<PAGE>
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
AMENDMENT NO. 3 TO [/R]
SCHEDULE 14A
(RULE 14A-101)
INFORMATION REQUIRED IN PROXY STATEMENT
SCHEDULE 14A INFORMATION
Proxy Statement Pursuant to Section 14(a) of
the Securities Exchange Act of 1934
Filed by the Registrant [X]
Filed by a Party other than the Registrant [_]
Check the appropriate box:
[X] Preliminary Proxy Statement
[_] Confidential, For Use of the Commission Only
(as permitted by Rule 14a-6(e)(2))
[_] Definitive Proxy Statement
[_] Definitive Additional Materials
[_] Soliciting Material Pursuant to Rule 14a-11(c) or Rule 14a-12
PINNACLE ENTERTAINMENT, INC.
(Name of Registrant as Specified In Its Charter)
(Name of Person(s) Filing Proxy Statement, if Other Than the Registrant)
Payment of Filing Fee (Check the appropriate box):
[_] No fee required.
[X] Fee computed on table below per Exchange Act Rules 14a-6(i)(1) and 0-11.
(1) Title of each class of securities to which transaction applies: Common
Stock, $0.10 par value
(2) Aggregate number of securities to which transaction applies: 26,304,929
(3) Per unit price or other underlying value of transaction computed
pursuant to Exchange Act Rule 0-11 (set forth the amount on which the
filing fee is calculated and state how it was determined):
The filing fee was determined based upon (1) the product of (a) the
26,304,929 shares of common stock, par value $0.10 per share, proposed
to be acquired by the acquiror, and (b) merger consideration of $25.00
per share of common stock (which assumes a contingent payment of $1.00
per share), plus (2) $34,861,075 payable to holders of options and
warrants to purchase shares of common stock in exchange for the
cancellation of such options and warrants (the "Total Consideration").
The payment of the filing fee, calculated in accordance with Regulation
240.0-11 under the Securities Exchange Act of 1934, as amended, equals
one-fiftieth of one percent of the Total Consideration.
(4) Proposed maximum aggregate value of transaction: $692,484,294
(5) Total fee paid: $138,496.86
[_] Fee paid previously with preliminary materials.
[X] Check box if any part of the fee is offset as provided by Exchange Act Rule
0-11(a)(2) and identify the filing for which the offsetting fee was paid
previously. Identify the previous filing by registration statement number,
or the form or schedule and the date of its filing.
(1) Amount Previously Paid: $138,496.86
(2) Form, Schedule or Registration Statement No.: Schedule 13E-3
(3)Filing Party:
<TABLE>
<C> <S>
Pinnacle Entertainment, Inc. Bruce C. Hinckley
R.D. Hubbard Pinnacle Acquisition Corporation
G. Michael Finnigan PH Casino Resorts, Inc.
Paul R. Alanis Harveys Casino Resorts
J. Michael Allen Colony HCR Voteco, LLC
</TABLE>
(4) Date Filed: May 30, 2000
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
<PAGE>
[PINNACLE ENTERTAINMENT LOGO]
PINNACLE ENTERTAINMENT, INC.
330 NORTH BRAND BOULEVARD, SUITE 1100
GLENDALE, CALIFORNIA 91203
August , 2000
Dear Fellow Stockholder:
You are cordially invited to attend the Annual Meeting of Stockholders of
Pinnacle Entertainment, Inc. (formerly Hollywood Park, Inc.) ("Pinnacle" or
the "Company"), to be held at the Hilton Hotel, 100 West Glenoaks Boulevard,
Glendale, California on September , 2000 at 9:00 a.m. local time.
At the annual meeting, you will be asked to consider and vote upon a
proposal to approve and adopt a merger agreement which provides for the merger
of Pinnacle Acquisition Corporation, a wholly-owned subsidiary of PH Casino
Resorts, Inc., with and into the Company, with the Company as the surviving
corporation. Following the merger, the Company would be wholly-owned by PH
Casino Resorts and would no longer have securities listed on the New York
Stock Exchange. PH Casino Resorts and Pinnacle Acquisition Corporation are
newly formed direct and indirect subsidiaries of Harveys Casino Resorts formed
for the purpose of completing the merger. Harveys Casino Resorts is an
affiliate of Colony Capital LLC, a private investment firm.
Upon closing of the merger, holders of the outstanding shares of the
Company's common stock (other than shares of the Company's common stock owned
by the Company or its subsidiaries, Pinnacle Acquisition Corporation and
stockholders who have perfected their appraisal rights in accordance with
Delaware law and certain shares of the Company's common stock to be
contributed to PH Casino Resorts by certain members of senior management of
the Company, as discussed below) will be entitled to receive $24.00 in cash,
without interest, for each share of the Company's common stock held by them.
Such stockholders may also be entitled to receive up to an additional $1.00 in
cash for each share of the Company's common stock contingent on the sale by
the Company of the Company's 97 acres of surplus land in Inglewood, California
under certain circumstances, as described in the accompanying Proxy Statement.
However, there is no assurance that such a sale will occur or, if such a sale
occurs, that such circumstances will be satisfied.
Upon the closing of the merger, holders of options to purchase shares of
the Company's common stock (other than certain options held by certain members
of senior management of the Company which will be cancelled and replaced with
PH Casino Resorts options, as discussed below) also may be entitled to receive
cash in exchange for their options, depending on the per share exercise price
of such options, as described in the accompanying Proxy Statement, regardless
of whether their options are fully vested.
In connection with the merger, certain members of the Company's senior
management, including myself, have agreed to contribute certain of their
shares of the Company's common stock to PH Casino Resorts in exchange for
shares of PH Casino Resorts common stock, and to cause certain of their
Pinnacle stock options to be cancelled and replaced with fully vested options
to purchase shares of PH Casino Resorts common stock, with the new PH Casino
Resorts shares and options having an aggregate value equal to that of the
shares contributed and options being cancelled and replaced.
In addition, certain members of the Company's senior management, including
myself, are or will be parties to other arrangements concerning their
positions as directors, executive officers and stockholders of PH Casino
<PAGE>
Resorts or its subsidiaries following the merger. These arrangements are
described in more detail in the Proxy Statement. Following the merger, it is
currently expected that members of the Company's senior management will
beneficially own approximately 15.6% of the voting power of PH Casino Resorts
common stock (assuming no additional investment in PH Casino Resorts is made
by affiliates of Colony Capital).
Accompanying this letter is the formal Notice of Annual Meeting, Proxy
Statement and Proxy Card relating to the meeting. The Proxy Statement provides
detailed information about the proposed merger. We encourage you to read the
entire Proxy Statement, including the annexes, completely and carefully.
Because certain members of the Company's senior management will obtain an
ownership interest in PH Casino Resorts following the merger, the Board of
Directors appointed a special committee of the Board of Directors comprised of
seven independent members of the Board of Directors to negotiate and evaluate
the merger agreement on behalf of the Company and to recommend to the full
Board of Directors whether to proceed with the proposed merger. The Board of
Directors, acting on the unanimous recommendation of the special committee,
unanimously approved the merger agreement and the transactions contemplated by
the merger agreement. Paul Alanis and I, each of whom will own shares of PH
Casino Resorts common stock upon consummation of the merger, abstained from
the vote.
The Board of Directors has determined that the terms and conditions of the
merger agreement, the proposed merger and the transactions contemplated by the
merger agreement are advisable, fair to and in the best interests of the
Company's stockholders other than the management stockholders who will have a
continuing interest in PH Casino Resorts. THEREFORE, THE BOARD OF DIRECTORS,
BASED ON THE RECOMMENDATION OF THE SPECIAL COMMITTEE, UNANIMOUSLY, WITH THE
DIRECTORS WHO ARE MANAGEMENT MEMBERS ABSTAINING, RECOMMENDS THAT STOCKHOLDERS
VOTE "FOR" THE APPROVAL AND ADOPTION OF THE MERGER AGREEMENT. The
recommendation of the special committee and the approval and recommendation of
the Board of Directors are based on a number of factors described in the Proxy
Statement, including the written opinion of Jefferies & Company, Inc., the
special committee's financial advisor, to the effect that, as of the date of
the opinion, the merger consideration to be received by the stockholders in
the merger (even if no contingent payment is made) is fair to such
stockholders from a financial point of view. The price of $24.00 per share
(not taking into account any additional contingent payment) represents a
39.1% premium to the closing price of the Company's common stock on March 6,
2000 (the second to last trading day prior to the public announcement that the
Company had received a proposal regarding the proposed transaction) and a
21.5% premium to the closing price for the common stock on April 14, 2000 (the
last trading day before the signing of the definitive merger agreement was
announced). The merger is subject to certain conditions to closing in addition
to approval by the Company's stockholders, including regulatory approvals in
the various jurisdictions in which the Company and Harveys Casino Resorts
conduct gaming operations, the completion by the Company of certain asset
sales, completion of PH Casino Resorts's financing for the transaction (with
respect to which bank commitment and "highly confident" letters have been
received) and the opening of the Belterra Casino Resort in Indiana
substantially in accordance with its budget by not later than September 15,
2000. In light of damage to the Company's Miss Belterra riverboat casino in a
recent accident, the repair of which will delay such opening until after
September 15, 2000, the Company intends to discuss with PH Casino Resorts the
possibility of a waiver of, or an agreement to modify, the condition regarding
the opening of the Belterra Casino Resort when the extent of the damage and
the length of delay have been ascertained. PH Casino Resorts and Pinnacle
Acquisition Corporation have notified the Company that they are reserving all
rights with respect to the conditions in the merger agreement, including the
condition regarding the Belterra Casino Resort.
Approval and adoption of the merger agreement requires the affirmative vote
of the holders of a majority of the outstanding shares of the Company's common
stock in accordance with applicable Delaware law. The members of the Company's
senior management, including myself, who will have a continuing ownership
interest in PH Casino Resorts have agreed to vote their shares (representing a
total of approximately 11.4% of the Company's outstanding common stock) in
favor of the approval and adoption of the merger agreement.
<PAGE>
At the annual meeting, you will also be asked to consider and vote on the
election of nine directors to serve for the coming year on the Company's Board
of Directors until the earlier of the Company's next annual meeting of
stockholders (and until such director's successor shall have been duly elected
and qualified) or the effective time of the merger. The accompanying Proxy
Statement contains important information concerning the directors to be
elected at the annual meeting. We hope you will take the time to study it
carefully.
Your vote is very important, regardless of how many shares you own. We hope
you can attend the annual meeting in person. However, whether or not you plan
to attend the annual meeting, please complete, sign, date and return the Proxy
Card in the enclosed envelope. If you attend the annual meeting, you may vote
in person if you wish, even though you have previously returned your Proxy
Card.
Sincerely,
/s/ R.D. Hubbard
R.D. Hubbard
Chairman of the Board of Directors
<PAGE>
PINNACLE ENTERTAINMENT, INC.
330 NORTH BRAND BOULEVARD, SUITE 1100
GLENDALE, CALIFORNIA 91203
NOTICE OF ANNUAL MEETING OF STOCKHOLDERS
TO BE HELD ON SEPTEMBER , 2000
TO THE STOCKHOLDERS OF PINNACLE ENTERTAINMENT, INC.:
NOTICE IS HEREBY GIVEN that an Annual Meeting of Stockholders of Pinnacle
Entertainment, Inc. (formerly Hollywood Park, Inc.), a Delaware corporation
("Pinnacle" or the "Company"), will be held on September , 2000, at 9:00
a.m. local time, at the Hilton Hotel, 100 West Glenoaks Boulevard, Glendale,
California and at any adjournment or postponement thereof (the "Annual
Meeting"). At the Annual Meeting, the Company's stockholders will be asked to
consider and vote upon:
1. A proposal to approve and adopt the Agreement and Plan of Merger,
dated as of April 17, 2000, as amended by the letter agreement dated August
, 2000 (as amended, the "Merger Agreement"), by and among the Company, PH
Casino Resorts, Inc., a Delaware corporation ("PHCR"), and Pinnacle
Acquisition Corporation, a Delaware corporation and wholly-owned subsidiary
of PHCR ("Pinnacle Acq Corp"), pursuant to which (i) Pinnacle Acq Corp will
merge with and into the Company, with the Company as the surviving
corporation, (ii) holders of the then outstanding shares of the Company's
common stock (other than shares owned by the Company or any of its
subsidiaries, Pinnacle Acq Corp and stockholders who have perfected their
appraisal rights in accordance with Delaware law and certain shares to be
contributed to PHCR by certain members of the Company's senior management)
will be entitled to receive $24.00 in cash, without interest, for each
share of the Company's common stock held by them and up to an additional
$1.00 in cash for each such share of the Company's common stock, contingent
on the sale by the Company of the Company's 97 acres of surplus land in
Inglewood, California under certain circumstances, and (iii) holders of
options to purchase shares of the Company's common stock (other than
certain options held by certain members of senior management of the Company
which will be cancelled and replaced with PHCR options) also may be
entitled to receive cash in exchange for their options, depending on the
per share exercise price of such options, as described in the accompanying
Proxy Statement, regardless of whether their options are fully vested;
2. The election of nine directors to serve on the Company's Board of
Directors for the coming year, each to hold office until the earlier of the
next annual meeting of stockholders (and until such director's successor
shall have been duly elected and qualified) or the effective time of the
merger; and
3. Such other business as may properly come before the Annual Meeting or
before any adjournments or postponements thereof.
The Merger Agreement is described in the accompanying Proxy Statement,
which you are urged to read carefully. A copy of the Merger Agreement is
attached as Annexes A and A1 to such Proxy Statement.
Only stockholders of record of the Company's common stock at the close of
business on August 8, 2000 are entitled to notice of and to vote at the Annual
Meeting or any adjournments or postponements thereof.
Stockholders of the Company who do not vote in favor of the Merger
Agreement will have the right to seek appraisal of the fair value of their
shares if the merger is completed, but only if they submit a written demand
for such an appraisal prior to the taking of the vote on the Merger Agreement
and they comply with the other Delaware law procedures for exercising
appraisal rights explained in the accompanying Proxy Statement.
<PAGE>
Your vote is very important. The proposed merger cannot occur unless, among
other things, the Merger Agreement is approved and adopted by the affirmative
vote of the holders of a majority of all outstanding shares of the Company's
common stock. Your failure to vote will have the same effect as if you voted
against approval and adoption of the Merger Agreement. TO ENSURE THAT YOUR
SHARES ARE REPRESENTED AT THE ANNUAL MEETING, YOU ARE URGED TO COMPLETE, DATE,
AND SIGN THE ENCLOSED PROXY CARD AND MAIL IT PROMPTLY IN THE POSTAGE PAID
ENVELOPE PROVIDED, WHETHER OR NOT YOU PLAN TO ATTEND THE ANNUAL MEETING IN
PERSON. YOUR PROXY CAN BE WITHDRAWN BY YOU AT ANY TIME BEFORE IT IS VOTED.
BY ORDER OF THE BOARD OF DIRECTORS
/s/ Loren S. Ostrow
Loren S. Ostrow
Secretary
Glendale, California
August [ ], 2000
<PAGE>
PINNACLE ENTERTAINMENT, INC.
(FORMERLY HOLLYWOOD PARK, INC.)
330 NORTH BRAND BOULEVARD, SUITE 1100
GLENDALE, CALIFORNIA 91203
PROXY STATEMENT RELATING TO
ANNUAL MEETING OF STOCKHOLDERS
To Be Held September , 2000
This Proxy Statement is being furnished to the stockholders of Pinnacle
Entertainment, Inc., a Delaware corporation ("Pinnacle" or the "Company"), in
connection with the solicitation of proxies by the Company's Board of
Directors for use at the Annual Meeting of the Company's Stockholders (the
"Annual Meeting") to be held on September , 2000, at 9:00 a.m. local time,
at the Hilton Hotel, 100 West Glenoaks Boulevard, Glendale, California, and at
any adjournments or postponements thereof.
At the Annual Meeting, holders of the Company's common stock, $0.10 par
value per share ("Pinnacle Common Stock"), will consider a proposal to approve
and adopt the Agreement and Plan of Merger, dated as of April 17, 2000, as
amended by the letter agreement dated as of August , 2000 (as amended, the
"Merger Agreement"), by and among the Company, PH Casino Resorts, Inc., a
Delaware corporation ("PHCR"), and Pinnacle Acquisition Corporation, a
Delaware corporation ("Pinnacle Acq Corp"), which provides for the merger of
Pinnacle Acq Corp, a newly formed wholly-owned subsidiary of PHCR, with and
into the Company, with the Company surviving as a wholly-owned subsidiary of
PHCR (the "Pinnacle Merger"). A copy of the Merger Agreement is attached to
this Proxy Statement as Annexes A and A1.
Upon closing of the Pinnacle Merger, holders of then outstanding shares of
Pinnacle Common Stock (other than shares of Pinnacle Common Stock owned by the
Company or any of its subsidiaries, Pinnacle Acq Corp and stockholders who
have perfected their appraisal rights in accordance with Delaware law and
certain shares of Pinnacle Common Stock to be contributed to PHCR by certain
members of the Company's senior management as described below) will be
entitled to receive $24.00 in cash, without interest, for each share of
Pinnacle Common Stock held by them. Such stockholders may also be entitled to
receive up to an additional $1.00 in cash for each share of Pinnacle Common
Stock held by them, contingent on the sale by the Company of the Company's 97
acres of surplus land in Inglewood, California under certain circumstances, as
described in this Proxy Statement. See "Merger Agreement--Conversion of
Pinnacle Shares and Stock Options; Contingent Payment." Upon the closing of
the Pinnacle Merger, holders of options to purchase shares of Pinnacle Common
Stock (other than certain options held by certain members of the Company's
senior management which will be cancelled and replaced with PHCR options, as
described below) with a per share exercise price of less than $24.00 will be
entitled to receive an amount in cash equal to the difference between $24.00
and the exercise price per share, without interest, for each share underlying
such option, regardless of whether the option is fully vested. Each such
option holder also will be entitled to receive the contingent payment
described above to the extent that the cash merger consideration (taking into
account any contingent payment to be paid in cash at the effective time)
exceeds the per share exercise price of such options.
In connection with the Pinnacle Merger, certain members of the Company's
senior management (the "Management Stockholders") have agreed to contribute
certain of their shares of Pinnacle Common Stock to PHCR in exchange for
shares of PHCR common stock and to cause certain of their Pinnacle stock
options to be cancelled and replaced with fully vested options to purchase
shares of PHCR common stock, with the new PCHR shares and options having an
aggregate value equal to that of the shares contributed and options being
cancelled and replaced.
In addition, the Management Stockholders are or will be parties to other
arrangements concerning their positions as directors, executive officers and
stockholders of PHCR or its subsidiaries following the merger. These
arrangements are described in more detail in the Proxy Statement. Following
the merger, it is currently expected that members of the Company's senior
management will beneficially own approximately 15.6% of the
<PAGE>
voting power of PHCR's common stock (assuming no additional investment in PHCR
by affiliates of Colony Capital).
THE BOARD OF DIRECTORS, AFTER RECEIVING THE UNANIMOUS RECOMMENDATION OF A
SPECIAL COMMITTEE OF INDEPENDENT DIRECTORS, HAS APPROVED THE MERGER AGREEMENT,
THE PINNACLE MERGER AND THE TRANSACTIONS CONTEMPLATED BY THE MERGER AGREEMENT,
AND HAS DETERMINED THAT THE TERMS AND CONDITIONS OF THE MERGER AGREEMENT, THE
PINNACLE MERGER AND THE TRANSACTIONS CONTEMPLATED BY THE MERGER AGREEMENT ARE
ADVISABLE, FAIR TO AND IN THE BEST INTERESTS OF THE COMPANY'S STOCKHOLDERS.
THE BOARD OF DIRECTORS, BASED UPON THE RECOMMENDATION OF THE SPECIAL
COMMITTEE, UNANIMOUSLY, WITH THE MANAGEMENT STOCKHOLDERS ABSTAINING,
RECOMMENDS THAT STOCKHOLDERS VOTE "FOR" THE APPROVAL AND ADOPTION OF THE
MERGER AGREEMENT.
Approval and adoption of the Merger Agreement requires the affirmative vote
of the holders of a majority of the outstanding shares of Pinnacle Common
Stock. The Management Stockholders have agreed to vote their shares
(representing a total of approximately 11.4% of the outstanding Pinnacle
Common Stock) in favor of the approval and adoption of the Merger Agreement.
At the Annual Meeting, holders of Pinnacle Common Stock will also vote to
elect nine directors to serve on the Company's Board of Directors until the
earlier of the Company's next annual meeting of stockholders (and until such
director's successor shall have been duly elected and qualified) or the
effective time of the Pinnacle Merger. If the Pinnacle Merger is approved and
completed, at the effective time of the Pinnacle Merger, the directors of the
Company will be replaced with the directors of Pinnacle Acq Corp.
This Proxy Statement and the accompanying Proxy Card are first being mailed
to the Company's stockholders on or about August , 2000. The address of the
principal executive offices of the Company is 330 North Brand Boulevard, Suite
1100, Glendale, California 91203.
NEITHER THE SECURITIES AND EXCHANGE COMMISSION (THE "SEC") NOR ANY STATE
SECURITIES COMMISSION HAS APPROVED OR DISAPPROVED THE TRANSACTIONS DESCRIBED
IN THIS PROXY STATEMENT OR PASSED UPON THE FAIRNESS OR MERITS OF SUCH
TRANSACTION NOR UPON THE ACCURACY OR ADEQUACY OF THE INFORMATION CONTAINED
HEREIN. ANY REPRESENTATION TO THE CONTRARY IS UNLAWFUL.
2
<PAGE>
SUMMARY TERM SHEET
The following is a summary of some of the terms of the merger of Pinnacle
Acquisition Corporation with and into the Company, with the Company surviving
as a wholly-owned subsidiary of PH Casino Resorts, Inc., and other information
relating to the annual meeting. Throughout this summary, Pinnacle Acquisition
Corporation is referred to as Pinnacle Acq Corp, and PH Casino Resorts, Inc. is
referred to as PHCR. This summary is not meant to be comprehensive and does not
contain all the information that is important to you. We have included page
references to direct you to more complete information in the Proxy Statement.
You should carefully read the entire Proxy Statement, including the Annexes,
and the other documents to which this Proxy Statement refers to fully
understand the Pinnacle merger and its consequences.
The Pinnacle Merger (see . PHCR will acquire the Company through a merger
pages 28 and 66) of PHCR's newly formed wholly-owned subsidiary,
Pinnacle Acq Corp, into the Company. PHCR and
Pinnacle Acq Corp are newly formed wholly-owned
subsidiaries of Harveys Casino Resorts, a gaming
company with gaming establishments in Nevada,
Iowa, and Colorado. At the present time, PHCR
and Pinnacle Acq Corp have no assets and conduct
no operations. Harveys Casino Resorts is an
affiliate of Colony Capital LLC. Following the
Pinnacle merger, the Company will be a wholly-
owned subsidiary of PHCR and will cease to be a
reporting company, and Pinnacle common stock
will cease to be traded on the New York Stock
Exchange.
. Concurrently with the Pinnacle merger, another
newly formed wholly-owned subsidiary of PHCR,
Harveys Acquisition Corporation, will merge into
Harveys Casino Resorts, with Harveys Casino
Resorts surviving as a wholly-owned subsidiary
of PHCR. Throughout this summary, this merger is
referred to as the Harveys merger.
. Immediately following the Pinnacle merger and
the Harveys merger, it is currently expected
that the voting power of PHCR's common stock
will be owned approximately as follows (assuming
no additional investment in PHCR by affiliates
of Colony Capital):
. 82.7% by Colony HCR Voteco, LLC, an
affiliate of Colony Capital,
. 15.6% by some members of the Company's
senior management, including R.D. Hubbard,
and
. 1.7% by the current management of Harveys.
See "--Ownership Structure and Voting Control."
