessed and
repair plans, both in terms of time and cost, are being developed. The Company
currently expects that the Belterra Casino Resort will open in the fourth
quarter of 2000. The Company has property damage, liability and business
interruption insurance applicable to the accident, subject to various
deductibles. The Company has not yet submitted any claims to its insurance
carriers and does not know the amount, if any, other than deductibles, that
will not be reimbursed by its insurance carriers. The Company intends to have
discussions with PHCR and Pinnacle Acq Corp regarding a possible waiver of, or
agreement to modify, the condition in the Merger Agreement regarding Belterra
Casino Resort when the extent of the damage and the length of delay have been
ascertained.
22
<PAGE>
Turf Paradise Sale. On June 13, 2000, the Company completed the sale of
Turf Paradise, including all 275 acres at the Phoenix, Arizona horse racing
facility, to a private investor for $53,000,000 in cash. The property, plant
and equipment and related accumulated depreciation were included as "Assets
held for sale" as of March 31, 2000 and December 31, 1999. The after tax gain
from this sale was approximately $21,262,000.
The condensed results of operations before taxes for Turf Paradise from
January 1, 2000 to June 13, 2000 (the date of sale) and for the three and six
months ended June 30, 1999 were:
<TABLE>
<CAPTION>
For the For the
two months & three months
13 days ended ended
June 13, 2000 June 30, 1999
------------- -------------
(in thousands--unaudited)
<S> <C> <C>
Revenues......................................... $3,722 $3,499
Expenses......................................... 2,978 2,920
------ ------
Operating income............................... 744 579
Interest income.................................. (22) 0
------ ------
Income before income taxes................... $ 766 $ 579
====== ======
</TABLE>
<TABLE>
<CAPTION>
For the For the
five months & six months
13 days ended ended
June 13, 2000 June 30, 1999
------------- -------------
(in thousands--unaudited)
<S> <C> <C>
Revenues......................................... $10,665 $10,285
Expenses......................................... 7,628 7,420
------- -------
Operating income............................... 3,037 2,865
Interest income.................................. (49) 0
------- -------
Income before income taxes................... $ 3,086 $ 2,865
======= =======
</TABLE>
Land Sale. On March 24, 2000, the Company announced it had completed the
sale of approximately 42 acres of surplus land in Inglewood, California to
Home Depot, Inc. for $24,200,000 in cash (see Note 3 to the Condensed Notes to
Consolidated Financial Statements). The 42 acres of surplus land was included
in "Assets held for sale" as of December 31, 1999. The after tax gain from
this sale was approximately $15,322,000.
Sales of Hollywood Park Race Track and Hollywood Park-Casino. On September
10, 1999, the Company completed the dispositions of the Hollywood Park Rack
Track and Hollywood Park-Casino to Churchill Downs for $117,000,000 cash and
$23,000,000 cash, respectively (see Note 3 to the Condensed Notes to
Consolidated Financial Statements). Churchill Downs acquired the race track,
240 acres of related real estate and the Hollywood Park-Casino. The Company
then entered into a 10-year leaseback of the Hollywood Park-Casino at an
annual lease rate of $3,000,000 per annum, with a 10-year renewal option. The
Company then subleased the facility to a third party operator for a lease
payment of $6,000,000 per year. The sublease is for a one-year period.
The disposition of the Hollywood Park Race Track and related real estate
was accounted for as a sale and resulted in a pre-tax gain of $61,522,000. The
disposition of the Hollywood Park-Casino was accounted for
23
<PAGE>
as a financing transaction and therefore not recognized as a sale for
accounting purposes as the Company subleased the Hollywood Park-Casino to a
third-party operator. During the third quarter of 1999, under the provisions
of SFAS No. 121, the Company determined that it would not be able to recover
the net book value of the Hollywood Park-Casino on an undiscounted cash flow
basis. The Company recorded an impairment write-down of the long-lived assets
comprising the Hollywood Park-Casino of $20,446,000 representing the
difference between its net book value of $43,400,000 and estimated fair value.
Fair value was determined based on an independent appraisal. Due to
competitive conditions in the California casino market, sublease rentals were
projected to decline over the ten-year lease term. Pursuant to accounting
guidelines, the Company recorded a long-term debt obligation of $23,000,000
for the Hollywood Park-Casino (see Note 9). The Hollywood Park-Casino building
will continue to be depreciated over its estimated useful life. The estimated
tax liability on the sales transactions to Churchill Downs is approximately
$22,000,000 and will be paid in 2000.
Due to the disposition of the Hollywood Park Race Track and Hollywood Park-
Casino in September 1999, there are no results of operations for the six
months ended June 30, 2000 for these facilities (as discussed above, effective
with the disposition of the Hollywood Park-Casino, the Company receives only
lease income from the operator of the facility).
The condensed results of operations before taxes for the Hollywood Park
Race Track and Hollywood Park-Casino for the three and six months ended June
30, 1999 were:
<TABLE>
<CAPTION>
For the For the
three months six months
ended ended
June 30, 1999 June 30, 1999
------------- -------------
(in thousands--unaudited)
<S> <C> <C>
Revenues......................................... $43,737 $63,227
Expenses......................................... 30,461 51,626
------- -------
Operating income............................... 13,276 11,601
Interest expense(a).............................. 0 0
------- -------
Income before income taxes................... $13,276 $11,601
======= =======
</TABLE>
--------
(a) No interest expense was specifically identified for these operations.