What You Will Receive in . Upon the closing of the Pinnacle merger, holders
the Pinnacle Merger (see of then outstanding shares of Pinnacle common
pages 1 and 82) stock, other than shares of Pinnacle common
stock owned by stockholders who perfect their
appraisal rights in accordance with Delaware
law, will be entitled to receive $24.00 in cash,
without interest, for each share of Pinnacle
common stock held by them, plus up to an
additional $1.00 per share in cash contingent
upon the sale by the Company before December 31,
2001 of the Company's 97 acres of surplus land
in Inglewood, California. You will be entitled
to receive the
3
<PAGE>
full $1.00 per share contingent payment if the
net after tax proceeds of the Inglewood land
sale are at least $40,750,000. If the net after
tax proceeds are between $13,054,000 and
$40,750,000, the $1.00 per share contingent
payment will be reduced proportionately. If the
Inglewood land sale does not close before
December 31, 2001, or if the net after tax
proceeds are less than or equal to $13,054,000,
then you will not be entitled to any contingent
payment.
. The Company has entered into an agreement to
sell the Inglewood land at a price which the
Company estimates would result in net after tax
proceeds in excess of $40,750,000. That
agreement is subject to contingencies, so that
there can be no assurance that the sale of the
Inglewood land will be completed on such terms
or at all.
. Upon the closing of the Pinnacle merger, holders
of options to purchase shares of Pinnacle common
stock, other than options to be cancelled and
replaced with PHCR options by the management
stockholders, may receive cash in exchange for
their options, depending on the per share
exercise price of such options.
The Special Committee . Because two members of the Company's board of
and Its Recommendation directors, R.D. Hubbard, chairman of the board,
to the Board (see pages and Paul Alanis, along with other management
37 and 49) stockholders, will obtain an ownership interest
in PHCR following the Pinnacle merger, the board
of directors formed a special committee
consisting of seven disinterested directors to
evaluate and negotiate the terms of the merger
agreement with PHCR and to recommend to the full
board whether to proceed with the proposed
Pinnacle merger. The special committee
independently selected and retained legal and
financial advisors to assist it in the
negotiation. The special committee and the board
of directors received an opinion from the
special committee's financial advisor, on which
the special committee and the entire board of
directors relied, that as of the date of the
opinion, the merger consideration, even if no
contingent payment is made, was fair to you from
a financial point of view. See "Special
Factors--Opinion of Financial Advisor to the
Special Committee." The special committee
determined that the terms and conditions of the
merger agreement are advisable, fair to and in
the best interests of the Company's stockholders
other than the management stockholders and
recommended to the full board that it approve
the merger agreement.
The Board of Directors . The board of directors, with Messrs. Hubbard and
Recommends That You Vote Alanis abstaining, recommends you vote in favor
for the Merger Agreement of the approval and adoption of the merger
(see page 49) agreement. The board of directors, based upon
the unanimous recommendation of the special
committee, has determined that the terms and
conditions of the merger
4
<PAGE>
agreement, the Pinnacle merger and the
transactions contemplated by the merger agreement
are advisable, fair to and in the best interests
of the Company's stockholders other than the
management stockholders. ACCORDINGLY, THE BOARD
OF DIRECTORS UNANIMOUSLY, WITH THE MANAGEMENT
STOCKHOLDERS ABSTAINING, RECOMMENDS THAT
STOCKHOLDERS VOTE "FOR" THE APPROVAL AND ADOPTION
OF THE MERGER AGREEMENT.
Acquiring Parties' and . Each of Pinnacle Acq Corp, PHCR, Harveys Casino
Management Resorts, Colony HCR Voteco and Messrs. R.D.
Stockholders' Position Hubbard, G. Michael Finnigan, Paul R. Alanis, J.
on the Fairness of the Michael Allen and Bruce C. Hinckley, as officers
Transaction (see pages and/or directors of the Company, believes that
61 and 63) the transaction is substantively and procedurally
fair to the holders of Pinnacle common stock
other than the management stockholders. This
position is based on the limited facts and
circumstances available to them and takes into
account, among other things, the fact that, as
the acquiring parties in the transaction or the
management stockholders, as the case may be, they
may have interests in conflict with the interests
of the Company's stockholders other than the
management stockholders.
Vote Required to
Approve the Merger . The holders of a majority of the outstanding
Agreement (see page 25) shares of Pinnacle common stock must vote to
approve and adopt the merger agreement. The
management stockholders currently own a total of
approximately 11.4% of the outstanding Pinnacle
common stock and have agreed to vote their shares
in favor of the approval and adoption of the
merger agreement. IF YOU DO NOT VOTE YOUR SHARES,
THE EFFECT WILL BE A VOTE AGAINST THE APPROVAL
AND ADOPTION OF THE MERGER AGREEMENT.
Opinion of Financial . The special committee of the Company's board of
Advisor (see page 54) directors received a written fairness opinion
from Jefferies & Company, Inc. with respect to
the merger consideration in the Pinnacle merger.
The written fairness opinion states that as of
the date of the opinion the merger consideration,
even if no contingent payment is made, was fair
from a financial point of view to the holders of
Pinnacle common stock.
Location, Date and Time . The annual meeting will be on September , 2000
of Annual Meeting (see at 9:00 a.m. local time at the Hilton Hotel, 100
page 1) West Glenoaks Boulevard, Glendale, California.
Interest of Management
Stockholders (see pages . The management stockholders have interests in the
66 and 96) Pinnacle merger that are different from your
interests as a stockholder. Collectively, the
management stockholders now own 3,000,285 shares
of Pinnacle common stock representing
approximately 11.4% of the outstanding Pinnacle
common stock. As a condition to the Pinnacle
merger, the management stockholders will,
immediately prior to the Pinnacle merger,
contribute to PHCR some of the shares of Pinnacle
common stock held by them in exchange for shares
of PHCR common stock and cause some of their
Pinnacle stock options to be cancelled and
replaced
5
<PAGE>
with fully vested options to purchase shares of
PHCR common stock, with an aggregate value equal
to that of the shares contributed and options
being cancelled and replaced. Based on the
merger consideration, the aggregate value of the
shares of Pinnacle common stock being
contributed to PHCR and Pinnacle stock options
being cancelled and replaced by the management
stockholders is $50,000,000. The remaining
Pinnacle common stock and stock options held by
the management stockholders, other than Mr.
Hubbard, will be treated the same as the
Pinnacle common stock and stock options held by
other stockholders.
. With respect to remaining shares owned by Mr.
Hubbard, in order to mitigate a tax disadvantage
of this transaction structure which affects
Mr. Hubbard but does not affect other
stockholders, immediately prior to the Pinnacle
merger, the Company will purchase from
Mr. Hubbard the shares of Pinnacle common stock
owned by Mr. Hubbard which are not being
contributed to PHCR for a purchase price equal
to the merger consideration, including any right
to receive the applicable contingent payment, if
any, on terms substantively identical to those
which apply to the Company's stockholders.
. The management stockholders will continue to
serve as executive officers of PHCR or its
subsidiaries after the Pinnacle merger.
. The management stockholders will also be
entitled to receive restricted stock grants for
shares of PHCR stock and be eligible to receive
additional PHCR stock options.
. The management stockholders have agreed to vote
their shares of Pinnacle common stock in favor
of the approval and adoption of the merger
agreement.
Financing and Sources of . One of the conditions to Pinnacle Acq Corp's
Funds for the Pinnacle obligation to consummate the Pinnacle merger is
Merger (see page 71) the receipt by Pinnacle Acq Corp and Harveys
Acquisition Corporation of cash proceeds of debt
financing satisfying the terms specified in the
merger agreement. See "--Conditions to the
Pinnacle Merger."
. PHCR has received a commitment letter with
respect to a $900,000,000 aggregate principal
amount senior secured credit facility, and PHCR
and certain of its affiliates have received
"highly confident" letters with respect to
$550,000,000 aggregate principal amount of
senior subordinated debt. In addition to
financing, it is expected that the Company will
need to have significant cash on hand at the
closing in order for the Pinnacle merger and the
other transactions contemplated by the merger
agreement to be consummated. Such cash will be
utilized in making payments required to be made
in the transactions. If such cash is not on
hand, then PHCR's ability to consummate
financing and the Pinnacle merger will likely be
materially impaired. While the amount cannot be
known with certainty, it is expected that an
6
<PAGE>
aggregate of at least $1,600,000,000 will be
required to enable the payment in full of all
amounts necessary to consummate the Pinnacle
merger and the other transactions contemplated
by the merger agreement in the case where no
Pinnacle indebtedness is assumed by the
acquiror.
Conditions to the . A number of conditions must be satisfied or
Pinnacle Merger (see waived before any of the parties is obligated to
page 87) complete the Pinnacle merger, including the
approval and adoption of the merger agreement by
the holders of a majority of the outstanding
shares of Pinnacle common stock.
. Additional conditions must be satisfied or
waived before Pinnacle Acq Corp, but not the
Company, is obligated to complete the Pinnacle
merger, including:
. All required licenses, permits, consents,
findings of suitability and approvals from
the applicable gaming authorities, other
governmental entities and specified third
parties shall have been obtained;
. Pinnacle Acq Corp and Harveys Acquisition
Corp shall have received the cash proceeds of
debt financing satisfying the terms specified
in the merger agreement;
. Since April 17, 2000, no event shall have
occurred which would reasonably be expected
to have a material adverse effect on the
Company or the transactions contemplated by
the merger agreement;
. To the extent required, Pinnacle Acq Corp
shall have received valid consents and
related tenders under the outstanding
principal amount of debt of the Company and
Harveys Casino Resorts pursuant to tender
offers for such debt;
. The Company shall have completed the sales of
Turf Paradise, Boomtown Biloxi and Casino
Magic Bay St. Louis on substantially the
terms and conditions contained in the
applicable definitive agreements for such
transactions and for at least a minimum
amount of net proceeds;
. The shares held by stockholders who exercise
appraisal rights under Delaware law must not
exceed 5% of the outstanding shares of
Pinnacle common stock; and
. All material phases of the Belterra Casino
Resort, other than the golf course and
performance theater, shall have been
substantially completed and open to the
public by not later than September 15, 2000,
and the costs associated with such project
shall not be, in the aggregate, more than
$207,000,000, and such project (other than
the golf course and performance theater)
shall have been completed in substantial
conformity with the written budgets, plans
and policies relating to such project
provided to Pinnacle Acq
7
<PAGE>
Corp. In light of damage to the Company's
Miss Belterra riverboat casino in a recent
accident, the repair of which will delay the
opening of the Belterra Casino Resort until
after September 15, 2000, the Company intends
to discuss with PHCR and Pinnacle Acq Corp
the possibility of a waiver or modification
of this condition after ascertaining the
extent of the damage and the length of delay.
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 regarding
the Belterra Casino Resort.
Termination of the . All parties may mutually agree in writing at any
Merger Agreement (see time, including any time after the annual
page 93) meeting, to terminate the merger agreement.
. In addition, either Pinnacle Acq Corp or the
Company may terminate the merger agreement if,
among other things:
. the Pinnacle merger has not been completed by
January 15, 2001; provided that at Pinnacle
Acq Corp's option, such outside closing date
may be extended for up to two months or up to
six months in order to obtain gaming
authority approval under specified
circumstances;
. either party receives a final and
nonappealable written disapproval of the
merger agreement from a gaming authority and
such disapproval would cause Pinnacle Acq
Corp to be unable to consummate the Pinnacle
merger;
. a final, nonappealable court order or other
governmental action prohibits the Pinnacle
merger;
. at a duly held stockholders meeting, the
stockholder approval required to complete the
Pinnacle merger is not obtained; or
. the commitment and "highly confident" letters
which have been received by PHCR with respect
to financing have been withdrawn or
terminated by the issuing lenders and are not
replaced within 20 business days.
. Pinnacle Acq Corp may also terminate the merger
agreement if, among other things:
. the board of directors of the Company amends,
modifies or withdraws its recommendation of
the merger agreement;
. following the submission of a takeover
proposal, the Company fails to comply with
the covenant in the merger agreement
prohibiting solicitation of other acquisition
proposals (see "Acquisition Proposals" below)
or the covenant to use all reasonable efforts
to consummate the transactions contemplated
by the merger agreement; or
8
<PAGE>
. the merger agreement has not been approved
by the Company's stockholders on or prior to
[ ], 2000.
. The Company also may terminate the merger
agreement if on or prior to September [ ], 2000,
to the extent required by the fiduciary duties
to the Company's stockholders and subject to the
other requirements of the merger agreement, the
Pinnacle board of directors or the special
committee approves a competitive proposal, and
concurrently with the termination of the merger
agreement the Company enters into a definitive
agreement with respect to that competitive
proposal and pays to Pinnacle Acq Corp the
$25,000,000 termination fee. See "--Termination
Fee."
. In general, the merger agreement prohibits the
Acquisition Proposals Company and its officers, directors, employees
(see page 91) and other representatives from soliciting,
initiating, encouraging or participating in
inquiries, discussions or negotiations or
furnishing non-public information regarding
takeover proposals. However, the merger
agreement permits the Company to provide
information to and participate in negotiations
with third parties who make unsolicited, written
competitive proposals if:
(1) in the opinion of the Company's board of
directors after consultation with outside
legal counsel, the failure to act would be
inconsistent with the fiduciary duties of
the Company's board of directors to the
Company's stockholders, and
(2) other conditions are met.
. Under some circumstances, the Company will be
Termination Fee (see page obligated to pay Pinnacle Acq Corp a termination
95) fee equal to $25,000,000. This termination fee
is payable if, among other things, the merger
agreement:
. is terminated by Pinnacle Acq Corp because
the Company's board of directors amends,
modifies or withdraws its recommendation of
the merger agreement,
. is terminated by Pinnacle Acq Corp because
following a takeover proposal Pinnacle
failed to comply with the covenant in the
merger agreement prohibiting solicitation of
other acquisition proposals or the covenant
to use all reasonable efforts to consummate
the transactions contemplated by the merger
agreement (see "--Acquisition Proposals"
above),
. is terminated by the Company in compliance
with the merger agreement upon entering into
a definitive agreement with respect to a
competitive proposal, as summarized above
and as set out in detail in the merger
agreement (see "--Termination of the Merger
Agreement"),
9
<PAGE>
. is terminated, because the merger agreement
has not been approved by the Company's
stockholders on or prior to [ ], 2000, or
the Pinnacle merger has not been completed
by the outside closing date and, in either
case, prior to such termination a
competitive proposal or a significant
takeover proposal was made and within 12
months of such termination the Company
consummates a significant takeover proposal,
or enters into an agreement with respect to,
or approves or recommends or publicly
proposes to approve or recommend, a
significant takeover proposal which is
thereafter consummated (subject to some
exceptions), or
. is terminated because the Company's stockholders
do not approve the Pinnacle merger and prior to
the termination of the merger agreement a
significant takeover proposal was made.
Advantages of the . In the Pinnacle merger, you will receive for
Pinnacle Merger to You your shares of Pinnacle common stock a cash
(see page 48) premium over the market price when the Pinnacle
merger was announced. The merger consideration
of $24.00 per share, not taking into account any
additional contingent payment, represents a
premium of 39.1% over the closing price of
Pinnacle common stock on March 6, 2000, the
second to last trading day prior to the public
announcement that the Company had received a
proposal regarding the proposed transaction, and
a 21.5% premium over the closing price for
Pinnacle common stock on April 14, 2000, the
last trading day before the signing of the
definitive merger agreement was announced.
Following the Pinnacle merger, you also will not
bear the risk of any decrease in the value of
the Company.
Disadvantages of the . Following the Pinnacle merger, you will no
Pinnacle Merger to You longer own stock of the Company and will no
(see page 48) longer benefit from any earnings or growth of
the Company. Also, you may recognize a taxable
gain as a result of the Pinnacle merger. See "--
U.S. Federal Income Tax Consequences of the
Pinnacle Merger."
. Please mark your vote on, sign, date and mail
What to Do Now your Proxy Card in the enclosed return envelope
as soon as possible, so that your shares may be
represented and voted at the annual meeting.
Rights You Have if You
Oppose the Pinnacle . Stockholders who do not vote in favor of the
Merger (see page 79) Pinnacle merger may dissent and obtain the fair
value of their shares as determined by the
Delaware Court of Chancery, but only if they
strictly comply with all of the Delaware law
procedures explained on pages 79 to 82 and in
Annex C to this Proxy Statement.
Who May Vote on the . All stockholders of record as of the close of
Pinnacle Merger (see page business on August 8, 2000 will be entitled to
25) notice of, and to vote at, the annual meeting.
10
<PAGE>
U.S. Federal Income Tax
Consequences of the . The receipt of cash for your shares of Pinnacle
Pinnacle Merger (see page common stock pursuant to the Pinnacle merger
64) generally will be taxable for U.S. federal
income tax purposes. As described in more detail
below, you are likely to be subject to special
treatment with respect to the contingent
payment. To review the U.S. federal income tax
consequences to stockholders in greater detail,
see "Special Factors--Federal Income Tax
Consequences of the Pinnacle Merger."
. At the annual meeting you will also vote on the
Other Matters to be Voted election of nine directors to the Company's
on at the Annual Meeting board of directors. Such directors will hold
(see page 105) office until the earlier of the next annual
meeting of stockholders (and until such
director's successor shall have been duly
elected and qualified) or the effective time of
the Pinnacle merger. If the Pinnacle merger is
completed, all of such directors will be
replaced by the members of board of directors of
Pinnacle Acq Corp.
Who Can Help Answer Other . If you have more questions about the Pinnacle
Questions merger or would like additional copies of this
Proxy Statement, you should contact the
Corporate Secretary of the Company at Pinnacle
Entertainment, Inc., 330 North Brand Boulevard,
Suite 1100, Glendale, California 91203.
11
<PAGE>
Ownership Structure and Voting Control
The following diagrams illustrate the ownership of the voting power of
Pinnacle, PHCR and Harveys Casino Resorts before and after the Pinnacle merger
and the Harveys merger (assuming no additional investment in PHCR by
affiliates of Colony Capital).
[DIAGRAMS APPEAR HERE]
12
<PAGE>
TABLE OF CONTENTS
<TABLE>
<S> <C>
SUMMARY TERM SHEET......................................................... 3
TABLE OF CONTENTS.......................................................... 13
SELECTED CONSOLIDATED FINANCIAL DATA....................................... 16
UNAUDITED PRO FORMA CONSOLIDATED FINANCIAL STATEMENTS REFLECTING CERTAIN
DISPOSITIONS.............................................................. 18
ANNUAL MEETING............................................................. 25
Purpose.................................................................. 25
Record Date; Outstanding Shares; Quorum.................................. 25
Voting of Proxies; Votes Required........................................ 25
Abstentions; Broker Non-Votes............................................ 26
Solicitation of Proxies and Expenses..................................... 26
CAUTIONARY STATEMENTS REGARDING FORWARD-LOOKING STATEMENTS................. 27
PROPOSAL 1: MERGER OF THE COMPANY AND PINNACLE ACQUISITION CORPORATION..... 28
PARTIES TO THE PINNACLE MERGER............................................. 28
The Company.............................................................. 28
Pinnacle Acq Corp, PHCR, Harveys Casino Resorts and Voteco............... 32
SPECIAL FACTORS............................................................ 37
Background of the Pinnacle Merger........................................ 37
Purpose and Reasons for the Pinnacle Merger.............................. 46
Certain Effects of the Pinnacle Merger................................... 47
Recommendation of the Special Committee and Board of Directors; Fairness
of the Pinnacle Merger.................................................. 49
Opinion of Financial Advisor to the Special Committee.................... 54
Position of Pinnacle Acq Corp, PHCR, Harveys Casino Resorts and Voteco... 61
Position of Enumerated Management Stockholders........................... 63
Federal Income Tax Consequences of the Pinnacle Merger................... 64
THE PINNACLE MERGER........................................................ 66
Interests of Certain Persons in the Pinnacle Merger; Certain
Relationships........................................................... 66
Conduct of the Business of the Company if the Pinnacle Merger is Not
Consummated............................................................. 68
Plans for the Company After the Pinnacle Merger.......................... 68
Financing of the Pinnacle Merger and the Harveys Merger.................. 71
Regulatory Requirements.................................................. 73
Legal Proceedings........................................................ 78
Fees and Expenses........................................................ 78
Accounting Treatment..................................................... 79
APPRAISAL RIGHTS........................................................... 79
MERGER AGREEMENT........................................................... 82
General.................................................................. 82
Effective Time........................................................... 82
Conversion of Pinnacle Shares and Stock Options; Contingent Payment...... 82
Surrender of Shares and Payment.......................................... 84
Contribution of Stock by the Management Stockholders..................... 85
The Harveys Merger....................................................... 85
Representations and Warranties........................................... 85
Conduct of Business Pending the Pinnacle Merger.......................... 85
Conditions to the Pinnacle Merger........................................ 87
</TABLE>
13
<PAGE>
<TABLE>
<S> <C>
Expenses of the Pinnacle Merger......................................... 90
Financing of the Pinnacle Merger and the Harveys Merger................. 90
Indemnification and Insurance........................................... 91
No Solicitation......................................................... 91
Termination............................................................. 93
Termination Fee......................................................... 95
Amendment............................................................... 95
Limited Joint and Several Liability of Harveys Casino Resorts........... 95
VOTING AND CONTRIBUTION AGREEMENT; MEMORANDUM OF UNDERSTANDING............ 96
Voting and Contribution Agreement....................................... 96
Memorandum of Understanding............................................. 98
STOCKHOLDERS AGREEMENT.................................................... 99
COMMON STOCK MARKET PRICE AND DIVIDEND INFORMATION........................ 103
Market Price Information................................................ 103
Dividend Information.................................................... 103
COMMON STOCK PURCHASE INFORMATION......................................... 104
Purchases by the Company................................................ 104
Purchases by Management Stockholders.................................... 104
PROPOSAL 2: ELECTION OF DIRECTORS......................................... 105
General................................................................. 105
Information Regarding the Directors of the Company...................... 105
Board Meetings, Board Committees and Director Compensation.............. 107
Amended and Restated Directors Deferred Compensation Plan............... 108
Compensation Committee Interlocks and Insider Participation............. 110
Executive Officers...................................................... 110
Executive Compensation.................................................. 111
Compensation Committee Report on Executive Compensation................. 115
Performance Graph....................................................... 116
Certain Relationships and Related Transactions.......................... 117
Section 16(a) Beneficial Ownership Reporting Compliance................. 117
Security Ownership of Certain Beneficial Owners and Management.......... 118
ADDITIONAL INFORMATION ABOUT THE COMPANY.................................. 120
Gaming and Other Operations............................................. 120
Expansion Plans......................................................... 124
Government Regulation................................................... 125
Competition............................................................. 139
Federal Income Tax Matters.............................................. 140
Employees............................................................... 141
Other Information....................................................... 141
Real Estate Properties.................................................. 142
Legal Proceedings....................................................... 143
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS............................................................... 145
INDEPENDENT PUBLIC ACCOUNTANTS............................................ 159
STOCKHOLDER PROPOSALS FOR THE NEXT ANNUAL MEETING......................... 159
ANNUAL REPORT TO STOCKHOLDERS AND FORM 10-K............................... 159
WHERE TO FIND ADDITIONAL INFORMATION...................................... 160
PROVISIONS FOR UNAFFILIATED SECURITY HOLDERS.............................. 160
AVAILABLE INFORMATION..................................................... 161
</TABLE>
14
<PAGE>
<TABLE>
<S> <C>
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS................................. F-1
ANNEX A AGREEMENT AND PLAN OF MERGER...................................... A-1
ANNEX A1 LETTER AGREEMENT................................................. A1-1
ANNEX B OPINION OF JEFFERIES & COMPANY, INC............................... B-1
ANNEX C SECTION 262 OF THE DELAWARE GENERAL CORPORATION LAW............... C-1
</TABLE>
15
<PAGE>
SELECTED CONSOLIDATED FINANCIAL DATA
The following table sets forth selected consolidated financial data for the
Company and its subsidiaries as of and for each of the five years in the
period ended December 31, 1999, and as of and for the six months ended June
30, 2000 and the six months ended June 30, 1999. The historical financial data
for Company as of and for each of the five fiscal years in the period ended
December 31, 1999, and as of and for the six months ended June 30, 2000 and
the six months ended June 30, 1999 has been derived from the audited and
unaudited Consolidated Financial Statements of the Company and should be read
in conjunction with the Consolidated Financial Statements of the Company and
the notes thereto included in the Company's Annual Report on Form 10-K for the
fiscal year ended December 31, 1999, and in the Company's Quarterly Report on
Form 10-Q for the fiscal quarter ended June 30, 2000, respectively, and
included in this Proxy Statement beginning on page F-1.