24
<PAGE>
Pending Casino, Race Track and Land Sales. Assets held for sale at June 30,
2000 and December 31, 1999 consisted of the following, and excluded the
related goodwill and deferred income taxes associated with such assets:
<TABLE>
<CAPTION>
At June 30, 2000
----------------------------
Net Property
Plant &
Equipment Other Total
------------ ------ --------
(in thousands--unaudited)
<S> <C> <C> <C>
Casino Magic Bay St. Louis & Boomtown Biloxi
Casinos...................................... $114,656 $6,591 $121,247
Other (primarily 1 parcel of undeveloped land
in California)............................... 17,662 0 17,662
-------- ------ --------
$132,318 $6,591 $138,909
======== ====== ========
</TABLE>
<TABLE>
<CAPTION>
At December 31, 1999
-----------------------------
Net Property
Plant &
Equipment Other Total
------------ ------- --------
(in thousands)
<S> <C> <C> <C>
Casino Magic Bay St. Louis & Boomtown Biloxi
Casinos..................................... $115,731 $ 5,876 $121,607
Turf Paradise Race Track..................... 10,873 4,359 15,232
Other (primarily 2 parcels of undeveloped
land in California)......................... 17,810 0 17,810
-------- ------- --------
$144,414 $10,235 $154,649
======== ======= ========
</TABLE>
Sales transactions for these assets were pending or the properties were
actively being marketed as of June 30, 2000 and December 31, 1999. As
discussed below, on August 8, 2000, the Company completed the casino sales.
Until the sales transactions were completed, the Company operated the casinos
held for sale. In addition, certain liabilities were assumed by the buyers of
these assets. Such liabilities, consisting primarily of accrued liabilities
and accounts payable, have been classified as "Liabilities to be assumed by
buyers of assets held for sale" on the accompanying Consolidated Balance
Sheets. Goodwill net of amortization at June 30, 2000 and December 31, 1999
includes approximately $13,157,000 and $13,331,000, respectively, related to
the pending casino sales.
Casinos in Mississippi. On December 10, 1999, the Company announced it had
entered into definitive agreements with subsidiaries of Penn National Gaming,
Inc. ("Penn National") to sell its Casino Magic Bay St. Louis, Mississippi,
and Boomtown Biloxi, Mississippi, casino operations for $195,000,000 in cash.
Subsidiaries of Penn National agreed to purchase all of the operating assets
and certain liabilities and related operations of the Casino Magic Bay St.
Louis and Boomtown Biloxi properties, including the 590 acres of land at
Casino Magic Bay St. Louis and the leasehold rights at Boomtown Biloxi.
On August 8, 2000, the Company completed the casino sales to Penn National
and received $195,000,000 in cash.
Race Track in Arizona. On June 13, 2000, the Company completed the sale of
Turf Paradise--see Note 3 to the Condensed Notes to Consolidated Financial
Statements.
Other. On April 18, 2000, the Company announced it had entered into an
agreement with Casden Properties Inc. for the sale of the remaining 97 acres
of surplus land in Inglewood, California for $63,050,000 in cash. The sale of
the 97 acres is subject to a number of conditions, including the receipt by
Casden Properties Inc. of certain entitlements to develop the property. On
July 31, 2000, the Company announced Casden
25
<PAGE>
Properties had completed its due diligence phase of the transaction and is
moving forward with entitlements necessary to complete the transaction. The
sale is expected to take six to nine months to close and is expected to
generate after tax net cash proceeds in excess of $41,000,000. No assurances
can be given that the sale of the Inglewood land will be completed on such
terms, or at all.
The Company owns other land parcels in Missouri, which it is actively
seeking to sell.
Condensed results of operations before taxes for the Casino Magic Bay St.
Louis and Boomtown Biloxi casinos for the three and six months ended June 30,
2000 and 1999 are as follows:
<TABLE>
<CAPTION>
For the three
months ended
June 30,
---------------
2000 1999
------- -------
(in thousands--
unaudited)
<S> <C> <C>
Revenues.................................................... $39,311 $39,613
Expenses.................................................... 32,015 33,130
------- -------
Operating income.......................................... 7,296 6,483
Interest expense (income), net.............................. 37 (13)
------- -------
Income before income taxes................................ $ 7,259 $ 6,496
======= =======
</TABLE>
<TABLE>
<CAPTION>
For the six
months ended
June 30,
---------------
2000 1999
------- -------
(in thousands--
unaudited)
<S> <C> <C>
Revenues(a)................................................. $80,806 $80,375
Expenses.................................................... 66,087 66,400
------- -------
Operating income.......................................... 14,719 13,975
Interest expense, net....................................... 82 62
------- -------
Income before income taxes................................ $14,637 $13,913
======= =======
</TABLE>
--------
(a) Revenues for the six months ended June 30, 2000 include proceeds from the
settlement of a 1998 business interruption claim of approximately
$1,204,000, which amount was recorded in the three months ended March 31,
2000.
Expansion & Development. Belterra Casino Resort. In July 1999, the Company
broke ground on the Belterra Casino Resort. The project is located in
Switzerland County, Indiana, which is approximately 35 miles southwest of
Cincinnati, Ohio and will be the gaming site most readily accessible to major
portions of northern and central Kentucky, including the city of Lexington.
The Company plans to spend approximately $200,000,000 ($127,000,000 of
which has been spent as of June 30, 2000) in total costs (including land, pre-
opening expenses, organizational expenses and community grants) on the
Belterra Casino Resort, which will feature a 15-story, 308-room hotel, a
cruising riverboat casino (the Miss Belterra) with approximately 1,800 gaming
positions, an 18-hole championship golf course, a 1,500 seat entertainment
facility, four restaurants, retail areas and other amenities.
See discussion above and Note 12 to the Condensed Notes to Consolidated
Financial Statements regarding the July 31, 2000 Miss Belterra riverboat
accident and related impact on the project and to the PHCR Merger Agreement. A
condition to the PHCR Merger Agreement, relating to the opening of the
Belterra Casino Resort, will not be satisfied.
26
<PAGE>
Lake Charles. In November 1999, the Company filed an application for the
fifteenth and final gaming license to be issued by the Louisiana Gaming
Control Board. In July 2000, the Company was one of three groups who presented
their proposed projects to the Louisiana Gaming Control Board. The Company's
application is seeking the approval to operate a cruising riverboat casino,
hotel and golf course resort complex in Lake Charles, Louisiana. The Louisiana
Gaming Control Board has not awarded such license and there are no assurances
such license will be issued to the Company or any other applicant. At the July
2000 meeting, the Louisiana Gaming Control Board indicated that another
meeting to address the applications for the license will be held at such time
as the Louisiana State Police have completed their suitability investigations
of the applicants; however, the Louisiana Gaming Control Board did not
indicate when the next meeting would be convened.
In connection with the application, Pinnacle Entertainment entered into an
option agreement with the Lake Charles Harbor and Terminal District (the
"District") to lease 225 acres of unimproved land from the District upon which
such resort complex would be constructed. The initial lease option was for a
six-month period ending January 2000, with three six-month renewal options
(the first two of which the Company has exercised), at a cost of $62,500 per
six-month option. If the lease option is exercised, the annual rental payment
would be $815,000, with a maximum annual increase of 5%. The term of the lease
would be for a total of up to 70 years, with an initial term of 10 years and
six consecutive renewal options of 10 years each. The lease would require the
Company to develop certain on- and off-site improvements at the location. If
awarded the license by the Louisiana Gaming Control Board, the Company
anticipates building a resort similar in design and scope to the Belterra
Casino Resort currently under construction in Indiana.
California Card Clubs. By California state law, a corporation may operate a
gambling enterprise in California only if every officer, director and
shareholder holds a state gambling license. Only 5% or greater shareholders of
a publicly traded racing association, however, must hold a state gambling
license. As a practical matter, therefore, public corporations that are not
qualified racing associations may not operate gambling enterprises in
California. As a result, the Hollywood Park-Casino, since September 10, 1999
(see Note 3 to the Condensed Notes to Consolidated Financial Statements), and
the Crystal Park Hotel and Casino, are leased to, and operated by, an
unrelated third party.
By law, a California card club may neither bank card games nor offer
certain of the casino games permitted in Nevada and other traditional gambling
jurisdictions, and thus does not participate in the wagers made or in the
outcome of any of the games played.
Results of Operations
On June 13, 2000, the Company completed the sale of Turf Paradise and on
September 10, 1999, the Company completed the dispositions of the Hollywood
Park Race Track and Hollywood Park-Casino (see Note 3 to the Condensed Notes
to Consolidate Financial Statements). The results of operations of Turf
Paradise, Hollywood Park Race Track and Hollywood Park-Casino are included in
the results of operations only until such dates. Future revenue and operating
results will be materially reduced due to the sale of these assets, as well as
by the future sale of assets, which are classified as held for sale at June
30, 2000 and December 31, 1999 on the Consolidated Balance Sheets (see Note 4
to the Condensed Notes to Consolidated Financial Statements).
Three months ended June 30, 2000 compared to the three months ended June 30,
1999
Total revenues for the three months ended June 30, 2000 decreased by
$39,505,000, or 19.8%, as compared to the three months ended June 30, 1999.
Contribution to revenues in the three months ended June 30, 2000 from Turf
Paradise was $3,722,000 and from the Hollywood Park Race Track and Hollywood
Park-Casino was $1,500,000 (all from the sublease arrangement for the
Hollywood Park-Casino--see Note 3 to the Condensed Notes to Consolidated
Financial Statements) compared to contribution to revenue of $3,499,000 from
Turf Paradise in the three months ended June 30, 1999 and $43,737,000 from the
Hollywood Park Race Track and Hollywood Park-Casino in the three months ended
June 30, 1999. When excluding such revenues
27
<PAGE>
for both periods, total revenues in the three months ended June 30, 2000
increased by $2,509,000, or 1.6%, when compared to June 30, 1999.
Gaming revenues decreased by $12,472,000, or 8.6%, including $12,398,000
due to the timing of the disposition of the Hollywood Park-Casino in September
1999. When excluding the Hollywood Park-Casino from the three-month results
ended June 30, 1999, gaming revenues decreased by $74,000, or less than 1.0%.
Gaming revenues increased at Boomtown Reno by $1,950,000 and at Casino Magic
Bossier City by $1,836,000, while gaming revenues declined at Boomtown New
Orleans by $2,313,000 and at Casino Magic Biloxi by $1,322,000. Boomtown
Reno's record second quarter gaming revenue was due primarily to a 16%
increase in slot coin-in (volume of slot play), a 7% increase in table game
drop (volume of table game play) and higher table game win percentage. The
higher volume of casino activity in Reno was the result of increased marketing
programs of the 200 room hotel addition and convention area completed in early
1999 and significantly improved occupancy at such expanded hotel facility. The
Casino Magic Bossier City gaming revenue improvement was due primarily to
upgrading the slot machine product mix, new marketing programs and management
changes that have occurred since the second quarter of 1999. The decline in
gaming revenues at the New Orleans and Biloxi locations reflect the adverse
impact of new competition in 1999 in each market. Racing revenues declined by
$25,653,000, or 88.6%, entirely due to the disposition of the Hollywood Park
Race Track in September 1999. Food and beverage revenues decreased by
$3,045,000, or 25.3%, including $3,851,000 due to the dispositions of the
Hollywood Park Race Track and Hollywood Park-Casino in September 1999. When
excluding the results of these two locations from the 1999 results, food and
beverage revenue increased $806,000, or 9.9%. A majority of the increase is
attributed to Boomtown Reno (increase of $508,000), which resulted primarily
from the increased occupancy of the hotel, which rose from 61% in the second
quarter of 1999 to 86% in the same period in 2000. Hotel and recreational
vehicle park revenues increased by $500,000, or 16.5%, due primarily to
increases in hotel occupancy at Casino Magic Biloxi, which is consistent with
the overall marketing strategy to compete in the Biloxi, Mississippi market.