The Hollywood Park Race Track ("HPRT") and Hollywood Park-Casino ("HPC")
were disposed of in September 1999. The Company leased HPC back from the
purchaser and immediately subleased the facility to an unaffiliated third
party (see Note 3 to the Notes to Consolidated Financial Statements). Casino
Magic Corp. was acquired on October 15, 1998 and Boomtown, Inc. was acquired
on June 30, 1997, with both acquisitions accounted for under the purchase
method of accounting for a business combination, and therefore Casino Magic's
and Boomtown's financial results were not included in periods prior to their
respective acquisitions. The Crystal Park Casino began operations on October
25, 1996, under a lease with an unaffiliated third party. As of March 31,
1996, results of operations of Sunflower Racing, Inc. (a horse and greyhound
racing facility in Kansas) were no longer consolidated with the Company's due
to Sunflower Racing's May 17, 1996, filing for reorganization under Chapter 11
of the Bankruptcy Code.
Included in the table is a presentation of earnings before interest, taxes,
depreciation, amortization and other non-recurring items ("EBITDA"). EBITDA is
not a measure of financial performance under generally accepted accounting
principles ("GAAP"), but is used by some investors to determine a company's
ability to service or incur indebtedness. EBITDA is not calculated in the same
manner by all entities and accordingly, may not be an appropriate measure for
performance. EBITDA should not be considered in isolation from, or as a
substitute for, net income (loss), cash flows from operations or cash flow
data prepared in accordance with GAAP. EBITDA is calculated by adding income
taxes, minority interest, net interest expense, depreciation and amortization
and other non-recurring items to net income (loss). Other non-recurring items
include: a) the gain (loss) on disposition of assets incurred in the six
months ended June 30, 2000 and the years ended December 31, 1999, 1998 and
1996; b) the impairment write-down in the year ended December 31, 1999, c) the
pre-opening expenses for Belterra Casino Resort incurred in the six months
ended June 30, 2000 and 1999 and the years ended December 31, 1999 and 1998;
d) the proposed merger costs incurred in the six months ended June 30, 2000;
e) the REIT restructuring expenses incurred in the years ended December 31,
1998 and 1997; and f) the lawsuit settlement incurred in the year ended
December 31, 1995.
16
<PAGE>
PINNACLE ENTERTAINMENT, INC.
SELECTED CONSOLIDATED FINANCIAL DATA
<TABLE>
<CAPTION>
Six Months
ended
Years ended December 31, June 30,
--------------------------------------------------- ----------------------
1999 1998 1997 1996 1995 2000 1999
---------- --------- -------- -------- -------- ---------- ----------
(in thousands, except per share data and ratios)
<S> <C> <C> <C> <C> <C> <C> <C>
Statement of Operations
Data:
Revenues:
Gaming................. $ 557,526 $ 293,057 $137,659 $ 50,717 $ 26,656 $ 265,595 $ 285,305
Racing................. 55,209 66,871 68,844 71,308 79,862 9,452 38,741
Food and beverage...... 39,817 30,510 19,894 13,947 19,783 17,236 21,701
Other.................. 54,305 36,529 21,731 7,253 4,271 30,338 25,780
---------- --------- -------- -------- -------- ---------- ----------
706,857 426,967 248,128 143,225 130,572 322,621 371,527
---------- --------- -------- -------- -------- ---------- ----------
Expenses:
Gaming................. 309,508 161,549 74,733 27,249 5,291 149,455 156,499
Racing................. 22,694 29,316 30,304 30,167 30,960 4,133 15,378
Food and beverage...... 46,558 38,860 25,745 19,573 24,749 19,020 25,763
General, administrative
and other............. 174,030 118,397 77,370 43,962 54,735 83,400 91,664
Depreciation and
amortization.......... 51,924 32,121 18,157 10,695 11,384 24,255 27,202
(Gain) loss on
disposition of
assets................ (62,507) 2,221 0 11,412 0 (59,441) 0
Impairment write-down
of Hollywood Park-
Casino................ 20,446 0 0 0 0 0 0
---------- --------- -------- -------- -------- ---------- ----------
562,653 382,464 226,309 143,058 127,119 220,822 316,506
---------- --------- -------- -------- -------- ---------- ----------
Operating income........ 144,204 44,503 21,819 167 3,453 101,799 55,021
Interest expense, net.. 57,544 22,518 7,302 942 3,922 23,959 30,053
---------- --------- -------- -------- -------- ---------- ----------
Income (loss) before
income taxes and
minority interests..... 86,660 21,985 14,517 (775) (469) 77,840 24,968
Minority interests..... 1,687 374 (3) 15 0 0 1,137
Income tax expense..... 40,926 8,442 5,850 3,459 693 29,696 9,987
---------- --------- -------- -------- -------- ---------- ----------
Net income (loss)...... $ 44,047 $ 13,169 $ 8,670 $ (4,249) $ (1,162) $ 48,144 $ 13,844
========== ========= ======== ======== ======== ========== ==========
Dividends on convertible
preferred stock........ $ 0 $ 0 $ 1,520 $ 1,925 $ 1,925 $ 0 $ 0
---------- --------- -------- -------- -------- ---------- ----------
Net income (loss)
available to (allocated
to) common
stockholders........... $ 44,047 $ 13,169 $ 7,150 $ (6,174) $ (3,087) $ 48,144 $ 13,844
========== ========= ======== ======== ======== ========== ==========
Net income (loss) per
common share:
Basic.................. $ 1.70 $ 0.50 $ 0.33 $ (0.33) $ (0.17) $ 1.83 $ 0.54
Diluted................ $ 1.67 $ 0.50 $ 0.32 $ (0.33) $ (0.17) $ 1.76 $ 0.54
Other Data:
Earnings before
interest, taxes,
depreciation,
amortization and other
non-recurring items
(EBITDA)............... $ 157,087 $ 80,085 $ 42,459 $ 22,274 $ 20,925 $ 74,194 $ 83,732
Cash flows provided by
(used in):
Operating activities... $ 75,323 $ 38,112 $ 14,365 $ 13,677 $ 20,291 $ 4,857 $ 68,377
Investing activities... (51,063) (136,532) (16,226) (19,895) (32,922) 91,747 (27,246)
Financing activities... 54,868 118,498 9,609 (4,268) (2,085) (2,765) 60,129
Capital expenditures... 59,680 56,747 32,505 23,786 25,150 108,776 19,705
Ratio of earnings to
fixed charges (1998,
1999 and 2000 only).... 2.20x 1.73x N/A N/A N/A 3.15x 1.67x
Balance Sheet Data:
Cash and cash
equivalents............ $ 123,362 $ 44,234 $ 24,156 $ 16,408 $ 25,532 $ 217,201 $ 145,494
Short-term investments.. 123,428 3,179 0 4,766 6,447 0 16,143
Total assets............ 1,045,408 891,339 419,029 205,886 283,303 1,088,546 1,008,876
Current liabilities..... 145,008 128,592 57,317 35,364 74,951 258,857 148,623
Long term notes
payable................ 618,698 527,619 132,102 282 15,629 498,751 603,702
Total liabilities....... 764,532 656,611 195,729 44,711 117,557 758,434 757,539
Minority interests...... 0 3,752 1,946 3,015 0 0 3,933
Stockholders' equity.... 280,876 230,976 221,354 158,160 165,746 330,112 247,404
</TABLE>
17
<PAGE>
UNAUDITED PRO FORMA CONSOLIDATED FINANCIAL STATEMENTS
REFLECTING CERTAIN DISPOSITIONS
As more fully described in Pinnacle's Annual Report on Form 10-K for the
year ended December 31, 1999 and Quarterly Report on Form 10-Q for the six
months ended June 30, 2000, Pinnacle disposed of HPRT and HPC in September
1999 (the "1999 Asset Dispositions"), sold 42 acres of excess raw land in
March 2000 (the "Land Sale") and sold Turf Paradise Race Track ("Turf") in
June 2000 to a private investor (the "Turf Transaction"). In addition, during
1999, the Company entered into asset sales agreements for the sale of the
Casino Magic Bay St. Louis ("CMAG-BSL") and Boomtown Biloxi ("BT-Biloxi")
facilities to subsidiaries of Penn National Gaming, Inc. (the "Penn
Transaction") which sale was completed on August 8, 2000. The Penn Transaction
is shown because the closing of the transaction is a condition precedent to
the Pinnacle Merger. See "Merger Agreement--Conditions to the Pinnacle
Merger."
The following unaudited pro forma consolidated balance sheet was prepared
from the unaudited consolidated balance sheet of Pinnacle as of June 30, 2000.
The following unaudited pro forma consolidated statements of operations
were prepared from the audited consolidated statement of operations of
Pinnacle for the year ended December 31, 1999 and from the unaudited
consolidated statement of operations of Pinnacle for the six months ended June
30, 2000. The results of operations attributable to the actual and pending
asset dispositions have been eliminated through pro forma adjustments.
It was assumed that the 1999 Asset Dispositions, the Land Sale, the Penn
Transaction and the Turf Transaction occurred on January 1, 1999 for the
unaudited pro forma consolidated statements of operations and that the Penn
Transaction occurred as of June 30, 2000 for the unaudited pro forma
consolidated balance sheet. In accordance with pro forma presentation
guidelines of the SEC, the pro forma statements of operations for the year
ended December 31, 1999 and the six months ended June 30, 2000 do not reflect
estimated gains or asset impairments from these transactions. Therefore, the
gain and asset impairments and related tax expense for the 1999 Asset
Dispositions were eliminated to arrive at the unaudited pro forma consolidated
statement of operations for the year ended December 31, 1999, and the gain and
related tax expense for the Land Sale and Turf Transaction were eliminated to
arrive at the unaudited pro forma consolidated statement of operations for the
six months ended June 30, 2000.
The dispositions of HPRT, CMAG-BSL, BT-Biloxi, Turf and the 42 acres of
excess raw land were accounted for as sales. The disposition of HPC was
accounted for as a financing transaction and therefore is not recognized as a
sale for accounting purposes because Pinnacle subleased HPC to a third-party
operator.
The following unaudited pro forma consolidated financial statements should
be read in conjunction with the accompanying notes and assumptions. The
unaudited pro forma consolidated financial information is presented for
illustrative purposes only and contains estimates such as transaction costs
and income taxes for the Penn Transaction. Accordingly, the gains and related
tax expenses on the Penn Transaction for the unaudited pro forma balance sheet
are estimated, and the pro forma financial statements are not necessarily
indicative of the operating results or financial position of Pinnacle if the
pending disposition had been completed in an earlier period, nor necessarily
indicative of its future operating results or financial position.
These pro forma financial statements are based on, and should be read in
conjunction with, the historical consolidated financial statements and the
related notes thereto of Pinnacle contained in Pinnacle's Annual Report on
Form 10-K for the year ended December 31, 1999, and Quarterly Report on Form
10-Q for the six months ended June 30, 2000, and included in this Proxy
Statement beginning on page F-1.
18
<PAGE>
PINNACLE ENTERTAINMENT, INC.
UNAUDITED PRO FORMA CONSOLIDATED BALANCE SHEET
As of June 30, 2000
(in thousands, except per share data)
<TABLE>
<CAPTION>
Pinnacle
Entertainment, Pro Forma Pro Forma
Inc. Adjustments Consolidated
-------------- ----------- ------------
<S> <C> <C> <C>
Assets
Current Assets:
Cash and cash equivalents......... $ 217,201 $ 195,000 (a) $ 410,219
(1,982) (b)
Receivables, net.................. 12,750 12,750
Prepaid expenses and other
assets........................... 18,055 18,055
Assets held for sale.............. 138,909 (122,083)(c) 16,826
Current portion of notes
receivable....................... 5,785 5,785
---------- --------- ----------
Total current assets............ 392,700 70,935 463,535
Notes receivable.................... 8,345 8,345
Net property, plant and equipment... 530,372 530,372
Goodwill, net of amortization....... 85,876 (13,157)(d) 72,719
Gaming license, net of
amortization....................... 40,210 40,210
Debt issuance costs, net of
amortization....................... 20,563 20,563
Other assets........................ 10,480 10,480
---------- --------- ----------
Total assets.................... $1,088,546 $ 57,778 $1,146,324
========== ========= ==========
Liabilities and Stockholders' Equity
Current Liabilities:
Accounts payable.................. $ 21,723 $ 21,723
Accrued interest.................. 24,564 24,564
Other accrued liabilities......... 38,478 1,500 (e) 39,978
Accrued compensation.............. 14,591 14,591
Liabilities to be assumed by
buyers of assets held for sale... 8,573 (8,573)(f) 0
Federal and state income taxes.... 28,715 23,523 (g) 52,238
Current portion of notes payable.. 122,213 122,213
---------- --------- ----------
Total current liabilities....... 258,857 16,450 275,307
Notes payable, less current
maturities......................... 498,751 0 498,751
Deferred tax liabilities............ 826 0 826
Stockholders' Equity:
Capital stock--
Preferred........................ 0 0
Common........................... 2,631 2,631
Capital in excess of par value.... 225,739 225,739
Retained earnings................. 101,742 41,328 (h) 143,070
---------- --------- ----------
Total stockholders' equity...... 330,112 41,328 371,440
---------- --------- ----------
Total liabilities and
stockholders' equity............. $1,088,546 $ 57,778 $1,146,324
========== ========= ==========
Other Data
Book value per share................ $ 12.55
Pro forma book value per share...... $ 14.12
Pro forma cash and cash equivalents
per share.......................... $ 15.59
</TABLE>
19
<PAGE>
PINNACLE ENTERTAINMENT, INC.
NOTES TO UNAUDITED PRO FORMA CONSOLIDATED BALANCE SHEET
Assumptions--During 1999 and 2000, the Company entered into asset sales
agreements for the Penn Transaction and the Turf Transaction. The Turf
Transaction closed in June 2000 and the Penn Transaction closed in August
2000. However, pursuant to pro forma presentation guidelines, the unaudited
pro forma consolidated balance sheet as of June 30, 2000 is presented as if
the Penn Transaction had occurred on June 30, 2000.
Pro Forma Adjustments--The following adjustments have been made to the
unaudited pro forma consolidated balance sheet:
(a) To record the sales proceeds of $195,000,000 for the Penn
Transaction.
(b) To record the net cash paid to the buyers of CMAG-BSL and BT-Biloxi,
which amount represents the difference between assets sold (other than net
property, plant and equipment) and liabilities assumed.
(c) To record the sale of CMAG-BSL and BT-Biloxi, and related assets,
net of accumulated depreciation.
(d) To record the write off of goodwill associated with the Penn
Transaction, net of accumulated amortization.
(e) To record estimated Penn Transaction expenses and other related
costs of approximately $1,500,000.
(f) To record the liabilities assumed by the buyers in the Penn
Transaction.
(g) To record the current and deferred federal and state income taxes
payable related to the dispositions. The Company may elect deferred like-
kind Section 1031 exchanges (the "Exchanges") for tax purposes with regard
to the Penn Transaction. If the Company elects, and is successful in
completing, the Exchanges, the Company may not recognize a current taxable
gain on the Penn Transaction and, accordingly, may be able to defer the tax
liabilities as a result of this transaction.
(h) To record the estimated gain on the Penn Transaction. The following
is the preliminary calculation of the estimated impact to the statement of
operations resulting from this transaction (in thousands):
<TABLE>
<CAPTION>
CMAG-BSL
and BT-
Biloxi
--------
<S> <C>
Cash proceeds........................................................ $195,000
Less:Estimated transaction and other related costs................... 1,500
Estimated net book value of property, plant and equipment
disposed.......................................................... 115,492
Estimated goodwill, net of accumulated amortization, related to the
Penn Transaction.................................................. 13,157
--------
Estimated gain before income taxes................................... 64,851
Less: Estimated income taxes......................................... 23,523
--------
Estimated gain....................................................... $ 41,328
========
</TABLE>
The above calculations are preliminary, subject to final determination of
the net book value of property, plant and equipment disposed of, income tax
consequences and transaction and other costs. Actual accounting adjustments
related to the dispositions may differ from the pro forma adjustments.
20
<PAGE>
PINNACLE ENTERTAINMENT, INC.
UNAUDITED PRO FORMA CONSOLIDATED STATEMENT OF OPERATIONS
For the year ended December 31, 1999
(in thousands, except per share data and ratios)
<TABLE>
<CAPTION>
Pro Forma Adjustments
-----------------------
Less: HPRT,
HPC, Pinnacle
Pinnacle CMAG-BSL, Entertainment, Inc.
Entertainment, Inc. BT-Biloxi, Pro Forma Pro Forma
Consolidated Turf(a)(1) Adjustments Consolidated
------------------- ----------- ----------- -------------------
<S> <C> <C> <C> <C>
Revenues:
Gaming................ $557,526 $172,178 $385,348
Racing................ 55,209 55,209 0
Food and beverage..... 39,817 19,962 19,855
Hotel and recreational
vehicle park......... 11,737 1,797 9,940
Truck stop and service
station.............. 17,644 0 17,644
Other income.......... 24,924 11,469 4,500 (b) 17,955
-------- -------- -------- --------
706,857 260,615 4,500 450,742
-------- -------- -------- --------
Expenses:
Gaming................ 309,508 95,053 214,455
Racing................ 22,694 22,694 0
Food and beverage..... 46,558 23,959 22,599
Hotel and recreational
vehicle park......... 5,923 894 5,029
Truck stop and service
station.............. 16,296 0 16,296
General and
administrative....... 134,870 52,114 200 (c) 82,956
Depreciation and
amortization......... 51,924 16,036 746 (d) 36,634
Pre-opening costs,
Belterra Casino
Resort .............. 3,020 0 3,020
Gain on disposition of
assets, net.......... (62,507) 0 61,522 (e) (985)
Impairment write-down
of Hollywood Park-
Casino............... 20,446 0 (20,446)(e) 0
Proposed merger
costs................ 0 0 0 (f) 0
Other................. 13,921 5,921 8,000
-------- -------- -------- --------
562,653 216,671 42,022 388,004
-------- -------- -------- --------
Operating income........ 144,204 43,944 (37,522) 62,738
Interest expense,
net.................. 57,544 86 912 (g) 58,370
-------- -------- -------- --------
Income before minority
interests and income
taxes.................. 86,660 43,858 (38,434) 4,368
Minority interests.... 1,687 0 0 1,687
Income tax expense
(benefit)............ 40,926 17,306 (20,958)(h) 2,662
-------- -------- -------- --------
Net income.............. $ 44,047 $ 26,552 $(17,476) $ 19
======== ======== ======== ========
Net income per common
share:
Net income--basic..... $1.70 $0.00
Net income--diluted... $1.67 $0.00
Number of shares--
basic.................. 25,966 25,966
Number of shares--
diluted................ 26,329 26,329
Other Data:
Ratio of earnings to
fixed charges........ 2.20x
Pro forma ratio of
earnings to fixed
charges.............. 1.02x
</TABLE>
21
<PAGE>
PINNACLE ENTERTAINMENT, INC.
UNAUDITED PRO FORMA CONSOLIDATED STATEMENT OF OPERATIONS
For the six months ended June 30, 2000
(in thousands, except per share data and ratios)
<TABLE>
<CAPTION>
Pro Forma Adjustments
-----------------------
Less: HPRT,
HPC, Pinnacle
Pinnacle CMAG-BSL, Entertainment, Inc.
Entertainment, Inc. BT-Biloxi, Pro Forma Pro Forma
Consolidated Turf(a)(2) Adjustments Consolidated
------------------- ----------- ----------- -------------------
<S> <C> <C> <C> <C>
Revenues:
Gaming................ $265,595 $70,452 $195,143
Racing................ 9,452 9,452 0
Food and beverage..... 17,236 6,086 11,150
Hotel and recreational
vehicle park......... 6,346 1,053 5,293
Truck stop and service
station.............. 9,383 0 9,383
Other income.......... 14,609 4,428 0 (b) 10,181
-------- ------- -------- --------
322,621 91,471 0 231,150
-------- ------- -------- --------
Expenses:
Gaming................ 149,455 38,985 110,470
Racing................ 4,133 4,133 0
Food and beverage..... 19,020 6,677 12,343
Hotel and recreational
vehicle park......... 3,104 586 2,518
Truck stop and service
station.............. 8,703 0 8,703
General and
administrative....... 57,959 16,458 0 (c) 41,501
Depreciation and
amortization......... 24,255 4,758 (175)(d) 19,322
Pre-opening costs,
Belterra Casino
Resort .............. 5,456 0 5,456
Gain on disposition of
assets, net.......... (59,441) 0 59,777 (e) 336
Proposed merger
costs................ 2,125 0 (2,125)(f) -
Other................. 6,053 2,118 3,935
-------- ------- -------- --------
220,822 73,715 57,477 204,584
-------- ------- -------- --------
Operating income........ 101,799 17,756 (57,477) 26,566
Interest expense,
net.................. 23,959 33 (37)(g) 23,889
-------- ------- -------- --------
Income before income
taxes.................. 77,840 17,723 (57,440) 2,677
Income tax expense
(benefit)............ 29,696 6,380 (22,352)(h) 964
-------- ------- -------- --------
Net income.............. $ 48,144 $11,343 $(35,088) $ 1,713
======== ======= ======== ========
Net income per common
share:
Net income--basic..... $ 1.83 $ 0.07
Net income--diluted... $ 1.76 $ 0.06
Number of shares--
basic.................. 26,281 26,281
Number of shares--
diluted................ 27,326 27,326
Other Data:
Ratio of earnings to
fixed charges........ 3.15x
Pro forma deficiency
of earnings available
to cover fixed
charges.............. (266)
</TABLE>
22
<PAGE>
PINNACLE ENTERTAINMENT, INC.
NOTES TO UNAUDITED PRO FORMA CONSOLIDATED
STATEMENTS OF OPERATIONS
Assumptions--The unaudited pro forma consolidated statements of operations
for the year ended December 31, 1999, and the six months ended June 30, 2000,
are presented as if the 1999 Asset Dispositions, the Land Sale, the Penn
Transaction and the Turf Transaction had taken place on January 1, 1999. Had
these transactions occurred on January 1, 1999, the cash and cash equivalents
generated as of January 1, 1999, net of estimated transaction costs and
related estimated federal and state income taxes, would have been
approximately 330,900,000. The results of operations of HPRT, HPC, CMAG-BSL,
BT-Biloxi and Turf have been eliminated from Pinnacle's historical results of
operations, so that only the continuing Pinnacle operations are reflected.
In accordance with pro forma presentation guidelines of the SEC, the pro
forma statements of operations eliminate the gain and impairment write-down
and related income tax expense on the 1999 Asset Dispositions, Land Sale and
Turf Transaction. In addition, in accordance with pro forma presentation
guidelines, the pro forma statements of operations do not reflect estimated
gains and related tax expense on the Penn Transaction or any income that could
have been generated during the periods shown from the proceeds received. A
reduction of debt, investments in other assets including short-term investment
securities or an investment in other casino operations would likely have
resulted and has not been reflected in these pro forma statements of
operations.