Truck stop and service station revenue increased by $761,000, or 16.7%,
primarily due to continued increased fuel prices at Boomtown Reno. Other
income increased by $404,000, or 6.7%, which was primarily due to an increase
in the percentage of net revenues (as defined in the agreement) received,
pursuant to the Company's loan agreement, with the Yakama Indian Nation.
Total expenses for the three months ended June 30, 2000 decreased by
$61,090,000, or 36.7%, as compared to the three months ended June 30, 1999.
Included in the results of operations for the three months ended June 30,
2000, is a gain on the sale of Turf Paradise (see Note 3 to the Condensed
Notes to Consolidated Financial Statements) of $35,923,000. Included in the
results of operations for the three months ended June 30, 1999, are expenses
of $28,316,000 related to the Hollywood Park Race Track and Hollywood Park-
Casino. Excluding the Turf Paradise gain from the year 2000 results of
operations and the race track and casino expenses from the 1999 results of
operations, total expenses for the three months ended June 30, 2000 increased
by $3,149,000, or 2.3%, as compared to the three months ended June 30, 1999.
Gaming expenses decreased by $3,911,000, or 4.9%, including $6,550,000 due
to the timing of the disposition of the Hollywood Park-Casino in September
1999. When excluding the gaming expense attributed to the Hollywood Park-
Casino, gaming expenses increased $2,639,000, or 3.6%. Gaming expenses
increased at Boomtown Reno by $495,000 and at Casino Magic Bossier City by
$2,287,000, consistent with increased gaming revenues. Racing expenses
decreased by $8,548,000, or 85.3%, entirely due to the disposition of the
Hollywood Park Race Track in September 1999. Food and beverage expenses
decreased by $4,265,000, or 30.2%, including $4,717,000 due to the timing of
the dispositions of the Hollywood Park Race Track and Hollywood Park-Casino in
September 1999. Such expenses increased $225,000 at Boomtown Reno, consistent
with the overall increase in food and beverage revenue at such property, and
by $411,000 at Casino Magic Biloxi, consistent with the overall costs to
compete in the Biloxi, Mississippi market. Hotel and recreational vehicle park
expenses increased by $38,000, or 2.5%, primarily due to an increase at Casino
Magic Bay St. Louis, attributable to higher marketing costs resulting from
increased competition in the market. Truck stop and service station expenses
increased by $797,000, or 19.2%, primarily due to increased fuel costs at
Boomtown Reno. General and administrative expenses decreased by $10,720,000,
or 28.2%, including a reduction in expenses of $7,809,000 due to the
dispositions of the Hollywood Park Race Track and
28
<PAGE>
Hollywood Park-Casino in September 1999, and $1,856,000 with respect to
Pinnacle Entertainment corporate costs due to certain one-time costs incurred
in the second quarter of 1999. Depreciation and amortization decreased by
$2,171,000, or 15.7%, primarily due to the disposition of the Hollywood Park
Race Track assets in September 1999. Pre-opening costs for the Belterra Casino
Resort increased $2,911,000, or 363.0%, which is consistent with the overall
development of the project under construction (see Note 12 to the Condensed
Notes to Consolidated Financial Statements regarding the delayed opening of
the Belterra Casino Resort). The gain on disposition of assets of $35,587,000
is primarily due to the sale of Turf Paradise in June 2000 (see Note 3 to the
Condensed Notes to Consolidated Financial Statements). Proposed merger costs
of $1,500,000 relate to the Proposed Merger with PHCR--see Note 2 to the
Condensed Notes to Consolidated Financial Statements. Other expenses decreased
by $1,134,000, or 23.5%, including a reduction in other expenses of $546,000
due to the dispositions of the Hollywood Park Race Track and Hollywood Park-
Casino in September 1999. Net interest expense decreased by $4,483,000, or
28.8%, primarily due to the interest income of $3,013,000 generated from
invested funds in the second quarter of 2000 compared to $1,545,000 in the
same period of 1999, and capitalized interest of $2,166,000 compared with
$135,000 in 1999. Income tax expense increased to $17,457,000, or $10,226,000,
from $7,231,000, including $14,661,000 associated with the Turf Paradise sale
in June 2000 (see Note 3 to the Condensed Notes to Consolidated Financial
Statements).
Six months ended June 30, 2000 compared to the six months ended June 30, 1999
Total revenues for the six months ended June 30, 2000 decreased by
$48,906,000, or 13.2%, as compared to the six months ended June 30, 1999.
Contribution to revenues in the six months ended June 30, 2000 from Turf
Paradise was $10,665,000 and from the Hollywood Park Race Track and Hollywood
Park-Casino was $3,000,000 (all from the sublease arrangement for the
Hollywood Park-Casino--see Note 3 to the Condensed Notes to Consolidated
Financial Statements) compared to contribution to revenue of $10,285,000 from
Turf Paradise in the six months ended June 30, 1999 and $63,227,000 from the
Hollywood Park Race Track and Hollywood Park-Casino in the six months ended
June 30, 1999. When excluding such revenues for both periods, total revenues
in the six months ended June 30, 2000 increased by $10,941,000, or 3.7%, when
compared to June 30, 1999.
Gaming revenues decreased by $19,710,000, or 6.9%, including $24,254,000
due to the timing of the disposition of the Hollywood Park-Casino in September
1999. When excluding the Hollywood Park-Casino from the six-month results
ended June 30, 1999, gaming revenues increased by $4,544,000, or 1.7%. Gaming
revenues increased at Boomtown Reno by $4,531,000 and at Casino Magic Bossier
City by $6,763,000, while gaming revenues declined at Boomtown New Orleans by
$3,017,000 and at Casino Magic Biloxi by $3,129,000. Boomtown Reno's record
gaming revenue was due primarily to a 19% increase in slot coin-in (volume of
slot play), a 13% increase in table game drop (volume of table game play) and
higher table game win percentage. The higher volume of casino activity in Reno
was the result of: a) completion of a 200 room hotel addition and convention
area in the first quarter of last year; b) significantly improved occupancy at
such expanded hotel facility; c) good weather with minimal snowfall in the
first quarter of this year, making the property more accessible; d) strong
marketing programs; and, e) changes since last year in the management team.
The Casino Magic Bossier City gaming revenue improvement was due primarily to
upgrading the slot machine product mix, new marketing programs and management
changes that have occurred since the first quarter of 1999. The decline in
gaming revenues at the New Orleans and Biloxi locations reflect the adverse
impact of new competition in 1999 in each market. Racing revenues declined by
$29,289,000, or 75.6%, entirely due to the disposition of the Hollywood Park
Race Track in September 1999. Food and beverage revenues decreased by
$4,465,000, or 20.6%, including $5,785,000 due to the dispositions of the
Hollywood Park Race Track and Hollywood Park-Casino in September 1999. When
excluding the results of these two locations from the 1999 results, food and
beverage revenue increased $1,320,000, or 8.3%. A majority of the increase is
attributed to Boomtown Reno (increase of $1,198,000) consistent with the
overall improvement in the property. Hotel and recreational vehicle park
revenues increased by $646,000, or 11.3%, due primarily to an increase in
hotel occupancy at Casino Magic Biloxi, which is consistent with the overall
marketing strategy to compete in the Biloxi, Mississippi market. Truck stop
and service station revenue increased by $1,849,000, or 24.5%, primarily due
to increased fuel prices at
29
<PAGE>
Boomtown Reno. Other income increased by $2,063,000, or 16.4%, which amount
includes $800,000 received by Casino Magic Biloxi and $1,204,000 received by
Casino Magic Bay St. Louis in the first quarter of 2000 for the settlement of
a 1998 hurricane business interruption insurance claim.
Total expenses for the six months ended June 30, 2000 decreased by
$95,684,000, or 30.2%, as compared to the six months ended June 30, 1999.
Included in the results of operations for the six months ended June 30, 2000,
are gains on the sale of land and Turf Paradise (see Note 3 to the Condensed
Notes to Consolidated Financial Statements) of $59,777,000. Included in the
results of operations for the six months ended June 30, 1999, are expenses of
$47,339,000 related to the Hollywood Park Race Track and Hollywood Park-
Casino. Excluding the land and Turf Paradise gains from the year 2000 results
of operations and the race track and casino expenses from the 1999 results of
operations, total expenses for the six months ended June 30, 2000 increased by
$11,432,000, or 4.2%, as compared to the six months ended June 30, 1999.
Gaming expenses decreased by $7,044,000, or 4.5%, including $13,050,000 due
to the timing of the disposition of the Hollywood Park-Casino in September
1999. Gaming expenses increased $4,833,000 at Casino Magic Bossier City,
consistent with increased gaming revenues. Racing expenses decreased by
$11,245,000, or 73.1%, including $11,586,000 due to the disposition of the
Hollywood Park Race Track in September 1999. Food and beverage expenses
decreased by $6,743,000, or 26.2%, including $7,932,000 due to the timing of
the dispositions of the Hollywood Park Race Track and Hollywood Park-Casino in
September 1999. Such expenses increased $673,000 at Casino Magic Biloxi,
consistent with the overall costs to compete in the Biloxi, Mississippi
market. Hotel and recreational vehicle park expenses increased by $238,000, or
8.3%, primarily due to an increase at Casino Magic Biloxi, attributable to
higher marketing costs resulting from increased competition in the market.
Truck stop and service station expenses increased by $1,803,000, or 26.1%,
primarily due to increased fuel costs at Boomtown Reno. General and
administrative expenses decreased by $15,153,000, or 20.7%, including a
reduction in expenses of $13,621,000 due to the dispositions of the Hollywood
Park Race Track and Hollywood Park-Casino in September 1999. Depreciation and
amortization decreased by $2,947,000, or 10.8%, primarily due to the
disposition of the Hollywood Park Race Track assets in September 1999. Pre-
opening costs for the Belterra Casino Resort increased $3,947,000, which is
consistent with the overall development of the project under construction (see
Note 12 to the Condensed Notes to Consolidated Financial Statements regarding
the delayed opening of the Belterra Casino Resort). The gain on disposition of
assets of $59,441,000 is primarily due to the sale of 42 acres of surplus land
in March 2000 and the sale of Turf Paradise in June 2000 (see Note 3 to the
Condensed Notes to Consolidated Financial Statements). Proposed merger costs
of $2,125,000 relate to the Proposed Merger with PHCR--see Note 2 to the
Condensed Notes to Consolidated Financial Statements. Other expenses decreased
by $1,224,000, or 16.8%, including a reduction in other expenses of $1,150,000
due to the dispositions of the Hollywood Park Race Track and Hollywood Park-
Casino in September 1999. Net interest expense decreased by $6,094,000, or
20.3%, primarily due to the interest income of $6,234,000 generated from
invested funds in the six months ended June 30, 2000 compared with $2,443,000
of interest income in the same period in 1999 and capitalized interest of
$2,943,000 in the six months ended June 30, 2000, compared with $846,000 in
the same period in 1999. Income tax expense increased to $29,696,000, or
$19,709,000, from $9,987,000, which increase includes $23,193,000 associated
with the Home Depot land sale in March 2000 and Turf Paradise sale in June
2000 (see Note 3 to the Condensed Notes to Consolidated Financial Statements).