Pro Forma Adjustments--The following adjustments have been made to the
unaudited pro forma consolidated statements of operations:
(a)(1) To eliminate the historical results of operations of HPRT, HPC,
CMAG-BSL, BT-Biloxi and Turf.
(a)(2) To eliminate the historical results of operations of CMAG-BSL,
BT-Biloxi and Turf.
(b) To record HPC rental income to be received by Pinnacle. In
connection with the 1999 Asset Dispositions, Pinnacle entered into a lease
agreement with an unaffiliated third party to operate HPC. Rent is received
by Pinnacle in the amount of $500,000 per month, or $6,000,000 per annum.
Since the 1999 Asset Dispositions occurred in September 1999, the
historical results of operations for the year ended December 31, 1999
include three months of lease income and therefore the pro forma adjustment
reflects only the additional $4,500,000 of rental income for the period
January 1, 1999 to September 30, 1999.
(c) To record office rent expense to be paid by Pinnacle. In connection
with the 1999 Asset Dispositions, Pinnacle relocated its corporate offices.
Prior to the 1999 Asset Dispositions, Pinnacle maintained its corporate
offices at HPRT and did not pay any office rent. Since the 1999 Asset
Dispositions occurred in September 1999 and the Company relocated its
corporate offices prior to such transaction, the historical results of
operations for the year ended December 31, 1999 include four months of
office rent expense, and therefore the pro forma adjustment reflects only
the additional $200,000 of estimated office rent expense for the period
January 1, 1999 to August 31, 1999.
(d) To record estimated additional depreciation expense for HPC and
related assets associated with the 1999 Asset Dispositions and related
financing, as well as depreciation expense for Pinnacle assets sold which
are not reflected in the historical results of operations of HPRT and HPC;
off set by a reduction in amortization expense associated with the goodwill
written off in connection with the Penn Transaction. See note (e) to the
Unaudited Pro Forma Consolidated Balance Sheet.
(e) To eliminate the gain on disposition of assets related to the 1999
Asset Dispositions and the impairment write-down on the Hollywood Park-
Casino (for the year ended December 31, 1999) and the gain on disposition
of assets related to the Land Sale and Turf Transaction (for the six months
ended June 30, 2000).
(f) To eliminate the costs associated with the Pinnacle Merger, which
merger discussions began in 2000.
23
<PAGE>
PINNACLE ENTERTAINMENT, INC.
NOTES TO UNAUDITED PRO FORMA CONSOLIDATED
STATEMENTS OF OPERATIONS--(Continued)
(g) To adjust interest expense associated with the financing debt
incurred in connection with the 1999 Asset Dispositions.
(h) To record the U.S. federal and state income tax effect of pro forma
adjustments at Pinnacle's effective tax rate of approximately 39.5% for the
year ended December 31, 1999 and approximately 36% for the six months ended
June 30, 2000; off set by the elimination of the income tax expense related
to the 1999 Asset Dispositions for the year ended December 31, 1999, and
the income tax expense related to the Land Sale and Turf Transaction for
the six months ended June 30, 2000.
The unaudited pro forma consolidated statements of operations for the year
ended December 31, 1999, and the six months ended June 30, 2000, do not
reflect the benefit the Company may have received from unaudited pro forma
consolidated cash, cash equivalents and short term investments of
approximately $447,000,000 as of January 1, 1999. Such amount represents the
estimated net transaction proceeds of approximately $399,600,000 (the 1999
Asset Dispositions, the Land Sale, the Penn Transaction and the Turf
Transaction before estimated taxes of $68,700,000, which are assumed to be
paid with the scheduled second quarter 1999 quarterly estimated payment),
combined with $47,400,000 of cash, cash equivalents and short term investments
as of December 31, 1998.
In February 1999, the Company completed the issuance of $350,000,000 of
9.25% Senior Subordinated Notes (the "9.25% Notes"). Had the above
transactions been completed on January 1, 1999 for the estimated proceeds
noted above, the Company may not have issued the 9.25% Notes in February 1999.
The net proceeds from the issuance of the 9.25% Notes were used to pay down
the Company's bank credit facility of $287,000,000 at the time and provide
funds for future operating needs. Had the Company not issued the 9.25% Notes,
the Company may not have incurred interest expense of approximately
$28,328,000 (or, if using after tax costs, of $17,139,000, a benefit of $0.65
per diluted share) for the year ended December 31, 1999, and $16,188,000 (or,
if using after tax costs, of $10,360,000, a benefit of $0.38 per diluted
share) for the six months ended June 30, 2000.
In addition, as noted in note (e) above, the unaudited pro forma
consolidated statements of operations for the year ended December 31, 1999,
and the six months ended June 30, 2000, respectively, exclude the gain of
$61,522,000 and impairment write-down of $20,446,000 (or, if using the net of
the after tax gain and after tax impairment write down of approximately
$18,136,000, $0.69 per diluted share) related to the 1999 Asset Dispositions
and the gain of $23,854,000 (or, if using the after tax gain, of approximately
$15,322,000, $0.56 per diluted share) related to the Land Sale and the gain of
$35,923,000 (or, if using the after tax gain, of approximately $21,262,000,
$0.78 per diluted share) related to the Turf Transaction. In addition, the
unaudited pro forma consolidated statement of operations for the year ended
December 31, 1999 does not reflect the estimated after tax gain on the Penn
Transaction of approximately $41,328,000, or $1.57 per diluted share.
24
<PAGE>
ANNUAL MEETING
Purpose
At the Annual Meeting, holders of Pinnacle Common Stock will be asked to
vote upon: (i) a proposal to approve and adopt the Merger Agreement, (ii) the
election of nine directors to serve on the Company's Board of Directors for
the coming year, each to hold office until the earlier of the next annual
meeting of stockholders (and until such director's successor shall have been
duly elected and qualified) or the effective time of the Pinnacle Merger and
(iii) any other business that properly comes before the Annual Meeting.
Record Date; Outstanding Shares; Quorum
Only holders of record of Pinnacle Common Stock at the close of business on
August 8, 2000 (the "Record Date") will be entitled to notice of and to vote
at the Annual Meeting. As of the close of business on the Record Date, there
were 26,343,092 shares of Pinnacle Common Stock outstanding and entitled to
vote, held of record by 3,176 stockholders. Pursuant to New York Stock
Exchange requirements, a majority, or 13,171,547 of these shares, present in
person or represented by proxy, will constitute a quorum for the transaction
of business. Each of the Company's stockholders is entitled to one vote for
each share of Pinnacle Common Stock held as of the Record Date.
Voting of Proxies; Votes Required
Stockholders are requested to complete, date, sign and return the
accompanying Proxy Card in the enclosed envelope. All properly executed,
returned, and unrevoked Proxy Cards will be voted in accordance with the
instructions indicated thereon. Executed but unmarked Proxy Cards will be
voted FOR the approval and adoption of the Merger Agreement and FOR the
election of each director nominee listed on the Proxy Card. The Company's
Board of Directors does not presently intend to bring any business before the
Annual Meeting other than that referred to in this Proxy Statement and
specified in the Notice of the Annual Meeting. Since the Company did not
receive notice prior to August 8, 2000 of any other matter to come before the
Annual Meeting, as to any such other matter that may properly come before the
Annual Meeting, including any motion made for adjournment of the Annual
Meeting, by signing the Proxy Cards, stockholders confer discretionary
authority on the proxies (who are persons designated by the Board of
Directors) to vote all shares covered by the Proxy Cards on any such matter.
Any stockholder who has given a proxy may revoke it at any time before it
is exercised at the Annual Meeting by (i) filing a written revocation with, or
delivering a duly executed proxy bearing a later date to, the Secretary of the
Company, 330 North Brand Boulevard, Suite 1100, Glendale, California 91203, or
(ii) attending the Annual Meeting and voting in person (although attendance at
the Annual Meeting will not, by itself, revoke a proxy).
The proposal to approve and adopt the Merger Agreement requires approval by
the affirmative vote of the holders of a majority of the outstanding shares of
Pinnacle Common Stock. The Management Stockholders have agreed to vote their
shares (representing a total of approximately 11.4% of the outstanding
Pinnacle Common Stock) in favor of the approval and adoption of the Merger
Agreement. See "Voting and Contribution Agreement; Memorandum of
Understanding." Elections of directors are determined by a plurality of shares
of Pinnacle Common Stock represented in person or by proxy and voting at the
Annual Meeting.
PINNACLE STOCKHOLDERS SHOULD NOT SEND ANY CERTIFICATES REPRESENTING SHARES
OF PINNACLE COMMON STOCK WITH THEIR PROXY CARDS. YOU WILL RECEIVE WRITTEN
INSTRUCTIONS REGARDING THE SURRENDER OF YOUR STOCK CERTIFICATES AND RECEIPT OF
PAYMENT FOR YOUR SHARES OF PINNACLE COMMON STOCK AFTER THE PINNACLE MERGER IS
COMPLETED.
25
<PAGE>
Abstentions; Broker Non-Votes
If an executed proxy is returned and the stockholder has specifically
abstained from voting on any matter, the shares represented by such proxy will
be considered present at the Annual Meeting for purposes of determining a
quorum and for purposes of calculating the vote, but will not be considered to
have been voted in favor of such matter. If an executed proxy is returned by a
broker holding shares in street name that indicates that the broker does not
have discretionary authority as to certain shares to vote on one or more
matters, such shares will be considered present at the meeting for purposes of
determining a quorum on all matters, but will not be considered to have cast
votes with respect to such matter or matters. Thus, for purposes of
determining approval of the proposal to approve and adopt the Merger
Agreement, abstentions and broker non-votes will have the same effect as votes
against the proposal. With respect to the election of directors, abstentions
and broker non-votes will have no effect on the outcome of the vote.
Solicitation of Proxies and Expenses
The Company will bear the cost of the solicitation of proxies from its
stockholders in the enclosed form. The directors, officers and employees of
the Company may solicit proxies by mail, telephone, telegram, letter,
facsimile or in person. Following the original mailing of the proxies and
other soliciting materials, the Company will request that brokers, custodians,
nominees and other record holders forward copies of the Proxy Statement and
other soliciting materials to persons for whom they hold shares of Pinnacle
Common Stock and request authority for the exercise of proxies. In such cases,
the Company will reimburse such record holders for their reasonable expenses.
In addition, the Company has retained D.F. King & Co., Inc. to assist in the
solicitation of proxies at a cost (including brokers' expenses) of $20,000,
plus certain out-of-pocket expenses.
26
<PAGE>
CAUTIONARY STATEMENTS REGARDING
FORWARD-LOOKING STATEMENTS
The statements contained in this Proxy Statement or in documents
incorporated by reference herein with respect to the Company that are not
historical facts are "forward-looking statements." Forward-looking statements
include, but are not limited to, statements containing the words "believes,"
"anticipates," "intends," "expects," "projects", "may", "estimates", "seek" or
"continue" and words of similar import. These forward-looking statements
involve known and unknown risks, uncertainties and other factors that may
cause actual results, performance or achievements of the Company or industry
to be materially different from any future results, performance or
achievements contemplated, projected, forecasted, estimated or budgeted in, or
expressed or implied by, projections and forward-looking statements. Such
factors include regulatory, legislative, judicial, competitive and
technological developments; industry trends; currency fluctuations; and
general economic and business conditions in the markets the Company serves.
Other factors and assumptions not identified above were also involved in the
derivation of these forward-looking statements, and the failure of such other
assumptions to be realized, as well as other factors, may also cause actual
results to differ materially from those projected. Readers are cautioned not
to place undue reliance on such forward-looking statements. The Company
assumes no obligation to update any such factors or make any revisions to any
of the forward-looking statements or projections contained herein to reflect
actual results, changes in assumptions or changes in other factors affecting
such forward-looking statements or projections other than as required by law.
27
<PAGE>
PROPOSAL 1:
MERGER OF THE COMPANY AND PINNACLE ACQUISITION CORPORATION
(Item No. 1 on Proxy Card)
The description of the proposed Pinnacle Merger and Merger Agreement
contained in this Proxy Statement summarizes all material conditions and terms
of the Pinnacle Merger and the Merger Agreement and is qualified in its
entirety by reference to the Merger Agreement, a copy of which is attached as
Annexes A and A1 hereto and incorporated herein by reference.
PARTIES TO THE PINNACLE MERGER
The Company
Business
The Company is a Delaware corporation that owns and operates, through its
Boomtown, Inc. subsidiary, land-based and riverboat gaming operations in
Verdi, Nevada ("Boomtown Reno") and Harvey, Louisiana ("Boomtown New
Orleans"), respectively. The Company also owns and operates, through its
Casino Magic Corp. subsidiary, a dockside gaming casino in Biloxi, Mississippi
("Casino Magic Biloxi"); riverboat gaming in Bossier City, Louisiana ("Casino
Magic Bossier City"); and two land-based casinos in Argentina ("Casino Magic
Argentina").
The Company receives lease income from two card clubs--the Hollywood Park-
Casino and Crystal Park Hotel and Casino. Since September 1999, the Hollywood
Park-Casino has been leased from Churchill Downs California Company, a wholly-
owned subsidiary of Churchill Downs Incorporated, and is subleased to an
unaffiliated third party operator. Prior to September 1999, the Hollywood
Park-Casino was owned and operated by the Company. The Crystal Park Hotel and
Casino is owned by the Company and is leased to the same card club operator
that now leases and operates the Hollywood Park-Casino.
The Company is the successor to the Hollywood Park Turf Club, organized in
1938, incorporated in 1981 under the name Hollywood Park Realty Enterprises,
Inc., and in 1992, as part of a restructuring, renamed Hollywood Park, Inc. In
February 2000, Hollywood Park, Inc. changed its name to Pinnacle
Entertainment, Inc.
The principal office and business address of the Company is 330 North Brand
Boulevard, Suite 1100, Glendale, California 91203. The Company's telephone
number is (818) 662-5900.
For additional information regarding the Company, see "Additional
Information About The Company," "Where To Find Additional Information" and
"Available Information."
Belterra Casino Resort in Indiana
The Company has received a certificate of suitability from the Indiana
gaming commission and 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. Completion of the project is subject to, among other
things, receipt of a riverboat owner's license. The Company plans to spend
approximately $200,000,000 ($127,000,000 of which had 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 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.
Under the Merger Agreement, it is a condition to the Pinnacle Merger that
all material phases of the Belterra Casino Resort, other than the golf course
and performance theater, shall have been substantially completed and
28
<PAGE>
open to the public by not later than September 15, 2000, and the costs
associated with the Belterra Casino Resort shall not be, in the aggregate,
more than $207,000,000, and the Belterra Casino Resort (other than the golf
course and performance theater) will have been completed in substantial
conformity with the written budgets, plans and policies relating to the
Belterra Casino Resort provided to Pinnacle Acq Corp. On July 31, 2000, the
Miss Belterra riverboat casino was struck by a barge en route to its berthing
site at the Belterra Casino Resort. As a result of the accident, the scheduled
August 21, 2000 opening of the Belterra Casino Resort will be delayed until
after September 15, 2000. Therefore, the condition to Pinnacle Acq Corp's
obligations under the Merger Agreement related to the opening of the Belterra
Casino Resort 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 regarding the Belterra Casino
Resort.
On August 11, 2000, the Miss Belterra arrived at a dry dock 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 the
Belterra Casino Resort when the extent of the damage and the length of delay
have been ascertained.
Pending and Completed Asset Dispositions
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 Boomtown dockside gaming operations in Biloxi, Mississippi
("Boomtown Biloxi") and Casino Magic dockside gaming operations in Bay St.
Louis, Mississippi ("Casino Magic Bay St. Louis") for $195,000,000 in cash in
the aggregate. This transaction closed in August 2000. Subsidiaries of Penn
National have purchased 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.
In February 2000, the Company announced the signing of a definitive
agreement with a private investor for the sale of the Company's Turf Paradise
facility for $53,000,000 in cash. The sale included the horse racing
operations and all 275 acres at the Phoenix, Arizona property. The Turf
Paradise transaction closed in June 2000. The Company also owns approximately
97 acres of unimproved land adjacent to the Hollywood Park Race Track in
Inglewood, California, which is subject to a pending sale transaction.
Under the Merger Agreement, the Pinnacle Merger is conditioned upon, among
other things, the Company completing the sales of Boomtown Biloxi and Casino
Magic Bay St. Louis on substantially the terms and conditions contained in the
applicable definitive agreements for such transactions.
On April 18, 2000, the Company announced that it had entered into a
definitive agreement with Casden Properties Inc. for the sale of the Company's
remaining 97 acres in Inglewood, California for approximately $63,000,000 in
cash. The sale is subject to certain closing conditions, including Casden
Properties receiving the necessary entitlements to develop the property.
Therefore, there can be no assurance that the sale of the Inglewood land will
be completed on such terms or at all. The Company expects the sale to close by
the second quarter of 2001 and to generate after tax net cash proceeds in
excess of $41,000,000. Under the Merger Agreement, receipt by the Company's
stockholders of a contingent payment of up to an additional $1.00 in cash per
share in connection with the Pinnacle Merger is subject to the closing of the
sale of the Inglewood property by December 31, 2001 in a transaction in which
the after tax proceeds exceed $13,054,000. Such after tax proceeds must be
equal to or greater than $40,750,000 in order for the full $1.00 to be paid.
29
<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 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.
Recent Developments
On August 15, 2000, the Company redeemed all of the outstanding Casino
Magic of Louisiana, Corp. 13% First Mortgage Notes due 2003 at a price of
106.50% of principal amount, plus accrued coupon and contingent interest. The
cost to redeem the approximately $112,900,000 aggregate principal amount of
First Mortgage Notes outstanding will be approximately $120,200,000.
On July 31, 2000, the Company's Miss Belterra riverboat casino was struck
by a barge en route to its berthing site at the Belterra Casino Resort. As a
result of the accident, the opening of the Belterra Casino Resort will be
delayed until after September 15, 2000 and, therefore, the condition to
Pinnacle Acq Corp's obligations under the Merger Agreement related to the
opening of the Belterra Casino Resort by such date will not be satisfied. See
"--Belterra Casino Resort in Indiana."
Controlling Persons, Directors and Executive Officers of the Company
Because the Pinnacle Merger may be considered a "going private"
transaction, the Company and certain of the Management Stockholders that may
be considered affiliates of the Company (each of which affiliate Management
Stockholders is also a director and/or executive officer of the Company) have
filed a Schedule 13E-3 with the SEC with respect to the Pinnacle Merger. The
Schedule 13E-3 requires the persons filing the Schedule 13E-3 to furnish
additional information with respect to themselves and their controlling
persons, directors and executive officers. This information is set forth
below.
30
<PAGE>
The name, position and current principal occupation or employment of each
director and executive officer of the Company are set forth below.
The business address of Messrs. Hubbard, Alanis, Allen, Hinckley, Parrott
and Ornest is c/o Pinnacle Entertainment, Inc., 330 North Brand Boulevard,
Suite 1100, Glendale, California 91203. The business address of Mr. Finnigan
is c/o Realty Investment Group, Inc., c/o Pinnacle Entertainment, Inc., 330
North Brand Boulevard, Suite 1100, Glendale, California 91203. From September
1999 to August 2000 the business address of Mr. Hubbard and Mr. Finnigan was
c/o Pinnacle Entertainment, Inc. and Realty Investment Group, Inc.,
respectively, 4400 MacArthur Boulevard, Suite 380, Newport Beach, California
92660. Prior to September, 1999 the business address of all the aforementioned
persons was c/o Hollywood Park, Inc., 1050 S. Prairie Avenue, Inglewood,
California 90301. The business address of Mr. Manfuso is c/o Manfuso Brothers
Investments, 2730 University Blvd. West, Suite 430, Wheaton, Maryland 20902.
The business address of Mr. Martineau is c/o Genesis Portfolio Partners, LLC,
3889 Central Avenue N.E. #356, Columbia Heights, MN 55421. The business
address of Mr. Miller is c/o Fore Star Golf, 301 Commerce, Suite 1470, Fort
Worth, Texas 76102. The business address of Mr. Reitnouer is c/o Crowell
Weedon, One Wilshire Blvd., Suite 2600, Los Angeles, California 90017. The
business address of Mr. Torguson is c/o Casino Magic Corp., 711 Casino Magic
Drive, Bay St. Louis, Mississippi 39520.
All directors and executive officers listed below are citizens of the
United States.
<TABLE>
<CAPTION>
Present Principal Occupation
Name Position or Employment
---- -------- ----------------------------
<S> <C> <C>
R.D. Hubbard............ Chairman of the Board of Same as Position
Directors
Paul R. Alanis.......... Director, Chief Executive Same as Position
Officer, President and Chief
Operating Officer
Robert T. Manfuso....... Director Partner, Manfuso Brothers
Investments
James L. Martineau...... Director Chairman, Genesis Portfolio
Partners, LLC
Gary G. Miller.......... Director Chairman and Chief Executive
Officer of Fore Star Golf
Michael Ornest.......... Director Private Investor
Timothy J. Parrott...... Director Consultant to Pinnacle and
Private Investor
Lynn P. Reitnouer....... Director Partner, Crowell Weedon & Co.
Marlin Torguson......... Director Chairman of the Board of Casino
Magic Corp.
J. Michael Allen........ Vice President and Same as Position
Chief Operating Officer of
Gaming Operations
G. Michael Finnigan..... President and Chief Same as Position
Executive Officer of
Realty Investment Group,
Inc., a subsidiary of the
Company
Bruce C. Hinckley....... Chief Financial Officer, Same as Position
Vice President and Treasurer
</TABLE>
The material occupations, positions, offices or employments during the past
five years of each director and executive officer of the Company are described
in "Proposal 2: Election of Directors--Information Regarding the Directors of
the Company" and "Proposal 2: Election of Directors--Executive Officers,"
respectively.
31
<PAGE>
During the past five years, neither the Company nor, to the knowledge of
the Company, any of the individuals listed above as directors or executive
officers of the Company (1) has been convicted in a criminal proceeding
(excluding traffic violations or similar misdemeanors) or (2) has been a party
to any judicial or administrative proceeding (except for matters that were
dismissed without sanction or settlement) that resulted in a judgment, decree
or final order enjoining the person from future violations of, or prohibiting
activities subject to, federal or state securities laws, or a finding of any
violation of federal or state securities laws.
None of the information in this Proxy Statement concerning Pinnacle or any
of its subsidiaries, affiliates or associates, or any of their respective
directors, executive officers or employees, has been independently verified by
any of Pinnacle Acq Corp, Harveys Acquisition Corporation ("Harveys Acq
Corp"), PHCR, Harveys Casino Resorts, Colony HCR Voteco ("Voteco") or any of
their respective affiliates.
Pinnacle Acq Corp, PHCR, Harveys Casino Resorts and Voteco
Under a potential interpretation of the rules governing "going private"
transactions, one or more of Pinnacle Acq Corp, PHCR, Harveys Casino Resorts
and Voteco may be deemed to be an affiliate of the Company. Therefore, each of
Pinnacle Acq Corp, PHCR, Harveys Casino Resorts and Voteco has been included
as a filing person on the Schedule 13E-3 mentioned above. Therefore,
information with respect to such companies, as well as their controlling
persons, directors and executive officers, is set forth below.
Pinnacle Acq Corp
Pinnacle Acq Corp is a Delaware corporation and a direct wholly-owned
subsidiary of PHCR. Pinnacle Acq Corp was formed solely for the purposes of
engaging in the transactions contemplated by the Merger Agreement and has not
engaged in any business activities or conducted any operations other than in
connection with the transactions contemplated by the Merger Agreement.
The business address and telephone number of Pinnacle Acq Corp is c/o
Harveys Casino Resorts, Highway 50 and Stateline Avenue, P.O. Box 128, Lake
Tahoe, Nevada 89449, (775) 588-2411.
The name, position and current principal occupation or employment of Mr.
Barrack, the sole director and executive officer of Pinnacle Acq Corp, are set
forth below.
The business address of Mr. Barrack is as set forth below under "--Harveys
Casino Resorts."
Mr. Barrack is a United States citizen.
<TABLE>
<CAPTION>
Present Principal Occupation
Name Position or Employment
---- -------- ----------------------------
<S> <C> <C>
Thomas J. Barrack, Jr. .. President, Secretary, Chairman and Chief Executive
Treasurer and Director Officer of Colony Capital LLC
and Colony Advisors LLC
</TABLE>
The material occupations, positions, offices or employments during the past
five years of Mr. Barrack is described below under "--Harveys Casino Resorts."
PHCR
PHCR is a Delaware corporation and a direct wholly-owned subsidiary of
Harveys Casino Resorts. PHCR was formed solely for the purposes of engaging in
the transactions contemplated by the Merger Agreement and has not engaged in
any business activities or conducted any operations other than in connection
with the transactions contemplated by the Merger Agreement.
The business address and telephone number of PHCR is c/o Harveys Casino
Resorts, Highway 50 and Stateline Avenue, P.O. Box 128, Lake Tahoe, Nevada
89449, (775) 588-2411.
32
<PAGE>
The name, position and current principal occupation or employment of Mr.
Barrack, the sole director and executive officer of PHCR, are set forth below.
The business address of Mr. Barrack is as set forth below under "--Harveys
Casino Resorts."
Mr. Barrack is a United States citizen.
<TABLE>
<CAPTION>
Present Principal Occupation
Name Position or Employment
---- -------- ----------------------------
<S> <C> <C>
Thomas J. Barrack, Jr. .. President, Secretary, Chairman and Chief Executive
Treasurer and Director Officer of Colony Capital LLC
and Colony Advisors LLC
</TABLE>
The material occupations, positions, offices or employments during the past
five years of Mr. Barrack is described below under "--Harveys Casino Resorts."
Harveys Casino Resorts
Harveys Casino Resorts is a Nevada corporation engaged in the gaming
industry. Through its wholly-owned subsidiaries, Harveys owns and operates
gaming establishments in Nevada, Iowa and Colorado.
The business address of Harveys Casino Resorts and each of the directors
and executive officers listed below, other than Thomas J. Barrack, Jr. and
Kelvin L. Davis, is Highway 50 and Stateline Avenue, P.O. Box 128, Lake Tahoe,
Nevada 89449. The business telephone of Harveys Casino Resorts is (775) 588-
2411.
The business address of Mr. Barrack is 1999 Avenue of the Stars, Suite
1200, Los Angeles, California 90067. The business address of Mr. Davis is 345
California Street, Suite 3300, San Francisco, California 94014.
All directors and executive officers listed below are citizens of the
United States.
<TABLE>
<CAPTION>
Present Principal Occupation
Name Position or Employment
---- -------- ----------------------------
<S> <C> <C>
Thomas J. Barrack, Jr. .. Chairman of the Board of Chairman and Chief Executive
Directors Officer of Colony Capital LLC
and Colony Advisors LLC
Charles W. Scharer....... President, Chief Executive Same as Position
Officer and Director
John J. McLaughlin....... Chief Financial Officer, Same as Position
Treasurer and Secretary
Gary D. Armentrout....... Senior Vice President-- Same as Position
Business Development and
Government Relations
James J. Rafferty........ Senior Vice President-- Same as Position
Corporate Marketing
Edward B. Barraco........ Senior Vice President and Same as Position
General Manager of Harveys
Wagon Wheel
William R. Stephens...... Senior Vice President and Same as Position
General Manager of Harveys
Resort
Verne H. Welch, Jr. ..... Senior Vice President and Same as Position
General Manager of Harveys
Casino Hotel
John R. Bellotti......... Corporate Vice President of Same as Position
Human Resources
Kelvin L. Davis.......... Director Partner of Texas Pacific Group
</TABLE>
33
<PAGE>
The material occupations, positions, offices or employments during the past
five years of each director and executive officer of Harveys Casino Resorts
are described below.
Thomas J. Barrack, Jr.
Mr. Barrack currently serves as Chairman and Chief Executive Officer of
each of Colony Capital LLC ("Colony Capital") and Colony Advisors LLC and as
Chairman of the Board of Harveys Casino Resorts. Mr. Barrack has served as
Chairman and Chief Executive Officer of each of Colony Capital and Colony
Advisors LLC since August 1997, and as a Director and Chairman of the Board of
Harveys Casino Resorts since February 2, 1999, the date Voteco acquired
control of Harveys Casino Resorts. Mr. Barrack also holds a membership
interest in and serves as a Manager of Voteco. Mr. Barrack served as President
of Colony Capital and Colony Advisors LLC from August 1992 and September 1991,
respectively, until August 1997.
The business address of each of Colony Capital and Colony Advisors LLC is
1999 Avenue of the Stars, Suite 1200, Los Angeles, California 90067.
Mr. Barrack also is a Director of Continental Airlines, Inc., a commercial
airline; Public Storage, Inc., a developer, owner and operator of self-storage
facilities; Kennedy-Wilson, Inc., a worldwide real estate marketing, brokerage
and investment services company; Kerry Properties Limited, a Hong Kong-based
real estate company; Firstworld Communications, Inc., a network-based provider
of Internet, data and communications services; MegaWorld, Inc., a company
involved in the construction and fabrication of modular structures, primarily
for the energy, transportation and telecommunications industries; and The
Nippon Credit Bank, Ltd., a financial services company. The business address
of Continental Airlines, Inc. is 1600 Smith Street, Dept. HQSEO, Houston,
Texas 77002. The business address of Kennedy-Wilson, Inc. is 9601 Wilshire
Boulevard, Suite 220, Beverly Hills, California 90210-5205. The business
address of Kerry Properties Limited is 13 & 14th Floors, Cityplaza 3, 14
Taikoo Wan Road, Taikoo Shing, Hong Kong. The business address of Firstworld
Communications, Inc. is 8390 East Crescent Parkway, Suite 300, Greenwood
Village, Colorado 80111. The business address of MegaWorld, Inc. is 6250 North
Houston Rosslyn Road, Houston, Texas 77091. The business address of The Nippon
Credit Bank, Ltd. is 13-10, Kudan-kita 1 chome, Chiyoda-ku, Tokyo, 102-8660
Japan. Mr. Barrack also is a managing partner of Pacific Capital Group, a
private investment firm, which has also made an investment in Colony Capital.
Charles W. Scharer
Mr. Scharer serves as a Director and President and Chief Executive Officer
of Harveys Casino Resorts. He was appointed to such position effective
December 1, 1995. He has served as a Director of Harveys Casino Resorts since
April 1995 and has served as Chairman of the Board of Directors of Harveys
Casino Resorts from May 1, 1997 to February 2, 1999. Prior to becoming
President and Chief Executive Officer of Harveys Casino Resorts, Mr. Scharer
served as Executive Vice President of Harveys Casino Resorts from August 1995.
He was appointed Chief Financial Officer of Harveys Casino Resorts in July
1993 and Treasurer of Harveys Casino Resorts in September 1993.
John J. McLaughlin
Mr. McLaughlin serves as Senior Vice President, Chief Financial Officer,
Treasurer and Secretary of Harveys Casino Resorts. He was appointed Senior
Vice President, Chief Financial Officer and Treasurer of Harveys Casino
Resorts in March 1996. Mr. McLaughlin became Secretary of Harveys Casino
Resorts as of February 2, 1999. He joined Harveys Casino Resorts in September
1995 as Chief Financial Officer. From January 1993 until September 1995, he
was Chief Financial Officer of President Riverboat Casino, Inc.
Gary D. Armentrout
Mr. Armentrout serves as Senior Vice President--Business Development and
Government Relations of Harveys Casino Resorts. He has held such position
since May 1995. Prior to joining Harveys Casino Resorts,
34
<PAGE>
Mr. Armentrout was employed by President Riverboat Casinos, Inc. where he
served as Vice President--Gaming from May 1990 until June 1994 when he was
appointed Vice President--Gaming Development of President Riverboat Casinos,
Inc.
James J. Rafferty
Mr. Rafferty serves as Senior Vice President Corporate Marketing of Harveys
Casino Resorts. He was appointed Corporate Vice President of Marketing of
Harveys Casino Resorts in December 1995 and was promoted to Senior Vice
President of Corporate Marketing of Harveys Casino Resorts in 1997. Mr.
Rafferty served as Vice President, Marketing--Lake Tahoe from 1992 to 1995.
John R. Bellotti
Mr. Bellotti serves as Senior Vice President of Human Resources of Harveys
Casino Resorts. He was appointed Corporate Vice President of Human Resources
of Harveys Casino Resorts in August 1997 and was promoted to Senior Vice
President of Human Resources of Harveys Casino Resorts in December, 1999.
Prior to joining Harveys Casino Resorts in August 1997, Mr. Bellotti was
employed by Hyatt Hotels Corporation, serving most recently as Assistant Vice
President of Human Resources from 1993 to 1997.
Edward B. Barraco
Mr. Barraco serves as Senior Vice President and General Manager--Harveys
Wagon Wheel. He has held this position since July 1995. From 1985 to 1995, Mr.
Barraco served as Assistant General Manager--Lake Tahoe, where he was
responsible for overseeing all aspects of the operation on an assigned shift.
William R. Stephens
Mr. Stephens serves as Senior Vice President and General Manager--Harveys
Resort. He was appointed to this position in May 1999. Prior to assuming his
current position, Mr. Stephens was employed by the Hard Rock Hotel/Casino in
Las Vegas where he was the director of casino operations from the opening in
1995 until 1996 when he was promoted to the vice president of casino
operations.
Verne H. Welch, Jr.
Mr. Welch serves as Senior Vice President and General Manager--Harveys
Casino Hotel. He has held this position since September 1995. Prior to moving
to the Council Bluffs property, Mr. Welch served as Senior Vice President and
General Manager--Lake Tahoe from December 1993 to September 1995. From 1988 to
December 1993, he served as Vice President--Casino Operations.
Kelvin L. Davis
Mr. Davis serves as a Director of Harveys Casino Resorts. Mr. Davis has
served as a Director of Harveys Casino Resorts since February 2, 1999. Mr.
Davis is a partner with the Texas Pacific Group, an international private
equity investment firm. Prior to joining the Texas Pacific Group in March
2000, Mr. Davis served as President and Chief Operating Officer of each of
Colony Capital and Colony Advisors LLC since August 1997. Mr. Davis served as
Executive Vice President of Colony Capital and Colony Advisors LLC from August
1992 and September 1991, respectively, to August 1997. Mr. Davis also holds a
membership interest in and serves as a Manager of Voteco. As a result of Mr.
Davis' departure from Colony Capital and Colony Advisors LLC in March 2000,
his membership interest in Voteco is anticipated to be redeemed, subject to
the receipt of applicable regulatory approvals, either prior to or following
the closing of the Pinnacle Merger.
The business address of the Texas Pacific Group is 345 California Street,
Suite 3300, San Francisco, California 94014.
35
<PAGE>
Mr. Davis also is a Director of Franchise Finance Corporation of America, a
specialty real estate financing company, and Crestline Capital Corp., a hotel
and senior living community company. The business address of Franchise Finance
Corporation of America is The Perimeter Center, 17207 North Perimeter Drive,
Scottsdale, Arizona 85255. The business address of Crestline Capital Corp. is
6600 Rockledge Drive, Bethesda, Maryland 20817.
Voteco
Voteco, a Delaware limited liability company, is the beneficial owner of
approximately 97.5% of the voting common stock and voting power of Harveys
Casino Resorts. Voteco's principal business is its investment in the voting
common stock and other securities of Harveys Casino Resorts.
The business address and telephone of Voteco is c/o Colony Capital LLC,
1999 Avenue of the Stars, Suite 1200, Los Angeles, California 90067, (310)
282-8820.
The business addresses of Messrs. Barrack and Davis are as set forth above
under "--Harveys Casino Resorts."
Each of Messrs. Barrack and Davis is a citizen of the United States.
<TABLE>
<CAPTION>
Present Principal Occupation or
Name Position Employment
---- -------- -------------------------------
<S> <C> <C>
Thomas J. Barrack, Jr. ............. Manager Chairman and Chief
Executive Officer of Colony
Capital and Colony Advisors LLC
Kelvin L. Davis..................... Manager Partner of Texas Pacific Group
</TABLE>
The material occupations, positions, offices or employments during the past
five years of each manager of Voteco listed above are described above under
"--Harveys Casino Resorts." As a result of Mr. Davis' departure from Colony
Capital and Colony Advisors LLC in March 2000, his membership interest in
Voteco is anticipated to be redeemed, subject to the receipt of applicable
regulatory approvals, either prior to or following the closing of the Pinnacle
Merger.
During the past five years, none of PHCR, Harveys Casino Resorts or Voteco
nor, to the knowledge of PHCR, Harveys Casino Resorts or Voteco, any of the
individuals named in the tables above as directors, executive officers or
managers of PHCR, Harveys Casino Resorts or Voteco, (1) has been convicted in
a criminal proceeding (excluding traffic violations or similar misdemeanors)
or (2) has been a party to any judicial or administrative proceeding (except
for matters that were dismissed without sanction or settlement) that resulted
in a judgment, decree or final order enjoining the person from future
violations of, or prohibiting activities subject to, federal or state
securities laws, or a finding of any violation of federal or state securities
laws.
All information in this Proxy Statement concerning Pinnacle Acq Corp,
Harveys Acq Corp, PHCR, Harveys Casino Resorts or Voteco or any of their
respective directors, executive officers or employees, has been supplied by
PHCR for inclusion in this Proxy Statement and has not been independently
verified by Pinnacle.
36
<PAGE>
SPECIAL FACTORS
Background of the Pinnacle Merger
Pinnacle Merger
The Company's strategic plan has been to develop a broad base of regionally
diversified casino entertainment facilities. Within the past three years, the
Company has acquired the Boomtown and Casino Magic properties, begun
development of the Belterra Casino Resort in Indiana, completed the sales of
the Hollywood Park Race Track, the Turf Paradise Race Track, its Boomtown
Biloxi and Casino Magic Bay St. Louis gaming properties and 42 acres of excess
land in Inglewood, California and entered into an agreement to sell 97 acres
of excess land in Inglewood.
However, as management examined ways in which it could further enhance the
Company's value for the benefit of its stockholders, it realized that several
obstacles and significant development risk existed in its effort to achieve
this goal. While the Company's Belterra Casino Resort in Indiana, which is
expected to cost approximately $200,000,000, appears to provide the Company
with an excellent long-term growth prospect, similar development projects by
experienced gaming companies had taken, in some cases, a considerable amount
of time to provide reasonable returns to their sponsors. In addition,
management concluded that to increase cash flow they would need to expand and
improve several of the Company's key properties. This type of expansion would
involve the spending of significant amounts of additional capital and the
incurrence of increased development risk.
The Company was also mindful of two important factors which have influenced
the gaming industry over the past several years. First, the prospect for more
states legalizing non-Native American casino gaming appears unlikely for the
foreseeable future. Attempts to legalize casino gaming in states such as
Pennsylvania, Ohio, Florida, Kentucky and Arkansas have all met with failure
over the past several years. Therefore, the Company's near-term prospects for
new development opportunities in states that do not presently permit casino
gaming are very limited for the next several years. Second, significant
consolidation within the gaming industry has occurred particularly in the last
two to three years. This consolidation has reduced the Company's ability to
grow through acquisition as it did with Boomtown and Casino Magic. If the
Company were to remain independent, it would face the challenge of continuing
to compete in an industry where a few major companies were actively engaged in
consolidation, thereby creating additional competitive pressure on smaller
companies, such as Pinnacle. Smaller gaming companies suffer the competitive
disadvantage of being unable to borrow funds at the same attractive rates as
such large gaming companies. This prevents smaller companies from investing in
their existing properties to the same degree that large companies are able to
do in the same markets. The combination of these two factors created major
impediments to the Company's future growth prospects.
Other events occurring within the gaming industry have caused management to
evaluate the security and certainty of the Company's existing cash flow at its
various properties. In a recent statewide election, California voters passed
Proposition 1A, which will permit numerous additional and well funded Native
American casinos throughout California. Some of these new casinos are
anticipated to be built in locations that would be expected to adversely
affect the profitability of the Company's Boomtown Reno facility.
Additionally, the prospect of increased gaming taxes in several of the
jurisdictions in which the Company does business exists. Legislation has been
introduced in both Louisiana and Nevada which proposes gaming tax increases.
These factors, taken as a whole, caused the Company's management and Board
of Directors to conclude that at an appropriate price level it would be
advantageous and beneficial for the Company's stockholders to consider a
transaction with a strong merger partner. While the Company's long-term
prospects appear favorable, especially if the Belterra Casino Resort proves to
be successful, such a transaction would allow the Company's stockholders an
opportunity to sell their stock at a premium to its current trading price,
rather than face the risks associated with the Company's remaining
independent, including, in addition to other risks discussed above, the risks
that necessarily accompany the Company's development efforts, which may
adversely affect the market value of the Company's stock in the short term.
These development risks include the expenditure of significant
37
<PAGE>
amounts of capital to develop projects for which the timing and amount of
return on the investment, if any, is uncertain due to competition in the
markets where development would occur, increased competitive pressures due to
increased consolidation in the gaming industry, risks typically associated
with any construction project (such as work stoppages, cost overruns,
geological problems and weather interference) and legislative or regulatory
changes.
In the three to six months prior to the initial discussions with Colony
Capital, Mr. Hubbard and G. Michael Finnigan, President and Chief Executive
Officer of Realty Investment Group, Inc., a wholly-owned subsidiary of
Pinnacle, had preliminary meetings regarding the possibility of acquiring the
Company with three gaming companies which the Company believed would be
interested in making acquisitions in the gaming industry. None of these
companies indicated an interest in pursuing a transaction with the Company.
On November 17, 1999, Thomas J. Barrack, Jr., Chairman and Chief Executive
Officer of Colony Capital, telephoned R.D. Hubbard, Chairman of the Board and
then Chief Executive Officer of Pinnacle, and indicated that affiliates of
Colony Capital may have an interest in considering an acquisition of Pinnacle
for cash. Mr. Barrack asked if Mr. Hubbard believed that the Pinnacle Board
would be interested in discussing such an acquisition. Mr. Hubbard said that
he believed that the Pinnacle Board would be interested in exploring the
possibility of a transaction. However, Messrs. Barrack and Hubbard did not
discuss at this time any particulars of structure, price, management
participation or other terms of a proposal.
Messrs. Barrack and Hubbard had met a couple of times prior to November
1999. However, Messrs. Barrack and Hubbard previously had no specific
discussions regarding combining the operations of Harveys Casino Resorts and
Pinnacle. In February 1999, Colony Capital completed its acquisition of
Harveys Casino Resorts. Pinnacle also had made a previous proposal to acquire
Harveys Casino Resorts. See "--Pinnacle's Prior Proposal to Acquire Harveys
Casino Resorts" below.
Colony Capital and its representatives engaged in discussions and
negotiations with Pinnacle and its representatives on behalf of, and in their
respective capacities as shareholders, directors and officers of, Harveys
Casino Resorts. Accordingly, references to Colony Capital and its
representatives in this section of the Proxy Statement mean Colony Capital and
its representatives acting in such respective capacities.
Prior to calling Mr. Hubbard, Mr. Barrack had discussed with Lehman
Brothers the possibility of making a proposal to acquire Pinnacle. Lehman
Brothers was one of many investment banks that periodically had discussed with
representatives of Colony Capital the potential opportunities in the gaming
industry. In the summer of 1999, Lehman Brothers verbally suggested to Colony
Capital the possibility of a transaction between Colony Capital and the
Company. Lehman Brothers and Colony Capital had subsequent informal
discussions regarding such possibility but abandoned such discussions in
August 1999. In October 1999, Lehman Brothers re-emphasized to Colony Capital
Lehman Brothers' belief in the advantages of a possible transaction between
Colony Capital and the Company, including strong synergies, a strategic fit
between the Company and Harveys Casino Resorts and the ability to obtain
financing for the transaction, based on the underlying assumptions developed
by Lehman Brothers. The Company was not involved in such discussions. Colony
Capital ultimately determined not to retain Lehman Brothers. Lehman Brothers
also was not retained by the Company or the Special Committee. Accordingly,
Lehman Brothers did not deliver any opinions, reports or appraisals to Colony
Capital, the Company or the Special Committee with respect to the transaction.
Lehman Brothers may provide financing and/or advisory services to Harveys
Casino Resorts in connection with the transaction.
On November 22, 1999, Messrs. Barrack, Hubbard and Finnigan met and had
further discussions as to whether Colony Capital would have an interest in
pursuing an acquisition of the Company. Mr. Barrack informed Messrs. Hubbard
and Finnigan that Colony Capital had an interest in expanding its presence in
the gaming industry, was looking for possible acquisition candidates and had a
potential interest in acquiring the Company if and when the Company's
management and Board of Directors determined to consider possible
transactions. Mr. Hubbard indicated to Mr. Barrack that he believed that the
Pinnacle Board of Directors might consider a proposal and would be most
receptive to an all cash proposal, rather than a proposal that included stock
of
38
<PAGE>
another gaming entity, which would continue to subject the stockholders to
some or all the business risks the Company currently faces.
On December 2, 7 and 10, 1999, Colony Capital and Lehman Brothers had
general discussions regarding the Company and a possible transaction. Colony
Capital and Lehman Brothers discussed financial information regarding the
Company's operating results and capital expenditures, the budget and timing
for the Belterra development project and the feasibility of financing a
potential transaction at different debt to EBITDA levels. Colony Capital and
Lehman Brothers also reviewed several equity analyst reports on the Company.
On December 16, 1999, Mr. Hubbard advised the Executive Committee of the
Pinnacle Board of Directors of the preliminary discussions with Colony Capital
and that Colony Capital might deliver a written expression of interest. Mr.
Hubbard informed the Executive Committee of Mr. Barrack's November 17, 1999
telephone call to him and the November 22, 1999 meeting he and Mr. Finnigan
had with Mr. Barrack.
On December 17, 1999, Mr. Barrack and other representatives of Colony
Capital met with Mr. Hubbard and Mr. Finnigan to discuss the possibility of a
transaction. The representatives of Colony Capital discussed with Messrs.
Hubbard and Finnigan the price at which the Company's management and Board of
Directors would support a potential transaction, the performance of the
Company's assets, the process and timing with respect to a potential
transaction and the identity and structure of the potential acquisition
entity. In the discussion, Mr. Hubbard indicated that he would not be willing
to recommend a transaction to the Company's Board of Directors unless the
price per share was at least $30.00. Mr. Barrack responded that he did not
think Colony Capital would be willing to pay more than $27.00 per share, but
that Colony Capital was still reviewing financial information about the
Company. Messrs. Barrack, Hubbard and Finnigan mutually agreed to reconvene on
December 19.
On December 19, 1999, Messrs. Hubbard, Finnigan and Barrack met to have
further discussions relative to a possible transaction. At this meeting, Mr.
Barrack previewed for Messrs. Hubbard and Finnigan the expected contents of
the letter to be sent by Colony Capital to Mr. Hubbard indicating Colony
Capital's interest in pursuing a possible transaction. Mr. Barrack indicated
that Colony Capital would be interested in making a proposal to acquire the
Company, provided that the Company's public debt could be assumed in such a
transaction and that certain pending Company asset sales were completed. Mr.
Barrack indicated that he believed Colony Capital might be in a position to
offer $28.00 per share, subject to confirming various assumptions. Mr. Hubbard
reiterated that he would not be willing to recommend a transaction to the
Company's Board of Directors unless the price per share were at least $30.00.