Liquidity, Capital Resources and Other Factors Influencing Future Results
At June 30, 2000, the Company had cash and cash equivalents, all of which
had original maturities within ninety days, of $217,201,000 compared to
$123,362,000 at December 31, 1999. At December 31, 1999, the Company had
$123,428,000 of short-term investments and had no such investments at June 30,
2000 (see Note 7 to the Condensed Notes to Consolidated Financial Statements).
Operating activities provided net cash of $4,857,000 in the six months
ended June 30, 2000 compared with cash provided by operating activities of
$68,377,000 in the first six months of 1999. This year-over-year change is
largely due to the reduction of operating cash flow for the non-recurring gain
on the sale of the
30
<PAGE>
land in March 2000 and Turf Paradise in June 2000 (see Note 3 to the Condensed
Notes to Consolidated Financial Statements) and other liabilities, as compared
to the increase in cash flow from the increase in accrued liabilities in the
six month ended June 30, 1999 (which includes the Hollywood Park Race Track
racing liabilities in 1999 that do not exist as of June 30, 2000).
Net cash provided by investing activities of $91,747,000 in the six months
ended June 30, 2000 include proceeds of $123,428,000 from the maturity of
short term investments and the receipt of $76,528,000 from the sale of
property, plant and equipment (such receipts were generated primarily from the
sale of land in March 2000 and Turf Paradise in June 2000--see Note 3 to the
Condensed Notes to Consolidated Financial Statements), offset by the use of
cash of $108,776,000 for the additions of property, plant and equipment (the
primary additions attributed to the Belterra Casino Resort--see Note 6 to the
Condensed Notes to Consolidated Financial Statements). During the six months
ended June 30, 1999, net cash used in investing activities of $27,246,000 was
primarily for the addition to property, plant and equipment of $19,705,000 and
the purchase of short-term investments of $12,964,000.
The net cash used in financing activities in the six months ended June 30,
2000 of $2,765,000 reflects payments on notes payable of $3,650,000, partially
offset by proceeds from the exercise of common stock options of the Company.
During the six months ended June 30, 1999, net cash provided by financing
activities of $60,129,000 is primarily attributed to the net cash proceeds
from the issuance of the 9.25% Notes, offset by the pay down of the Bank
Credit Facility. Since February 1999, the Company has not borrowed any amounts
under its bank credit facility and in May 1999 the maximum amount of such bank
credit facility was reduced from $300,000,000 (with an option to increase to
$375,000,000) to $200,000,000 (with an option to increase to $300,000,000)
(see Note 9 to the Condensed Notes to Consolidated Financial Statements).
At June 30, 2000, the Company had signed definitive sales agreements to
sell Casino Magic Bay St. Louis and Boomtown Biloxi for $195,000,000 cash,
which transactions closed on August 8, 2000. In addition, in April 2000, the
Company signed an agreement to sell the remaining 97 acres of surplus land in
Inglewood, California, and is actively seeking buyers to purchase certain
unused land in Missouri. See Note 4 to the Condensed Notes to Consolidated
Financial Statements for more information on these transactions. The sales of
these assets are expected to generate gains; however, there is no assurance
the remaining land sales will be consummated in 2000 or 2001.
The Company believes that its available cash, cash equivalents, short-term
investments, cash to be generated by assets held for sale and cash flow from
operations will be sufficient to finance operations and capital requirements
for the foreseeable future, and in any event for at least the next twelve
months. Although the Company has substantial cash resources, unused bank
credit facilities and received $195,000,000 on August 8, 2000 for the sale of
two casinos, it has committed to utilize approximately $73,000,000 to complete
the Belterra project primarily in the third and fourth quarters of 2000 and
pay approximately $120,212,000 on August 15, 2000 for the redemption of the
Casino Magic 13% Notes. Moreover, in light of the accident involving the Miss
Belterra riverboat, additional funds may be needed for additional pre-opening
expenses which may not be reimbursed by insurance. In addition, the Company
may use a portion of these cash resources to i) reduce its outstanding debt
obligations prior to their scheduled maturities, ii) make significant capital
improvements to existing properties, and/or iii) develop or acquire other
casino properties or companies, including the proposed Lake Charles, Louisiana
project. To the extent cash is used for these cash purposes, the Company's
cash reserves will also be diminished and the Company may require additional
capital to finance any such activities. Additional capital may be generated
through internally generated cash flow, future borrowings (including amounts
available under the bank credit facility) and/or lease transactions. There can
be no assurance, however, that such capital will be available on terms
acceptable to the Company.