On December 20, 1999, Colony Capital sent a letter to Mr. Hubbard
indicating an interest in pursuing the possible acquisition of the Company by
one or more designees of Colony Capital at a cash price per fully diluted
share of $29.00. Colony Capital informed the Company that this indication of
interest was based on certain key assumptions regarding the pro forma
financial position of the Company and pending asset sales. These assumptions
included anticipated levels of after-tax cash balances to be realized on asset
sales, the absence of substantial change of control costs and the absence of
required consents from holders of Pinnacle's subordinated debt.
On December 29, 1999, Mr. Barrack and Messrs. Hubbard and Finnigan met to
have further discussions relative to a possible transaction. The meeting was
initiated by Mr. Barrack following intensive review by Colony Capital of key
assumptions underlying the proposed price of $29.00 per fully diluted share
set forth in the December 20, 1999 letter. Messrs. Barrack and Hubbard
discussed whether the Company's public debt would be assumed in the proposed
transaction and that, if it was not, Harveys Casino Resorts might incur
additional acquisition costs substantially greater than had been anticipated.
In addition, Messrs. Barrack, Hubbard and Finnigan discussed the assumptions
underlying the anticipated levels of after-tax cash balances to be realized on
the Company's pending asset sales and whether these assumptions accurately
predicted the anticipated pro forma financial position of the Company as a
result of these assets sales. Messrs. Hubbard and Finnigan agreed to
39
<PAGE>
arrange for representatives of the Company to meet with representatives from
Colony Capital and Lehman Brothers to develop more detailed financial
information regarding the Company and the assumptions underlying Lehman
Brothers' financial analysis.
On January 10, 2000, representatives of Colony Capital, Pinnacle, Lehman
Brothers and Bear, Stearns & Co. Inc. ("Bear Stearns") met at Pinnacle's
Newport Beach, California office to discuss the parameters of Colony Capital's
due diligence review of the Company. While Bear Stearns was not formally
retained at this time, Bear Stearns attended the meeting on behalf of Harveys
Casino Resorts in anticipation of serving in the role of financial advisor to
Harveys Casino Resorts in the event that Colony Capital and the Company
determined to pursue a possible transaction. The discussions focused on a
review of the key assumptions regarding the pro forma financial position of
the Company and pending asset sales and a review of the Company's capital
budgets and properties. Representatives of the Company agreed to have further
conversations with Lehman Brothers to further refine the key assumptions.
Over the next several days, representatives of the Company met with
representatives from Lehman Brothers to develop more detailed financial
information regarding the Company and the assumptions underlying Colony
Capital's financial analysis. That information was then conveyed to Bear
Stearns which subsequently discussed the financial information with Lehman
Brothers. The purpose of the meetings between Lehman Brothers and
representatives of the Company was to allow Lehman Brothers to further refine
the key assumptions underlying its analysis and to then discuss and reach a
consensus with Bear Stearns about the revised assumptions and the effects of
the revised assumptions on the proposed price of $29.00 per fully diluted
share set forth in the December 20 letter.
During the course of these meetings and discussions, it became apparent
that the pro forma financial position of the Company as a result of the
proposed transaction would vary materially from prior preliminary assumptions.
This prior preliminary financial analysis had assumed a substantially greater
projected after-tax cash balance for Pinnacle as of the projected closing date
of the proposed transaction than the cash balance the Company was projecting.
Although Lehman Brothers and Bear Stearns did not reach a consensus, the range
being discussed for the difference between the initial projected after-tax
cash balance for the Company and the revised projected after-tax cash balance
for the Company was approximately $70-105 million, or approximately $2.55-3.82
per share of Pinnacle Common Stock, taking into account estimates of the costs
of completing the Belterra project in Indiana, proceeds from the pending asset
sales, tax liability in connection with the pending asset sales and additional
cash necessary to complete the transaction, but not taking into account costs
with respect to the Company's public debt. In addition, the prior preliminary
financial analysis did not include any additional acquisition costs, including
financing fees, change of control costs and the costs of tendering for the
public debt and soliciting consents, if necessary, which might be incurred if
the Company's public debt was not assumed in the proposed transaction. The
difference being discussed between the initial projected costs with respect to
the Company's public debt and the revised projected costs with respect to the
Company's public debt was approximately $42 million, or approximately $1.53
per share of Pinnacle Common Stock. Lehman Brothers communicated to the
Company that Colony Capital was not prepared to make an offer at the $29.00
per share price level in light of the significant difference between the
Company's projected cash position compared to prior preliminary assumptions
regarding the level of cash at closing and in light of the fact that such
price level did not take into account additional acquisition costs which might
be incurred by Harveys Casino Resorts if the Company's public debt was not
assumed in the proposed transaction.
On January 21, 2000, at a meeting of the Pinnacle Board of Directors, Mr.
Hubbard informed the Board of the status of the discussions with Colony
Capital and indicated that Colony Capital was not prepared to make an offer to
acquire the Company at the time on the basis suggested in Colony Capital's
December 20, 1999 letter.
On February 18, 2000, Mr. Barrack called Mr. Hubbard. Mr. Barrack inquired
whether the Company would be willing to continue discussions regarding a
possible transaction. Mr. Hubbard indicated that the Company would be
interested in continuing the discussions. Since the time of the earlier
discussions, the trading price of
40
<PAGE>
Pinnacle Common Stock had decreased. On February 18, 2000, the trading price
of Pinnacle Common Stock closed at $16.75 per share.
On February 19, 2000, Mr. Barrack met with Messrs. Hubbard and Finnigan in
Palm Desert, California. At that meeting, Mr. Barrack indicated that Colony
Capital, through Harveys Casino Resorts, continued to be interested in
pursuing a possible acquisition of Pinnacle, but at a price per fully diluted
share in the $23.00 to $24.00 range. Mr. Hubbard indicated to Mr. Barrack that
he would not be prepared to recommend to the Company's Board of Directors that
it consider such a transaction unless the price per share were at least
$25.00 per share. Mr. Barrack indicated that he thought that such a price
could only be justified if certain members of Pinnacle's senior management
agreed to contribute a significant amount of their equity in Pinnacle to the
acquiring entity. See "--Purpose and Reasons for the Pinnacle Merger."
On February 29, 2000, Mr. Barrack and other representatives of Colony
Capital met with Messrs. Hubbard and Finnigan to discuss the total number of
shares of Pinnacle common stock and options currently owned by members of the
Company's management. The parties did not discuss the precise amount of equity
that the Company's management would own in PHCR. This discussion also involved
a valuation of Harveys Casino Resorts relative to Pinnacle and how the two
companies would fit together under a common parent company. The parties
determined that Harveys Casino Resorts and the Company both would be valued
principally using cash flow adjusted for Pinnacle's pending asset sales and to
reflect the future cash flows from the operations of the Belterra Casino
Resort and to adjust for new gaming machinery to be installed in Harveys
Casino Resorts' Iowa property. The parties also determined that the two
companies would be valued using the same multiple of EBITDA, but a precise
multiple was not selected.
On March 2, 2000, Mr. Barrack sent a letter to the Pinnacle Board of
Directors proposing an acquisition of the Company by an affiliate of Harveys
Casino Resorts at $25.00 per fully diluted share in cash (the "Proposal"). In
the letter, Mr. Barrack stated that continuity of Company management was an
important element of the proposed transaction, and that Colony Capital was
therefore requiring that management be willing to retain a significant equity
interest in the Company and continue their employment. The letter indicated
that Colony Capital was prepared to commence definitive due diligence and the
negotiation of definitive agreements. The letter also proposed that for four
weeks from the date of the letter, the Company would not in any respect
solicit from or negotiate with other parties regarding a transaction of the
nature proposed in his letter. Although the Proposal provided for an exclusive
negotiation period, no penalty to the Company or benefit to Colony Capital
existed if the Company were to have received offers from other interested
parties.
On March 7, 2000, the Pinnacle Board of Directors met to consider the
Proposal. In discussing the Proposal, the Board noted that the Proposal
contemplated an equity investment by senior management of the Company,
including Mr. Hubbard. The Proposal did not specify which other members of
senior management would have an equity interest in the post-merger company.
Mr. Hubbard noted that Colony Capital had agreed that, if desired by the
Company's Board of Directors, a press release could be disseminated disclosing
Colony Capital's interest and its proposed acquisition price. At the meeting,
the Pinnacle Board determined to establish a special committee (the "Special
Committee") comprised of all of the members of the Board, other than Mr.
Alanis and Mr. Hubbard, with full authority to act for and on behalf of the
Company in evaluating and acting upon the Proposal or any other proposal to
acquire the Company which might be received as a result of the announcement of
the Proposal (subject to such approvals by the entire Board of Directors as
might be required by Delaware law). The members of the Special Committee were
Messrs. Reitnouer, Miller, Ornest, Martineau, Torguson, Parrott and Manfuso.
The Special Committee was authorized to and, as discussed below, subsequently
did retain, at the Company's expense, independent legal counsel and financial
advisory counsel to assist it in the evaluation of any such proposals and
appointed Mr. Reitnouer as Chairman of the Special Committee.
Messrs. Hubbard, Alanis and Finnigan then left the March 7 Board meeting
and the Special Committee met separately. After considering the Company's
short term and long term prospects, including the status of the pending
Indiana project, the Special Committee decided it would be in best interests
of the Company and its stockholders to enter into the exclusivity agreement
proposed by Colony Capital. Colony Capital had informed
41
<PAGE>
the Company that it was unwilling to proceed further with the Proposal unless
the Company executed an exclusivity agreement. The Special Committee believed
that, in view of the Company's stock price, financial results and prospects,
and the prevailing market valuation for gaming companies like the Company, the
Proposal was at a price level that merited serious consideration and the
advice of outside financial advisors. The Special Committee also noted that it
was a significant benefit to have a public announcement which included the
proposed offering price since it would provide an early opportunity for other
potentially interested buyers to make their interest known, even if the
Company was not able to engage in negotiations with another interested party
during the exclusivity period. Therefore, the Special Committee unanimously
approved entering into the exclusivity agreement with Colony Capital to
explore whether to enter into an agreement to sell the Company and at what
price and on what terms. Following the Board meeting, the Company signed the
exclusivity agreement.
On March 8, 2000, the Company issued a press release announcing the signing
of the exclusivity agreement and the receipt of the Proposal.
Following the execution of the exclusivity agreement, Colony Capital, its
respective legal and financial advisors and management of Harveys Casino
Resorts commenced definitive due diligence with respect to the Company.
On March 11, 2000, Mr. Barrack met with Messrs. Hubbard, Alanis and
Finnigan to further discuss how the new parent company, PHCR, would be run.
There were no detailed discussions at this meeting as to the management
structure of the new parent company or the roles of each of the senior
management personnel in that structure. This meeting was the first meeting
between Messrs. Barrack and Alanis, and the primary purpose of the meeting was
to introduce Messrs. Barrack and Alanis. Messrs. Barrack and Alanis discussed
their strategic visions for the new parent company and their relative
expertise and interests in terms of how to run the new company.
On March 12, 2000, members of the Special Committee retained Munger, Tolles
& Olson LLP ("Munger Tolles") as legal counsel to the Special Committee.
On March 14, 2000, the Special Committee interviewed several financial
advisory firms and retained Jefferies & Company, Inc. ("Jefferies & Company")
as its financial advisor. Later that same day, Mr. Reitnouer, the Chairman of
the Special Committee, met with representatives of Colony Capital to inform
them that the Special Committee had been formed and had retained independent
financial and legal advisors to provide assistance in connection with the
consideration of the Proposal. Colony Capital's representatives indicated
Colony Capital's continued interest in a transaction with Company and urged
the Special Committee and its advisors to initiate contact with Colony
Capital's financial and legal advisors. On March 15, 2000, the Company issued
a press release announcing the retention of Jefferies & Company and Munger
Tolles as its respective financial and legal advisors.
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. On June 2, 2000, the action was dismissed without
prejudice.
On March 21, 2000, Leta Hilliard filed a similar purported class action
lawsuit in the Superior Court of the State of California. The plaintiff in the
lawsuit claims that the Company and its directors failed to undertake an
appropriate process for evaluating the value of the Company 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 the plaintiff's
claims are without merit. The parties to 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.
42
<PAGE>
From mid-March through mid-April, due diligence continued and discussions
were held frequently among Colony Capital, the Special Committee and senior
management of the Company and their respective legal and financial advisors
regarding the possible transaction. During this period, Colony Capital and
Messrs. Hubbard, Alanis, Finnigan and Loren Ostrow, Senior Vice President,
Secretary and General Counsel of the Company, on behalf of members of the
Company's senior management, engaged in negotiations regarding the details of
the management equity investment in, and their ongoing employment with, PHCR.
During this period, Bear Stearns and Jefferies & Company verbally discussed
Pinnacle's properties and the respective operations of such properties. During
this period, the legal advisors exchanged drafts of the definitive agreements
and representatives of Colony Capital were given a tour of the different
Pinnacle gaming facilities. On March 14, 2000, Colony Capital's legal advisors
sent to the Company and the Special Committee and their respective legal
advisors the first draft of the merger agreement.
On March 27, 2000, the Special Committee met telephonically with Jefferies
& Company and Munger Tolles to evaluate the Proposal. Jefferies & Company
reviewed with the Special Committee the terms and conditions of the Proposal,
the Company's historic financial performance, Jefferies & Company's estimates
of the Company's future financial performance based on information provided by
the Company, various valuation models for the Company and other gaming
acquisitions which had been recently completed. Jefferies & Company also
addressed the possibility that other acquirors might express an interest
during this process. In connection with its presentation to the Special
Committee, Jefferies & Company mentioned that the Special Committee might
consider pursuing other alternatives to a sale to Colony Capital.
Specifically, a recapitalization transaction in which the Company would adjust
its capital structure upon assuming a large amount of additional debt was
mentioned by Jefferies & Company. The Special Committee discussed such a
transaction, but did not consider it an attractive alternative due to (i) the
current amount of debt to which the Company was then subject and (ii) the fact
that since the Company's future cash flows would be reduced as a result of the
pending dispositions of the Casino Magic Bay St. Louis property, the Boomtown
Biloxi property and the Turf Paradise race track, the Company should not
undertake to support any additional debt burden. After an extended discussion,
the Special Committee directed Jefferies & Company to indicate to Bear Stearns
certain aspects of the Company's financial condition and operations bearing on
the price set forth in the Proposal.
At this same meeting, the Special Committee received a report concerning
the two lawsuits that had been filed regarding the Proposal. A full discussion
among the Special Committee, Jefferies & Company and Munger Tolles took place,
during which the Special Committee considered the allegations of the
complaints of the two lawsuits and also considered the relative advantages and
disadvantages of proceeding with the Proposal. The Special Committee
unanimously authorized Jefferies & Company to schedule a meeting for Mr.
Reitnouer with representatives of Colony Capital to discuss the Proposal
further.
In the afternoon of March 27, 2000, Mr. Reitnouer met with representatives
of Colony Capital at Colony Capital's offices in Los Angeles to discuss the
Proposal. The parties present discussed the information that Jefferies &
Company had prepared regarding the Company that had been presented to the
Special Committee earlier that same day. Mr. Reitnouer communicated to these
Colony Capital representatives the Special Committee's desire that Colony
Capital increase the proposed price per share from $25.00. Mr. Reitnouer also
informed the representatives of Colony Capital of the other issues on which
the Special Committee was especially focused--in particular, the conditions to
closing, the parties' termination rights and the proposed termination fee.
On March 28, 2000, the Special Committee met telephonically with Jefferies
& Company and Munger Tolles to discuss the Proposal in light of Mr.
Reitnouer's meeting of the previous day. Mr. Reitnouer conveyed Colony
Capital's decision not to increase the proposed price per share. The Special
Committee considered how to reduce PHCR's ability to terminate a transaction
for failure to obtain financing, while maintaining the Company's flexibility
before any such closing.
On March 29, 2000, Mr. Reitnouer again met telephonically with
representatives of Colony Capital to discuss PHCR's right to terminate a
transaction for failure to obtain financing. Colony Capital's representatives
43
<PAGE>
explained the risks associated with the long regulatory waiting periods
associated with gaming transactions. Representatives of Colony Capital
explained that having obtained the proceeds of financing was a fundamental
condition to the Pinnacle Merger but that because of the need to obtain
approval of the transaction from various gaming authorities, there was the
possibility that the closing might not occur until as long as 15 to 18 months
after signing the merger agreement. Requiring a financial institution to
commit itself over such a long period to provide financing upon the closing of
the transaction would be difficult and expensive. Moreover, over such a long
period the performance of the assets of the Company could change dramatically.
Such a change could impact not only PHCR's willingness to consummate the
transaction but also a financial institution's willingness to provide
financing. At the March 29 meeting, the parties also discussed various aspects
of the financing condition, including the terms on which the financing
condition was based and any penalty associated with termination of the merger
agreement based on the financing condition. The meeting ended with Mr.
Reitnouer's commitment to take these proposals back to the Special Committee
for consideration.
On March 30, 2000, the Special Committee met telephonically to evaluate the
proposals discussed at Mr. Reitnouer's March 29, 2000 meeting with Colony
Capital. Mr. Reitnouer summarized the negotiation he had with Colony Capital's
representatives and the details of the Proposal.
Later that same day, in order to provide additional time for the completion
of Colony Capital's due diligence and the negotiations, the Company and Colony
Capital extended the exclusivity period by two weeks, through April 14, 2000.
On that day, Pinnacle issued a press release to that effect. Although the
exclusivity period was extended, no penalty to the Company or benefit to
Colony Capital existed if the Company were to have received offers from other
interested parties.
During the course of the due diligence and negotiations, it became apparent
that, in making its $25.00 per share proposal, Colony Capital had been relying
on a financial analysis that had assumed that all significant contingencies to
the sale by the Company of the Company's 97 acres of surplus land in
Inglewood, California would be satisfied by the time the proposed merger
closed, even if the Inglewood land sale had not closed prior to the closing of
the proposed merger. Messrs. Hubbard and Finnigan made it clear to Colony
Capital that, unlike the other pending asset dispositions, there was no then
existing agreement to sell the Inglewood land and, even if there were, there
could be no assurance that the entitlement process for a buyer of the
Inglewood land would be completed prior to the completion of the proposed
merger. The Inglewood land issue remained as a significant open issue during
this period of the negotiations.
On April 10, 2000, a meeting was held with representatives of Colony
Capital, the Company and the Special Committee, and their respective advisors,
to discuss all of the open issues with respect to the Proposal. Beginning in
the afternoon and continuing through the evening of April 10, 2000, the
parties proceeded page by page through each of the transaction documents and
attempted to resolve all of the remaining issues with respect to the
transaction.
On April 11, 2000, the Special Committee met telephonically with its
advisors to evaluate the negotiations and significant open issues with respect
to the transaction.
On April 12, 2000, Jonathan Grunzweig, a principal of Colony Capital, and
other representatives of Colony Capital met with Messrs. Alanis, Finnigan (who
participated by telephone) and Ostrow to further discuss the arrangements with
respect to management equity investment and employment matters.
On April 13, 2000, Mr. Reitnouer had a telephonic conversation with
representatives of Colony Capital regarding a proposal by Colony Capital to
make a portion of the merger consideration contingent upon the sale by the
Company of the Company's 97 acres of surplus land in Inglewood, California.
On April 14, 2000, Mr. Barrack, Mr. Grunzweig and other representatives of
Colony Capital met with Messrs. Hubbard and Finnigan to discuss a variety of
open issues including the treatment of the Inglewood land sale discussed the
prior day between Mr. Reitnouer and representatives of Colony Capital. The
other open issues included the ability to mitigate the tax disadvantage of the
transaction structure which affects Mr. Hubbard but
44
<PAGE>
does not affect the other Management Stockholders or the public stockholders;
the determination of the number of shares of PHCR common stock and the
corresponding percentage interest in PHCR to be acquired by the Management
Stockholders; and the mix between PHCR common stock and options to be granted
to the Management Stockholders and the exercise price of such options.
At this meeting, Messrs. Hubbard and Finnigan received from Colony Capital
a verbal summary of the proposal discussed with Mr. Reitnouer the previous day
with respect to the Inglewood land sale. Messrs. Hubbard and Finnigan met with
Colony Capital to discuss the Inglewood land sale because they were the
Company representatives who were most familiar with the status of the
Inglewood land sale effort and could provide the most comprehensive update of
the situation for Colony Capital. Mr. Barrack outlined the issue from Colony
Capital's perspective and proposed a tentative resolution of the issue.
Messrs. Hubbard and Finnigan indicated that they would have to communicate
Colony Capital's proposal to the Special Committee and that any resolution of
the issue would be subject to approval by the Special Committee. Colony
Capital's proposal involved PHCR paying $24.00 in cash at the closing of the
merger with a contingent payment entitling stockholders to up to an additional
$1.00 per share if the Inglewood land sale was closed prior to December 31,
2001 at a sale price yielding at least a certain level of net after tax
proceeds to Pinnacle. Such minimum level of after tax proceeds was determined
to be $40,750,000 in the final negotiations on April 16, 2000, as discussed
below, with a proration of the $1.00 to the extent that the net after tax
proceeds are within a range between $13,054,000 and $40,750,000. During the
meeting, Messrs. Hubbard and Finnigan asked the Colony Capital representatives
to leave the room and then Messrs. Hubbard and Finnigan telephoned Mr.
Reitnouer to update him on Colony Capital's proposal on the Inglewood land
sale issue. Mr. Reitnouer indicated that he would present it to the Special
Committee for consideration. In addition, at this meeting, management equity
issues were finalized. Finally, the parties discussed certain tax issues
related to the transaction structure which affected Mr. Hubbard but did not
affect the other Management Stockholders or the public stockholders and
concluded that, in order to afford him tax treatment that was not worse than
that of the public stockholders with the respect to his stock which was not
being contributed to PHCR, Pinnacle should repurchase such shares immediately
prior to the completion of the proposed merger.
On April 14, 2000, the Special Committee met telephonically with its
advisors to evaluate the open issues relating to the proposed merger, the
general status of negotiation of the agreement and plan of merger and to
discuss Colony Capital's proposal associated with the Inglewood property.
Over the course of the next two days, April 15 and 16, the parties
negotiated to finalize the definitive agreements. On April 16, 2000, the
Special Committee held a meeting to consider the proposed merger agreement.
Jefferies & Company then presented its opinion that Colony Capital's proposal
to acquire all of the outstanding shares of the Company for $24.00 per fully
diluted share in cash, plus a possibility to receive up to another $1.00 in
cash per fully diluted share if the Company were to sell the Inglewood
property, was fair to the Company's stockholders from a financial point of
view. During the entire period of negotiation with Colony Capital, the Company
did not receive any other offers or any indications of interest from any party
other than Colony Capital. After discussion, the Special Committee voted
unanimously to recommend Colony Capital's proposed transaction to the
Company's Board of Directors for its approval. Immediately following the
meeting of the Special Committee, the Board of Directors of Pinnacle (with
Messrs. Hubbard and Alanis attending the meeting but abstaining from the vote)
met and approved the Merger Agreement and resolved to recommend that
stockholders of the Company approve and adopt the Merger Agreement.
On April 17, 2000, the Merger Agreement was executed by Pinnacle, PHCR and
Pinnacle Acq Corp, and the Voting and Contribution Agreement and the
Memorandum of Understanding were executed by PHCR and the members of Pinnacle
management who would receive certain equity interests in PHCR. A press release
to that effect was issued.
Pinnacle's Prior Proposal to Acquire Harveys Casino Resorts
In January 1998, the Company (then named Hollywood Park, Inc.), as one of
several potential purchasers, made a proposal to the Board of Directors of
Harveys Casino Resorts in which the Company would acquire
45
<PAGE>
Harveys Casino Resorts in a merger in which the Company would issue common
stock. The Company also proposed that up to one-third of the merger
consideration could be paid in cash. The Company later proposed an all-cash
offer at an increased price. However, Colony Capital also had submitted a
proposal as a potential purchaser, and Harveys Casino Resorts instead decided
to accept the offer from Colony Capital. In February 1998, after Harveys
Casino Resorts and an affiliate of Colony Capital had entered into a
definitive agreement with respect to Colony Capital's acquisition of Harveys
Casino Resorts, the Company made another offer to acquire Harveys Casino
Resorts at an increased price per share in cash if the Colony Capital break-up
fee were eliminated. Harveys Casino Resorts did not accept any of the
Company's proposals and was acquired by an affiliate of Colony Capital.
Purpose and Reasons for the Pinnacle Merger
General
The purpose of the Pinnacle Merger is to enable PHCR to acquire the Company
through a merger of its indirect wholly-owned subsidiary, Pinnacle Acq Corp,
with and into the Company. The Company will be the surviving corporation in
the Pinnacle Merger and will be a wholly-owned subsidiary of PHCR. PHCR is a
newly formed wholly-owned subsidiary of Harveys Casino Resorts. Concurrently
with the Pinnacle Merger, another newly formed subsidiary of PHCR, Harveys Acq
Corp, will merge into Harveys Casino Resorts, with the result that,
immediately following the two mergers, the Company and Harveys Casino Resorts
will be wholly-owned subsidiaries of PHCR. Immediately following the Pinnacle
Merger and the Harveys Merger, it is currently expected that Voteco, an
affiliate of Colony Capital, will own approximately 82.7% of the voting power
of PHCR's common stock, and the Management Stockholders will own in the
aggregate, approximately 15.6% of the voting power of PHCR's common stock. See
"The Pinnacle Merger--Interests of Certain Persons in the Pinnacle Merger;
Certain Relationships." It is currently expected that the remaining 1.7% of
the voting power of PHCR's common stock will be owned by members of current
management of Harveys Casino Resorts. The respective percentage ownership
interests of Voteco, the Management Stockholders and current management of
Harveys Casino Resorts with respect to PHCR common stock following the
Pinnacle Merger and the Harveys Merger that are set forth in this paragraph
and throughout the Proxy Statement are subject to adjustment in the event that
affiliates of PHCR determine to make any equity investment in PHCR or any of
its subsidiaries. Affiliates of PHCR are under no obligation to make any such
equity investment, and if affiliates of PHCR elect, in their sole discretion,
to make an equity investment in PHCR or its subsidiaries prior to the closing
of the Pinnacle Merger, such equity investment will be subject to the
reasonable approval of Mr. Hubbard.
Colony Capital has advised the Louisiana Gaming Control Board of Colony
Capital's willingness to make a $50,000,000 equity investment in PHCR to the
extent necessary to support the fifteenth and final gaming license to be
issued by the Louisiana Gaming Control Board should such license be awarded to
Pinnacle and provided that the Pinnacle Merger is completed. In November 1999,
Pinnacle filed an application for such license, seeking approval to operate a
cruising riverboat casino, hotel and golf course resort complex in Lake
Charles, Louisiana. Colony Capital has advised Pinnacle that it is Colony
Capital's intention to make such an equity investment at the closing of the
transactions even if the fifteenth license is not awarded to Pinnacle. Mr.
Hubbard has given his approval pursuant to the Voting Agreement for such
equity investment to be on the same terms as the equity investments being made
in PHCR by Pinnacle management and Harveys management, respectively, pursuant
to their exchange of Pinnacle Common Stock and Harveys Common Stock for PHCR
common stock pursuant to the Pinnacle Merger and the Harveys Merger. However,
Colony Capital and its affiliates are under no obligation to make such equity
investment or any other equity investment in PHCR or its subsidiaries, and no
assurances can be given that any such equity investment will be made.
Purpose and Reasons of the Company and the Management Shareholders
In light of certain obstacles to the Company's prospects for growth
resulting from legal limitations on casino gaming in a number of states and
legislation and referenda with potentially adverse impacts on the Company
(such as California's Proposition 1A and proposed increased gaming taxes), as
well as from competitive
46
<PAGE>
disadvantages associated with recent consolidation within the gaming industry
and increased risks related to the Company's expansion and development
efforts, the Company believes that it is a particularly opportune time for the
Company to undertake the Pinnacle Merger. The Pinnacle Merger will allow the
Company's stockholders to sell their stock at a premium to the price at which
Pinnacle Common Stock was trading, or would be expected to trade, in the
absence of the Proposal. Such a premium cannot be assured if the Company
remains publicly owned for the reasons mentioned above and because, while the
Company's development efforts may provide long-term benefits, such benefits
may not be reflected in the market value of the Company's stock.
Colony Capital conditioned the Proposal on senior management being willing
to retain a significant equity interest in the Company and continue their
employment. In order to facilitate the transaction, and in an effort to
demonstrate their confidence in the transaction, Messrs. Hubbard, Alanis,
Finnigan, Allen and Hinckley, along with certain other members of senior
management, agreed to retain an equity interest in PHCR.
Purpose and Reasons of Pinnacle Acq Corp, PHCR, Harveys and Voteco
The purpose of engaging in the transaction with the Company is to permit
Colony Capital to expand its presence in the gaming industry by acquiring a
company which has a strong management team and shares operating synergies with
Harveys Casino Resorts.
Colony Capital had been pursuing a presence in the gaming industry since
1998 and, in February 1999, completed its acquisition of Harveys Casino
Resorts. Because there are only a small number of public and private gaming
companies in the United States, the opportunities for potential acquisitions
is somewhat limited. Moreover, significant consolidation in the gaming
industry has occurred particularly in the last two to three years.
As a private company, Colony Capital had the resources and flexibility to
take advantage of opportunities presented by this consolidation. Therefore, in
late 1999, having identified the Company as one of a number of gaming
companies which was worthy of consideration with respect to a potential
transaction, Colony Capital decided to investigate the possibility of making a
proposal to acquire the Company.
Certain Effects of the Pinnacle Merger
Benefits and Detriments of the Pinnacle Merger to the Company
Upon completion of the Pinnacle Merger, the Company will become a private
company. As a result, the Company's management will be able to react with
greater speed and flexibility to changing conditions and opportunities,
increasing the operating flexibility of the Company. In addition, the
Company's management will be able to make decisions based on its long-range
business interests without the necessary consideration of the possible adverse
short-term effect of such decisions upon the market price of Pinnacle Common
Stock and without the constraint of the public market's emphasis on quarterly
earnings.
Becoming a private company also will reduce the operational and
administrative costs arising from and in connection with the Company's status
as a public reporting company. Pinnacle Common Stock is currently registered
under the Securities Exchange Act of 1934, as amended (the "Exchange Act"). If
the Merger Agreement is approved at the Annual Meeting and the Pinnacle Merger
is completed, Pinnacle Common Stock will become eligible for termination of
registration under Section 12(g)(4) of the Exchange Act, and the registration
of Pinnacle Common Stock under the Exchange Act will be terminated as soon as
practicable after the Pinnacle Merger is completed. Termination of
registration of the shares of Pinnacle Common Stock under the Exchange Act
will substantially reduce the information required to be furnished by the
Company to its stockholders and to the SEC and will make certain provisions of
the Exchange Act inapplicable to the Company, such as the obligation to file
reports under Section 15(d) of the Exchange Act, the short-swing profit
recovery provisions of Section 16(b), the requirement of furnishing a proxy
statement in connection with stockholders' meetings and the requirements of
Rule 13e-3 with respect to going-private transactions. The shares of Pinnacle
Common Stock will also be delisted from the New York Stock Exchange as a
result of the Pinnacle Merger.
47
<PAGE>
As the surviving company in the Pinnacle Merger, the principal detriments
to the Company will be its inability to use publicly-traded securities as
acquisition capital or to grant options to its employees exercisable for
publicly-traded securities. In addition, as a result of the Financing, PHCR
will have a significant amount of debt. A substantial portion of the cash flow
from the operations of Pinnacle and Harveys Casino Resorts may be required to
be used to pay interest and principal on the debt and such cash flow therefore
may be unavailable for other purposes, including capital expenditures, project
expansion, development and acquisition efforts. PHCR's level of debt may also
limit its ability to obtain additional financing and heighten its
vulnerability to downturns in its industry or in the general economy.
Benefits and Detriments of the Pinnacle Merger to the Public Stockholders
The benefit to the holders of Pinnacle Common Stock of the transaction will
be the payment of a premium, in cash, above the market value for such Pinnacle
Common Stock prior to the public announcement that the Company had received a
proposal regarding the transaction. If the Pinnacle Merger is completed,
stockholders of the Company (other than the Company or any of its
subsidiaries, Pinnacle Acquisition Corporation, stockholders who have
perfected their appraisal rights in accordance with Delaware law and
Management Stockholders with respect to the shares of Pinnacle Common Stock to
be contributed to PHCR) will be entitled to receive $24.00 in cash, without
interest, for each share of Pinnacle Common Stock and, if applicable, up to an
additional $1.00 in cash for each outstanding share of Pinnacle Common Stock,
contingent on the sale by the Company of the Company's 97 acres of surplus
land in Inglewood, California under certain circumstances. Holders of options
to purchase shares of Pinnacle Common Stock ("Pinnacle Stock Options") (other
than options to be cancelled by Management Stockholders and replaced with PHCR
options) with an exercise price of less than $24.00 per share will be entitled
to receive an amount in cash equal to the difference between $24.00 and the
exercise price per share, without interest, for each share underlying such
option, regardless of whether the option is fully vested. Each such option
holder also will be entitled to receive the contingent payment described above
to the extent that the cash merger consideration (taking into account any
Contingent Payment to be paid in cash at the effective time of the Pinnacle
Merger) exceeds the per share exercise price of such option. The merger
consideration of $24.00 per share represents a 39.1% premium to the closing
price of the common stock on March 6, 2000 (the second to last trading day
prior to the public announcement that the Company had received a proposal
regarding the proposed transaction) and a 21.5% premium to the closing price
for the common stock on April 14, 2000 (the last trading day before the
signing of the definitive Merger Agreement was announced). This cash payment
will assure that all public stockholders will receive the same amount for
their shares, rather than taking the risks associated with attempting to sell
their shares in the open market. Additionally, the risk of any possible
decline in the value of the stockholders' investment in the Company will be
eliminated and stockholders will not pay the commissions on brokerage fees
they would have incurred in connection with the sale of their shares of
Pinnacle Common Stock.
The detriment to such holders will be their inability to participate as
continuing stockholders in the possible future growth of the Company. If the
Pinnacle Merger is consummated, the Management Stockholders, together with
other stockholders of PHCR, will indirectly hold the entire equity interest in
the Company and will therefore be the sole beneficiaries of any future
earnings or growth of the Company and any increases in value of the Company.
See "The Pinnacle Merger--Interests of Certain Persons in the Pinnacle Merger;
Certain Relationships." Further, stockholders may recognize a taxable gain as
a result of the Pinnacle Merger. See "--Certain Federal Income Tax
Consequences of the Pinnacle Merger."
Benefits and Detriments of the Pinnacle Merger to the Management Stockholders
The Pinnacle Merger will benefit the Management Stockholders by allowing
them the opportunity to participate in the Company's and Harveys Casino
Resorts' future earnings and growth through their equity stakes in the Company
through PHCR. Upon consummation of the Pinnacle Merger, the Management
Stockholders will contribute on a tax-free basis certain of their shares of
Pinnacle Common Stock to PHCR in exchange for shares of common stock of PHCR
and will cause certain Pinnacle Stock Options held by them to be cancelled and
replaced with fully vested options to purchase common stock of PHCR. The
employment agreements of the
48
<PAGE>
Management Stockholders that have such agreements will be assumed by PHCR or
its subsidiaries without modification (except as necessary to reflect the
Pinnacle Merger) and, unless earlier terminated, will terminate on the
respective dates set forth therein. PHCR and the Management Stockholders will
also enter into additional agreements with respect to matters related to
corporate governance and stockholder rights. See "The Pinnacle Merger--
Interests of Certain Persons in the Pinnacle Merger; Certain Relationships",
"Voting and Contribution Agreement; Memorandum of Understanding" and
"Stockholders Agreement."
The principal detriment to the Management Stockholders of the completion of
the Pinnacle Merger will be that they will bear the risk of any decrease in
the future value of the equity of the Company and Harveys Casino Resorts after
the Pinnacle Merger.
Benefits and Detriments of the Pinnacle Merger to Director and Employee
Equityholders Other Than Management Stockholders
Members of the Board of Directors and some employees of the Company (other
than the Management Stockholders) own shares of Pinnacle Common Stock and
Pinnacle Stock Options. The treatment of such members of the Board of
Directors and employees is identical to treatment of stockholders of the
Company who are not members of the Board of Directors or employees. Therefore,
the benefits and detriments of the Pinnacle Merger to such directors
(including the Special Committee members) and employees match those applicable
to the public stockholders. As a result of the Pinnacle Merger, the members of
the Special Committee will be entitled to receive, in the aggregate,
$14,540,424 in cash, plus up to an additional $605,851 if the Inglewood sale
closes before December 31, 2001, for their shares of Pinnacle Common Stock and
$4,986,214 in cash, plus up to an additional $321,738 if the Inglewood sale
closes before December 31, 2001, for their Pinnacle Stock Options representing
an aggregate price per share equal to that paid to the Company's unaffiliated
stockholders. In addition, members of the Special Committee will be paid a fee
for their service on the Special Committee. See "The Pinnacle Merger--Fees and
Expenses."
In addition, the Merger Agreement provides that the existing
indemnification obligations set forth in Pinnacle's certificate of
incorporation and bylaws as of the date of the Merger Agreement shall be
maintained and not amended, repealed or otherwise modified for a period of six
years after the effective time in any manner that would adversely affect the
rights thereunder of individuals who at or prior to the effective time of the
Pinnacle Merger were directors, officers, employees or agents of the Company.
The Merger Agreement also provides that, for six years after the closing of
the Pinnacle Merger, the Company will provide directors' and officers'
liability insurance to cover persons covered by the Company's directors' and
officers' liability insurance policy in effect on the date of the Merger
Agreement (which insurance shall be of at least the same coverage, with
comparable carriers, and shall contain terms and conditions no less favorable
to such persons) with respect to those matters covered by such policy.
Other Effects of the Pinnacle Merger
Subject to the obligation to maintain the existing indemnification
obligations set forth therein, as discussed above, the certificate of
incorporation and bylaws of the Company will be amended upon consummation of
the Pinnacle Merger and, as amended, will be the certificate of incorporation
and bylaws of the Company until thereafter amended. In addition, at the
effective time of the Pinnacle Merger, the Board of Directors of Pinnacle Acq
Corp will replace the Board of Directors of the Company, and the officers of
Pinnacle Acq Corp will become the officers of the Company.
Recommendation of the Special Committee and Board of Directors; Fairness of
the Pinnacle Merger
The Special Committee unanimously recommended that the Board of Directors
and the stockholders of the Company approve the Merger Agreement, the Pinnacle
Merger and the transactions contemplated by the Merger Agreement, and
determined the Merger Agreement and the Pinnacle Merger to be advisable, fair
to and in the best interests of the Company's stockholders other than the
Management Stockholders.
49
<PAGE>
Factors Considered by the Special Committee
The decision of the Special Committee to recommend the approval of the
Merger Agreement to the Board of Directors of Pinnacle was based upon its
consideration of a number of factors, including the reasons for the merger and
countervailing considerations listed below, which include all of the material
factors considered, but which are not listed in order of significance. The
Special Committee believes that the transactions contemplated by the Merger
Agreement are both substantively and procedurally fair to the Company's
stockholders other than the Management Stockholders for the reasons described
in this section.
Reasons for the Merger
(a) The substantial premium represented by the merger consideration of at
least $24.00 per share of Pinnacle Common Stock over the then-prevailing
market price of the Pinnacle Common Stock compares favorably to both the
current and past market price of Pinnacle Common Stock (see "Common Stock
Market Price and Dividend Information") and the historical volatility of the
price of Pinnacle Common Stock over the last several years.
(b) The absence of any competing offers or proposals during the significant
period between the first public announcement relating to PHCR's interest in a
merger and the execution of the Merger Agreement, despite the Company's
issuance of three press releases during the course of negotiating the
transaction indicating, among other things, that Jefferies & Company had been
retained as the Special Committee's financial advisor to assist in the
evaluation of Colony Capital's proposal and that a finite exclusivity period
existed, indicated that better offers were unlikely to be available to the
Company.
(c) The Company's limited near-term growth prospects support approval of
the Pinnacle Merger. Those factors limiting the Company's growth possibilities
are:
. The lack of attractive properties to acquire during the last 18 months
in the Company's target markets;
. Both the successful and unsuccessful attempts of the Company to grow by
the acquisition of other gaming companies;
. The fact that the legalization of gaming, other than Native American
casino gaming, is unlikely to expand into new states; and
. The current status and timing of the Company's dispositions of various
assets and properties, including but not limited to the Casino Magic Bay
St. Louis property, the Boomtown Biloxi property, the Turf Paradise race
track and the Inglewood, California property, will correspondingly
reduce the Company's cash flow. With the exception of the Company's
Belterra Casino development project, the Company currently does not have
any attractive opportunities to replace such lost cash flow.
(d) In light of the substantial premium represented by the merger
consideration over the then prevailing market price of Pinnacle Common Stock,
the Special Committee believed that the business and competitive risks and
increased costs faced by the Company supported the recommendation to the
Company's Board of Directors and unaffiliated stockholders that the Merger
Agreement should be approved. These risks include:
. The risk that the Company may be unable to deploy sufficient capital to
undertake the expansion and improvement needs at the Company's existing
properties;
. The threat that some states in which the Company operates will increase
the taxes imposed on gaming transactions engaged in by the Company;
. The risks associated with opening a major new property such as the
Belterra Casino Resort and the uncertainty of the cash flow therefrom.
This risk is countered by the factor described in paragraph (c) of "--
Countervailing Considerations" below; and
. The risk posed by the anticipated construction of new Native American
casinos that would compete with the Company's existing properties,
including the Boomtown casino in Reno, Nevada.
50
<PAGE>
(e) The Pinnacle Merger would take advantage of the geographic diversity of
properties held by the Company and by Harveys Casino Resorts, and allow for
potential synergies between the companies.
(f) The Special Committee considered that the terms and conditions of the
Merger Agreement supported approval of the Pinnacle Merger by the Company's
Board of Directors and unaffiliated stockholders because the Merger Agreement
allowed the Company to receive unsolicited offers, under certain
circumstances, while committing PHCR, Pinnacle Acq Corp and Harveys Casino
Resorts to expend their efforts and financial resources to consummate the
transactions contemplated by the Merger Agreement. The following elements of
the Merger Agreement supported this determination by the Special Committee:
. PHCR's agreement to file within a specified time its corporate gaming
applications in each jurisdiction where gaming approvals are required to
permit consummation of the transactions contemplated by the Merger
Agreement;
. PHCR's agreement to use all reasonable efforts to obtain the required
gaming approvals;
. The Company's retention of the right to terminate the Merger Agreement
if the effective time of the Pinnacle Merger has not occurred by a
specified date, including because PHCR is unable to obtain the required
gaming approvals by such date;
. The Company's retention of the right to terminate the Merger Agreement
on or prior to September [ ], 2000, in order that it may accept an
unsolicited proposal for certain types of transactions, provided that
the Company complies with the terms of the Merger Agreement, including
payment of a $25,000,000 termination fee, and the Board determines in
its good faith judgment that:
(1) the value of the consideration exceeds the value of the merger
consideration under the Merger Agreement and any alternative
proposal presented by Pinnacle Acq Corp or any of its affiliates;
and
(2) such unsolicited proposal is more favorable to the Company's
stockholders than the Pinnacle Merger and any alternative proposal
presented by Pinnacle Acq Corp or any of its affiliates;
. The Company's retention of the right to withdraw or modify the
recommendation of the Merger Agreement or the Pinnacle Merger or to
recommend a competing proposal.
. Harveys Casino Resorts' agreement to be jointly and severally liable
with PHCR and Pinnacle Acq Corp to the Company for any claims brought
against PHCR or Pinnacle Acq Corp under the Merger Agreement, subject to
a $15,000,000 cap on the aggregate liability of Harveys Casino Resorts
relating to any such claim or arising under such agreement, or otherwise
pertaining to the Merger Agreement, and subject to the right of Harveys
Casino Resorts to assert defenses and set-offs of PHCR and Pinnacle Acq
Corp;
. Pinnacle Acq Corp's covenant to use its commercially reasonable efforts
to obtain and effectuate the Financing (as defined in "Merger
Agreement--Financing of the Pinnacle Merger and the Harveys Merger"; see
clause (i) below); and
. Pinnacle Acq Corp's covenant to use its reasonable best efforts to
obtain the consent or valid tender of certain of the Company's debt
instruments, to the extent required in connection with the transactions
contemplated by the Merger Agreement, subject to the provisions set
forth in the Merger Agreement.
(g) The Special Committee believed that the provisions of the Merger
Agreement themselves should not deter another party from making a superior
offer for the Company.
(h) The Special Committee's determination was supported by: (i) the
analysis and advice of Jefferies & Company to the Special Committee, (ii) the
description of the Company's going concern value as measured by the several
methods presented by Jefferies & Company to the Special Committee (e.g.,
Premiums Paid Analysis, Comparable Company Analysis, Similar Transaction
Analysis and Discounted Cash Flow Analysis) (See "Special Factors--Opinion of
Financial Advisor to the Special Committee"), and (iii) the oral opinion
51
<PAGE>
delivered to the Special Committee by Jefferies & Company on April 16, 2000
(confirmed in writing on the next day) to the effect that as of such date the
merger consideration (even if no contingent payment is made) was fair to the
Company's stockholders from a financial point of view.
(i) The copies provided to the Company of (1) a commitment letter issued by
certain lenders to PHCR regarding the anticipated provision, subject to
significant conditions, of a senior secured credit facility for the
acquisition of the Company on the terms set forth therein, and (2) letters
from two investment banks to PHCR and certain of its affiliates indicating,
subject to significant conditions, that it is highly confident of its ability
to place senior subordinated notes on the terms set forth therein provide some
limited assurance that PHCR and Pinnacle Acq Corp will in fact be able to
finance payment of the merger consideration.
(j) PHCR proposed a contingent payment of additional consideration to the
Company's stockholders based upon the timing and net after tax proceeds from
the sale by the Company of the Company's surplus land in Inglewood,
California.
Countervailing Considerations
The Special Committee's decision to recommend that the Company's Board of
Directors and stockholders approve the transactions contemplated by the Merger
Agreement was influenced by several considerations that weighed against such a
recommendation. The countervailing factors considered by the Special Committee
were:
(a) The risk that despite stockholder approval, the Pinnacle Merger would
not be consummated due to:
. PHCR's inability to obtain the required regulatory approvals;
. PHCR's inability to obtain and effectuate the Financing, whether due to
changes in interest rates, capital markets or otherwise;
. PHCR's possible failure to obtain the required consents or related
tenders of certain outstanding debt securities of the Company and of
Harveys Casino Resorts to the extent required in connection with the
transactions contemplated by the Merger Agreement, subject to the
provisions set forth in the Merger Agreement; or
. The Company's inability to sell the Casino Magic Bay St. Louis property,
the Boomtown Biloxi property or the Turf Paradise race track for the
specified amounts of net proceeds by the closing date.