Should the Proposed Merger (see Note 2 to the Condensed Notes to
Consolidated Financial Statements and "Factors Affecting Future Operating
Results" above) be consummated, new shareholders, Board of Directors and
management will operate the business and there will be a new capital
structure. Accordingly, the Liquidity and Capital Resources will likely
change. However, the Company believes that, regardless of
31
<PAGE>
whether the Proposed Merger and the transactions in connection therewith are
consummated, the Company will have sufficient capital through internally
generated cash flow, access to unused or new bank credit facilities and/or
other capital sources to finance operations and capital requirements for the
foreseeable future, and in any event for at least the next twelve months.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
At June 30, 2000, the Company did not hold any investments in market risk
sensitive instruments of the type described in Item 305 of Regulation S-K.
PART II
OTHER INFORMATION
Item 1. Litigation
Purported Class Action Lawsuits. On March 14, 2000, Harbor Finance Partners
filed a purported class action lawsuit in the Chancery Court of the State of
Delaware against the Company and each of its directors, claiming that the
defendants breached their fiduciary duty to the stockholders of the Company by
agreeing to negotiate exclusively with Harveys Casino Resorts, a majority
owned company of Colony Capital, LLC (see Note 2). On June 2, 2000, the action
was dismissed without prejudice.
On March 21, 2000, a similar purported class action lawsuit was filed by
Leta Hilliard in the Superior Court of the State of California. The lawsuit
claims that the Company and its directors failed to undertake an appropriate
process for evaluating the Company's worth and eliciting bids from third
parties, and that the price for the stock is inadequate. The Company intends
to vigorously defend this action and believes that the plaintiff's claims are
without merit. The parties in the Hilliard lawsuit have filed a stipulation in
which the plaintiff agreed to file and serve a First Amended Complaint on
September 15, 2000 and the defendants agreed to respond thereto within sixty
days of such filing.
Casino Magic Bay St. Louis Wrongful Death Litigation. On February 18, 2000,
three Casino Magic Bay St. Louis patrons, after leaving the casino property,
were involved in a vehicular accident which resulted in the death of two of
the individuals and injury to the third. On April 13, 2000, a lawsuit was
filed on behalf of the injured individual and one of the deceased individuals
against Casino Magic Bay St. Louis seeking compensatory damages in the amount
of $2,000,000 and punitive damages in the amount of $10,000,000. The suit
alleges, among other things, that Casino Magic Bay St. Louis employees
negligently served alcoholic beverages to the three individuals and the acts
and omissions of the Casino Magic Bay St. Louis employees were the proximate
cause of the accident. While the Company cannot predict the outcome of this
action, it believes that the plaintiffs' claims are without merit and intends
to vigorously defend this action.
Item 4. Submission of Matters to a Vote of Security Holders
None
Item 5. Other Information
Effective June 12, 2000, Paul R. Alanis, President and Chief Operating
Officer of the Company, was appointed to the additional position of Chief
Executive Officer. Mr. Alanis replaced R.D. Hubbard, who served as CEO of the
Company since 1991. Mr. Hubbard will remain as Chairman of the Board and
Chairman of the Executive Committee of the Board of Directors of the Company.
32
<PAGE>
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits:
<TABLE>
<CAPTION>
Exhibit
Number Description of Exhibit
------- ----------------------
<C> <S>
2.1 Agreement and Plan of Merger, dated as of April 17, 2000, among
Pinnacle Entertainment, Inc., PH Casino Resorts, Inc., and Pinnacle
Acquisition Corp., is hereby incorporated by reference to
Exhibit 2.1 to the Company's Current Report on Form 8-K filed May 1,
2000.
11* Statement re Computation of Per Share Earnings
27* Financial Data Schedule
</TABLE>
--------
* Filed herewith
(b) Reports on Form 8-K:
A Current Report on Form 8-K was filed on April 18, 2000, to report the
issuance of a press release on April 17, 2000, in which the Company announced
it had entered into a definitive agreement with PHCR, a newly formed
subsidiary of Harveys, pursuant to which PHCR would acquire by merger all of
the outstanding capital stock of the Company.
A Current Report on Form 8-K was filed on May 1, 2000, to report that, on
April 17, 2000, the Company, PHCR, and Pinnacle Acq Corp, a wholly owned
subsidiary of PHCR, entered into the Agreement and Plan of Merger (the "Merger
Agreement") pursuant to which Pinnacle Acq Corp would merge with and into the
Company and each share of the Company's common stock would be converted into
the right to receive cash, as more fully described in the Merger Agreement.
A Current Report on Form 8-K was filed on June 22, 2000 to report the
issuance of a press release on June 13, 2000, in which the Company announced
it had completed the sale of its Turf Paradise horse racing facility for $53
million in cash.
A Current Report on Form 8-K was filed on August 8, 2000 to report an
accident involving the Company's Miss Belterra riverboat casino and the
effects thereof under the Merger Agreement.
33
<PAGE>
PINNACLE ENTERTAINMENT, INC.
SELECTED FINANCIAL DATA BY PROPERTY
<TABLE>
<CAPTION>
For the three For the six
months ended June months ended June
30, 30,
------------------ ------------------
2000 1999 2000 1999
-------- -------- -------- --------
(in thousands, except per share
data--unaudited)
<S> <C> <C> <C> <C>
Revenues:
Boomtown Reno......................... $ 24,984 $ 21,356 $ 43,620 $ 35,498
Boomtown New Orleans.................. 24,967 27,167 49,962 52,888
Boomtown Biloxi....................... 16,456 16,894 33,960 34,693
Casino Magic Bay St. Louis............ 22,855 22,719 46,846 45,682
Casino Magic Biloxi................... 22,525 23,067 46,419 47,698
Casino Magic Bossier City............. 36,768 35,139 75,598 68,991
Casino Magic Argentina................ 5,368 5,651 11,054 10,978
Hollywood Park Race Track............. 0 28,747 0 34,212
Turf Paradise, Inc. .................. 3,722 3,499 10,665 10,285
Hollywood Park-Casino................. 1,500 14,990 3,000 29,015
Other................................. 879 300 1,497 889
Pinnacle Entertainment, Inc.--
Corporate............................ 0 0 0 698
-------- -------- -------- --------
160,024 199,529 322,621 371,527
-------- -------- -------- --------
Expenses:
Boomtown Reno......................... 18,761 16,818 34,821 30,016
Boomtown New Orleans.................. 17,851 18,471 36,047 35,740
Boomtown Biloxi....................... 13,213 13,685 27,601 27,771
Casino Magic Bay St. Louis............ 17,077 16,954 34,248 33,707
Casino Magic Biloxi................... 18,557 18,020 36,368 35,607
Casino Magic Bossier City............. 27,840 26,609 56,098 52,086
Casino Magic Argentina................ 3,461 3,334 6,791 6,489
Hollywood Park Race Track............. 0 16,043 0 23,227
Turf Paradise, Inc. .................. 2,745 2,618 7,108 6,823
Hollywood Park-Casino................. 0 12,273 0 24,112
Other................................. 101 669 197 695
Pinnacle Entertainment, Inc.--
Corporate............................ 4,360 6,215 9,148 11,522
-------- -------- -------- --------
123,966 151,709 248,427 287,795
-------- -------- -------- --------
Non-recurring income (expenses):
Gain on disposition of assets, net.... 35,587 0 59,441 0
Pre-opening costs, Belterra Casino
Resort............................... (3,713) (802) (5,456) (1,509)
Proposed merger costs................. (1,500) 0 (2,125) 0
Depreciation and amortization:
Boomtown Reno......................... 1,910 1,858 3,810 3,517
Boomtown New Orleans.................. 1,421 1,434 2,922 2,859
Boomtown Biloxi....................... 942 1,020 1,841 2,013
Casino Magic Bay St. Louis............ 783 1,471 2,397 2,909
Casino Magic Biloxi................... 1,842 1,747 3,694 3,486
Casino Magic Bossier City............. 2,110 2,065 4,204 3,954
Casino Magic Argentina................ 396 395 802 767
Hollywood Park Race Track............. 0 1,086 0 2,176
Turf Paradise, Inc. .................. 233 302 520 597
Hollywood Park-Casino................. 617 671 1,239 1,336
Other................................. 414 485 822 970
Pinnacle Entertainment, Inc.--
Corporate............................ 996 1,301 2,004 2,618
-------- -------- -------- --------
11,664 13,835 24,255 27,202
-------- -------- -------- --------
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
For the three For the six
months ended June months ended June
30, 30,
------------------ ------------------
2000 1999 2000 1999
-------- -------- -------- --------
(in thousands, except per share
data--unaudited)
<S> <C> <C> <C> <C>
Operating income (loss):
Boomtown Reno......................... $ 4,313 $ 2,680 $ 4,989 $ 1,965
Boomtown New Orleans.................. 5,695 7,262 10,993 14,289
Boomtown Biloxi....................... 2,301 2,189 4,518 4,909
Casino Magic Bay St. Louis............ 4,995 4,294 10,201 9,066
Casino Magic Biloxi................... 2,126 3,300 6,357 8,605
Casino Magic Bossier City............. 6,818 6,465 15,296 12,951
Casino Magic Argentina................ 1,511 1,922 3,461 3,722
Hollywood Park Race Track............. 0 11,618 0 8,809
Turf Paradise, Inc. .................. 744 579 3,037 2,865
Hollywood Park-Casino................. 883 2,046 1,761 3,567
Other................................. 364 (854) 478 (776)
Pinnacle Entertainment, Inc.--
Corporate............................ (5,356) (7,516) (11,152) (13,442)
Gain on disposition of assets, net.... 35,587 0 59,441 0
Pre-opening costs, Belterra Casino
Resort............................... (3,713) (802) (5,456) (1,509)
Proposed merger costs................. (1,500) 0 (2,125) 0
-------- -------- -------- --------
54,768 33,183 101,799 55,021
-------- -------- -------- --------
Interest expense, net................. 11,079 15,562 23,959 30,053
-------- -------- -------- --------
Income before minority interests and
income taxes......................... 43,689 17,621 77,840 24,968
-------- -------- -------- --------
Minority interests--Casino Magic
Argentina............................ 0 679 0 1,137
Income tax expense.................... 17,457 7,231 29,696 9,987
-------- -------- -------- --------
Net income............................ $ 26,232 $ 9,711 $ 48,144 $ 13,844
======== ======== ======== ========
Net income per common share:
Net income--basic..................... $ 1.00 $ 0.38 $ 1.83 $ 0.54
Net income--diluted................... $ 0.96 $ 0.37 $ 1.76 $ 0.54
Number of shares:
Basic................................. 26,303 25,871 26,281 25,836
Diluted............................... 27,345 26,129 27,326 25,836
</TABLE>
34
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed
on its behalf by the undersigned, thereunto duly authorized.
PINNACLE ENTERTAINMENT, INC.
(Registrant)
/s/ Paul R. Alanis
Dated: August 14, 2000 By: _________________________________
Paul R. Alanis
Chief Executive Officer and
President
(Principal Executive Officer)
/s/ Bruce C. Hinckley
Dated: August 14, 2000 By: _________________________________
Bruce C. Hinckley
Vice President and Chief
Financial Officer
(Principal Financial and
Accounting Officer)
35