(b) The terms of the Merger Agreement that prohibit the Company from, among
other things, soliciting, negotiating or entering into agreements relating to
a sale of the Company or a portion of its assets or securities or a merger or
similar transaction involving the Company, which is countered by the factor
described in the fourth bullet point in paragraph (f) of "--Reasons for the
Merger" above;
(c) The fact that the Company's stockholders would not be able to
participate in the future growth, if any, from the Company's Belterra Casino
Resort;
(d) The possibility that provisions in the Merger Agreement mandating that
the Company's Belterra Casino Resort open on schedule and under a specified
budget could prevent consummation of the transactions contemplated by the
Merger Agreement;
(e) The conditions in the Merger Agreement relating to the disposition of
the Casino Magic Bay St. Louis property, the Boomtown Biloxi property, the
Turf Paradise race track and the Company's surplus land in Inglewood,
California;
(f) The fact that PHCR and Pinnacle Acq Corp are newly formed corporations
without assets, which is countered by the factor described in the fifth bullet
point in paragraph (f) of "--Reasons for the Merger" above;
52
<PAGE>
(g) The extensive representations and warranties required to be made by the
Company to Pinnacle Acq Corp in the Merger Agreement; and
(h) The comprehensive and extensive covenants restricting Pinnacle's
conduct of its business set forth in the Merger Agreement.
The factors described above constitute those items that the Special
Committee considered relevant to its decision whether or not to approve the
Pinnacle Merger. Jefferies & Company provided analysis of the Pinnacle Merger
consideration to the Special Committee as described in the presentation
materials presented to the Special Committee dated March 24, 2000 (the
"Presentation Materials"). Although the Special Committee was aware that
Jefferies & Company's analysis indicated that the merger consideration trailed
certain valuation benchmarks, as discussed below in the description of the
opinion of the financial advisor, the Special Committee based its conclusion
on the totality of the circumstances and information reviewed by it.
Additionally, because the Special Committee based its conclusions regarding
the transaction upon the totality of the facts, circumstances and information
available to it, evaluation of the consideration offered to the Company's
unaffiliated stockholders in relation to the Company's net book value or
liquidation value was not deemed to be any more important than any of the
other facts, circumstances or information available to the Special Committee.
The Special Committee did consider that transactions in the gaming industry
are not commonly measured in relation to a company's net book value or
liquidation value. The Special Committee does not believe that these factors
have any significant impact on the market trading price of Pinnacle Common
Stock. The Special Committee also noted that within the last two years no
sales of the Company's securities occurred at a price higher than the merger
consideration. As mentioned above, given the totality of the circumstances and
information presented, the Special Committee concluded that the transaction is
both substantively and procedurally fair and that the terms and conditions of
the Merger Agreement are advisable, fair to and in the best interests of the
Company's stockholders other than the Management Stockholders.
The Special Committee based its belief regarding the procedural fairness of
the Pinnacle Merger on the following factors:
. The fact that a Special Committee consisting of members of the Company's
Board of Directors without any interest in the Pinnacle Merger other
than as stockholders of the Company was created to act solely for and on
behalf of the Company's unaffiliated stockholders in connection with the
negotiation and approval of the terms of the Pinnacle Merger;
. The fact that none of the Special Committee members was an employee of
the Company, except that Messrs. Parrott and Torguson have consulting
and/or employment relationships with the Company;
. The fact that the Special Committee retained independent legal and
financial advisors and that the Special Committee aggressively
negotiated the terms of the Merger Agreement;
. The fact that the Special Committee designated its Chairman, Mr.
Reitnouer, to act solely for and on behalf of the Special Committee and
the Company's unaffiliated stockholders, subject to the Special
Committee's subsequent approval, in communicating the Special
Committee's positions regarding the Pinnacle Merger and the transactions
contemplated by the Merger Agreement to Colony Capital and its
representatives;
. The fact that, between Special Committee meetings, Mr. Reitnouer
continually updated the Special Committee's other members of his
conversations with Colony Capital and its representatives;
. The fact that the Special Committee received a written opinion from its
independent financial advisor as to the fairness, from a financial point
of view, of the merger consideration, excluding any possible contingent
payment to the Company's stockholders;
. The fact that approval and adoption of the Merger Agreement was
unanimously recommended by the Special Committee to the Company's Board
of Directors and stockholders; and
53
<PAGE>
. The fact that, although the structure of the transaction does not
require approval by a majority of the outstanding shares of Pinnacle
Common Stock held by unaffiliated stockholders and although the
Management Stockholders have agreed to vote their shares in favor of the
approval and adoption of the Merger Agreement, such Management
Stockholders only own approximately 11.4% of the outstanding shares of
Pinnacle Common Stock.
In light of the number and nature of the factors considered by the Special
Committee, including those listed above, the Special Committee did not assign
relative weight to the factors considered in reaching its conclusions. Rather,
the Special Committee viewed its conclusions and recommendation to the Board
as being based on the totality of the information being presented to and
considered by it. The Special Committee determined that the factors leading it
to support the Merger Agreement outweighed the factors that detracted from the
attractiveness of the proposal, taken as a whole, of PHCR. The Special
Committee, therefore, voted unanimously to recommend the Merger Agreement to
the Board of Directors for its approval.
Reasons for the Board's Determination
The Board of Directors believes that the transaction is substantively and
procedurally fair to the Company's stockholders other than the Management
Stockholders. The Board of Directors adopted the Special Committee's
recommendation and unanimously approved the Merger Agreement (with Messrs.
Hubbard and Alanis abstaining from the vote in light of their interest in the
transaction--see "The Pinnacle Merger--Interests of Certain Persons in the
Pinnacle Merger; Certain Relationships"). In reaching its decision to approve
the Merger Agreement, the Board of Directors relied on the Special Committee's
recommendation and the factors considered by the Special Committee as
described above. The Board of Directors based this reliance on the
recommendation of the Special Committee and on the following procedural
factors: the fact that the members of the Special Committee had no interest in
the Pinnacle Merger other than as stockholders; the fact that none of the
Special Committee members was an employee of the Company, except that Messrs.
Parrott and Torguson have consulting and/or employment relationships with the
Company; the fact that the Special Committee retained independent legal and
financial advisors; the fact that the Special Committee received a written
opinion from its independent financial advisor as to the fairness, from a
financial point of view, of the merger consideration, excluding any possible
contingent payment, to the Company's stockholders; the fact that the Special
Committee aggressively negotiated the terms of the Merger Agreement and the
Pinnacle Merger; the unanimous recommendation of the Special Committee; and
the fact that the transaction is structured to require approval by the
affirmative vote of a majority of all the outstanding shares of Pinnacle
Common Stock. In view of the wide variety of factors considered in connection
with its evaluation of the proposed Pinnacle Merger, the Board of Directors
did not find it practicable to, and did not, quantify or otherwise attempt to
assign relative weights to the foregoing factors or determine that any factor
was of particular importance relative to any other factor. Rather, the Board
of Directors viewed its position as being based on the totality of the
information presented and considered by it. In connection with its
consideration of the determination by the Special Committee, as part of its
determination with respect to the fairness of the consideration to be received
by holders of Pinnacle Common Stock pursuant to the Merger Agreement, the
Board of Directors adopted the conclusion, and the analyses, underlying such
conclusion, of the Special Committee, based upon its view as to the
reasonableness of such analyses and adopted the financial analyses, underlying
the Jefferies & Company opinion based upon its review as to the reasonableness
of such analyses.
Opinion of Financial Advisor to the Special Committee
Pursuant to an engagement letter dated March 23, 2000, amended April 16,
2000, the Special Committee retained Jefferies & Company to render an opinion
as to the fairness of the merger consideration, from a financial point of
view, to the holders of Pinnacle Common Stock.
On April 16, 2000 at meetings of the Special Committee and the Pinnacle
Board of Directors held to evaluate the proposed Pinnacle Merger, Jefferies &
Company delivered to the Special Committee and the Pinnacle board its oral
opinion (confirmed in writing in an opinion dated the next day) that, as of
the date of the opinion, based on the assumptions made, the matters considered
and the limitations on the review undertaken described in the opinion, the
merger consideration (even if no contingent payment is made) was fair from a
54
<PAGE>
financial point of view to the holders of Pinnacle Common Stock. No
limitations were imposed by the Special Committee on Jefferies & Company with
respect to the investigations made or procedures followed by it in furnishing
its opinion, other than to comply with the no solicitation provisions in the
exclusivity agreement entered into between Pinnacle and Colony Capital on
March 7, 2000. See "--Background of the Pinnacle Merger." The Jefferies &
Company opinion was prepared for the benefit and use of the Pinnacle Board of
Directors and the Special Committee in their consideration of the Pinnacle
Merger and does not constitute a recommendation to stockholders of Pinnacle as
to how they should vote upon, or take any other action with respect to, the
Pinnacle Merger.
The full text of the Jefferies & Company opinion, which sets forth the
assumptions made, matters considered and limitations on the review undertaken
is attached as Annex B to this Proxy Statement. Stockholders are urged to read
the opinion carefully and in its entirety. The Presentation Materials will be
made available for inspection and copying at the principal executive offices
of the Company at 330 North Brand Boulevard, Suite 1100, Glendale, California
91203, during regular business hours by any interested equity security holder
or a representative of such holder who has been so designated in writing.
The Jefferies & Company opinion was delivered to the Special Committee and
the Board of Directors and does not address:
--the relative merits of the Pinnacle Merger and the other business
strategies that the Pinnacle Board of Directors has considered or may be
considering; or
--the underlying business decision of the Pinnacle Board of Directors to
proceed with the Pinnacle Merger.
In addition, the Jefferies & Company opinion does not constitute a
recommendation to any stockholder of Pinnacle as to whether to tender such
holder's shares of Pinnacle Common Stock in the Pinnacle Merger or as to how
such holder should vote with respect to the Pinnacle Merger.
In the course of performing its review and analyses for rendering its
opinion, Jefferies & Company, among other things:
--reviewed certain publicly available financial statements and other
business and financial information of Pinnacle;
--reviewed certain internal financial statements and other financial and
operating data concerning Pinnacle, prepared by the management of
Pinnacle;
--reviewed certain financial forecasts and other forward looking financial
information prepared by the management of Pinnacle;
--considered non-recurring revenues and expenses on a pro forma basis;
--held discussions with the management of Pinnacle concerning the business,
past and current operations, financial condition and future prospects of
Pinnacle;
--reviewed the financial terms and conditions set forth in the Merger
Agreement;
--reviewed the stock price and trading history of Pinnacle Common Stock;
--compared the financial performance of Pinnacle and the prices and trading
activity of Pinnacle Common Stock with that of certain other publicly-
traded companies comparable with Pinnacle;
--compared the financial terms of the Pinnacle Merger with the financial
terms, to the extent publicly available, of other transactions it deemed
relevant;
--prepared a discounted cash flow analysis of Pinnacle;
--participated in discussions among representatives of Pinnacle and their
financial and legal advisors; and
--made such other studies and inquiries, and took into account such other
matters, as it deemed relevant, including an assessment of general
economic, market and monetary conditions.
55
<PAGE>
In its review and analysis, and in arriving at its opinion, Jefferies &
Company assumed and relied upon the accuracy and completeness of all of the
financial and other information provided to it (including information
furnished to it orally or otherwise discussed with it by the management of
Pinnacle) or publicly available and neither attempted to verify, nor assumed
responsibility for verifying, any of such information. Jefferies & Company
relied upon the assurances of management of Pinnacle that they were not aware
of any facts that would make such information inaccurate or misleading.
Furthermore, Jefferies & Company did not obtain or make, or assume any
responsibility for obtaining or making, any independent evaluation or
appraisal of the properties, assets or liabilities (contingent or otherwise)
of Pinnacle, nor was Jefferies & Company furnished with any such evaluation or
appraisal.
In addition, Jefferies & Company assumed that:
--the Pinnacle Merger will be consummated upon the terms set forth in the
Merger Agreement without material alteration thereof;
--the minimum consideration offered ($24.00 per common share) would be
paid, disregarding the $1.00 per share contingent upon the sale of
property in Inglewood, California, in evaluating the fairness of the
offer; and
--the historical financial statements of Pinnacle reviewed by it had been
prepared and fairly presented in accordance with U.S. generally accepted
accounting principles consistently applied.
Jefferies & Company relied as to all legal matters relevant to rendering
its opinion on the advice of counsel.
The Jefferies & Company opinion is necessarily based upon market, economic
and other conditions as in effect on, and information made available to
Jefferies & Company as of, the date of the Jefferies & Company opinion. It
should be understood that subsequent developments may affect the conclusion
expressed in the Jefferies & Company opinion and that Jefferies & Company
disclaims any undertaking or obligation to advise any person of any change in
any matter affecting the opinion which may come or be brought to its attention
after the date of the opinion. The Jefferies & Company opinion is limited to
the fairness, from a financial point of view and as of the date thereof, of
the merger consideration to the holders of Pinnacle Common Stock, the
Management Stockholders and holders of dissenting shares. Jefferies & Company
does not express any opinion as to:
--the value of any employee agreement or other arrangement entered into in
connection with the Pinnacle Merger; or
--any tax or other consequences that might result from the Pinnacle Merger.
The following is a summary of the material financial analyses performed by
Jefferies & Company in connection with rendering the Jefferies & Company
opinion. The summary of the financial analyses is not a complete description
of all of the analyses performed by Jefferies & Company. Certain of the
information in this section is presented in a tabular form. IN ORDER TO BETTER
UNDERSTAND THE FINANCIAL ANALYSES PERFORMED BY JEFFERIES & COMPANY, THESE
TABLES MUST BE READ TOGETHER WITH THE TEXT OF EACH SUMMARY. THE JEFFERIES &
COMPANY OPINION IS BASED UPON THE TOTALITY OF THE VARIOUS ANALYSES PERFORMED
BY JEFFERIES & COMPANY AND NO PARTICULAR PORTION OF THE ANALYSES HAS ANY MERIT
STANDING ALONE.
56
<PAGE>
Premiums Paid Analysis. Using publicly available information, Jefferies &
Company analyzed, among other things, the premium paid relative to the stock
price of the Pinnacle Common Stock as of March 8, 2000 compared to the
universe of other recent acquisition transactions of similar size, as well as
selected gaming transactions. The results of such analysis are included in the
table below.
<TABLE>
<CAPTION>
Period Prior to March 8,
2000
----------------------------
One Day One Week Four Weeks
------- -------- ----------
<S> <C> <C> <C>
Pinnacle price per share during period........... $19.25 $16.63 $19.31
Proposed purchase price per share................ 24.00 24.00 24.00
------ ------ ------
Purchase premium--Pinnacle....................... 24.7% 44.4% 24.3%
Average premium paid in other public
transactions(1)(2)(3)
All offers..................................... 24.7% 30.4% 37.0%
All cash offers................................ 24.4% 30.3% 36.5%
Average premium paid in selected gaming
transactions(4)
All offers..................................... 36.8% 40.7% 38.7%
All cash offers................................ 36.8% 40.7% 38.7%
</TABLE>
--------
(1) Source: Securities Data Company.
(2) All public transactions announced and completed from January 1, 1997 to
March 7, 2000 with transaction value of $100 million to $1,500 million.
(3) Trimmed average, which excludes top 10% and bottom 10% of premiums paid.
(4) See "Similar Transaction Analysis" below.
In addition to analyzing the premium paid relative to other acquisitions,
Jefferies & Company reviewed the premium paid relative to the trading history
of shares of Pinnacle Common Stock as outlined in the table below.
<TABLE>
<CAPTION>
Stock
Period Prior to March 8, 2000 Price Premium
----------------------------- ------ ------- ---
<S> <C> <C> <C>
90 day average............................................... $19.84 20.9%
52 week average.............................................. 16.45 45.9%
52 week high (1/21/00)....................................... 23.50 2.1%
52 week low (3/8/99)......................................... 8.69 176.3%
</TABLE>
In reaching its conclusion that the transaction was fair to the Company's
unaffiliated stockholders, the Special Committee considered the financial
analysis provided by Jefferies & Company along with the other factors
specifically enumerated in the Proxy Statement. The Special Committee was
aware that the average premium paid for the one day and the four weeks prior
to March 8, 2000 in selected gaming transactions exceeded the premium proposed
by the Pinnacle Merger. The Special Committee considered this factor among all
of the others considered by it, and based its conclusion upon the totality of
the circumstances and the information available to it. Additionally, the
Special Committee did not deem the average one day premium paid to be a
material metric due to an aberrant increase in the Company's stock price on
the one day prior to March 8, 2000.
Comparable Companies Analysis. Using publicly available information,
Jefferies & Company analyzed and compared, among other things, the trading
multiples of Pinnacle to the corresponding trading multiples of selected
publicly-traded companies that Jefferies & Company believed were generally
comparable to Pinnacle given, among other things, their size (e.g., revenue
and profitability levels as well as enterprise value) and diversification
(e.g., number of facilities operated and jurisdictions of such operations)
relative to Pinnacle. These comparable companies are set forth in the table
below.
The purpose of the comparable company analysis was to establish that the
acquisition multiple being considered for Pinnacle was in the range of the
comparable publicly-traded companies. This was accomplished by deriving a
range of multiples determined by dividing the total enterprise value and the
public market capitalizations of these companies by their operating results.
57
<PAGE>
Comparable Publicly-Traded Companies
Ameristar Casinos, Inc.
Argosy Gaming Company
Boyd Gaming Corp.
Hollywood Casino Corp.
Isle of Capri Casinos, Inc.
Penn National Gaming, Inc.
Station Casinos, Inc.
Multiples compared by Jefferies & Company included: (1) total enterprise
value ("TEV") to revenues and to earnings before interest, taxes, depreciation
and amortization ("EBITDA") for the last twelve months and forward twelve
months, (2) public market capitalization to net income for the estimated
calendar years 2000 and 2001 and (3) public market capitalization to current
stockholder's equity. For purposes of Jefferies & Company's analyses, TEV was
calculated using the number of shares outstanding (giving consideration for
in-the-money options), current stock price, debt, preferred stock, cash
(excluding estimated cage amounts), and estimated value of excess assets
(e.g., undeveloped land). All multiples were based on closing stock prices as
of April 12, 2000.
<TABLE>
<CAPTION>
Historical Forward
---------- -------
<S> <C> <C>
Total Enterprise Value to
Net Revenues
High.................................................. 2.1x 2.0x
Low................................................... 1.1x 1.0x
Average............................................... 1.4x 1.3x
Pinnacle Acquisition Multiple......................... 1.7x 1.5x
EBITDA
High.................................................. 8.4x 7.4x
Low................................................... 4.7x 4.8x
Average............................................... 6.6x 5.9x
Pinnacle Acquisition Multiple......................... 7.7x 6.1x
<CAPTION>
2000E 2001E
---------- -------
<S> <C> <C>
Price to
Earnings per Share
High.................................................. 16.0x 14.2x
Low................................................... 6.7x 6.0x
Average............................................... 11.9x 10.1x
Pinnacle Acquisition Multiple......................... 24.0x 17.1x
<CAPTION>
Current
----------
<S> <C> <C>
Price to
Book Value per Share
High.................................................. 7.2x
Low................................................... (1.3x)
Average............................................... 2.7x
Pinnacle Acquisition Multiple......................... 2.2x
</TABLE>
The Special Committee based its conclusion that the transaction was fair to
the Company's unaffiliated stockholders upon the totality of the circumstances
and the information available to it. The Special Committee considered all of
the valuation multiples presented to it and balanced all such information in
light of the totality of such circumstances and information.
58
<PAGE>
Similar Transaction Analysis. Using publicly available information,
Jefferies & Company analyzed the consideration offered, and the transaction
value multiples paid or proposed to be paid, in acquisition transactions that
were completed in the past two years in the gaming industry that Jefferies &
Company deemed generally comparable to the Pinnacle Merger given, among other
things, their size (e.g., revenue and profitability levels as well as
enterprise value) and diversification (e.g., number of facilities operated and
jurisdictions operated in) relative to the Company. These transactions
included:
<TABLE>
<CAPTION>
Announcement
Target Acquirer Date
------ -------- ------------
<S> <C> <C>
Boomtown Biloxi and Penn National Gaming, Inc. 12/9/99
Casino Magic Bay St. Louis
Lady Luck Gaming Corp. Isle of Capri Casinos, Inc. 10/6/99
Players International, Inc. Harrahs Entertainment, Inc. 8/16/99
Empress Entertainment, Inc. Horseshoe Gaming Holding Corp. 9/2/98
Grand Casinos, Inc. Park Place Entertainment, Inc. 6/30/98
Casino Magic Corp. Hollywood Park, Inc. 2/19/98
Harveys Casino Resorts Colony Capital, Inc. 2/5/98
</TABLE>
The purpose of the similar transaction analysis was to establish that the
acquisition multiple being considered for Pinnacle was in the range of the
similar public acquisition multiples. This was accomplished by dividing the
aggregate consideration paid in the selected similar transactions by the
projected operating results of the acquired companies.
Multiples compared by Jefferies & Company included the total consideration
in such transactions as a multiple of the preceding twelve months ("LTM")
revenues and EBITDA on an unadjusted basis ("Raw Multiple") and on an adjusted
basis ("Adjusted Multiple") to take into consideration, among other things,
EBITDA pro forma for estimated cost savings of combining the companies and
operating results of recent facility openings and expansions and TEV pro forma
for the estimated value of excess assets (e.g., undeveloped land). All
multiples for the similar transactions were based on public information
available at the time of the announcement. Based on this information and other
publicly available information, the following table illustrates the implied
Pinnacle acquisition multiples compared to multiples that Jefferies & Company
derived from the similar transactions.
<TABLE>
<CAPTION>
Similar Transaction Multiples
-----------------------------
Adjusted
Raw Multiple Multiple
-------------- --------------
Revenue EBITDA Revenue EBITDA
------- ------ ------- ------
<S> <C> <C> <C> <C>
High.............................................. 1.6x 7.1x 1.5x 6.3x
Low............................................... 1.2x 5.5x 1.1x 5.1x
Average........................................... 1.4x 6.3x 1.3x 5.6x
Pinnacle Acquisition Multiple..................... 1.7x 7.7x 1.5x 6.2x
</TABLE>
Jefferies & Company noted that no company, business or transaction compared
in the comparable companies analysis or similar transaction analysis is
identical to Pinnacle or the Pinnacle Merger. Accordingly, an analysis of the
results of the foregoing is not entirely mathematical; rather it involves
complex considerations and judgments concerning differences in financial and
operating characteristics and other factors that could affect the acquisition,
public trading and other values of the comparable companies or the similar
transactions which are being compared.
Discounted Cash Flow Analysis. Jefferies & Company also performed a
discounted cash flow analysis of the after-tax free cash flows of Pinnacle
using information, which Jefferies & Company obtained from the
59
<PAGE>
Company. The purpose of the discounted cash flow analysis was to establish a
range for the potential equity value of Pinnacle by determining a range for
the net present value of Pinnacle's future cash flows. Jefferies & Company
first used information provided by the Company to estimate after-tax free cash
flows through December 31, 2004, and then used discount rates ranging from 12%
to 13% to discount those cash flows, which discount rates were based upon
Pinnacle's weighted average cost of capital (i.e., the after-tax cost of debt
and equity financing) as measured by Jefferies & Company. Jefferies & Company
measured the after-tax cost of debt at 6% based on the current cost of bank
and high yield debt and the after-tax cost of equity at 17.5% using the
capital asset pricing model. Pinnacle's after-tax free cash flows were
calculated as the after-tax operating earnings of Pinnacle adjusted to add
back non-cash expenses and deduct uses of cash not reflected in the income
statement. Jefferies & Company then added to the present value of the free
cash flows the terminal value of Pinnacle at December 31, 2004, discounted
back at the same discount rate to represent a present value. The terminal
value was computed by growing the estimated free cash flow for Pinnacle in
calendar year 2004 by a perpetual growth rate ranging from 2.0% to 3.0%, and
then dividing such amount by a capitalization rate equal to the discount rate
minus the perpetual growth rate. The perpetual growth rate represents the
average long-term rate of growth that can be expected beginning in 2005, as
measured by Jefferies & Company, based upon Pinnacle's business plan. The
following table summarizes the resulting implied Pinnacle equity valuations
and implied Pinnacle equity values per share which can be compared to the
minimum merger consideration offered of $24.00 per share:
<TABLE>
<CAPTION>
Perpetual Growth
Rate
--------------------
Discount Rate 2.0% 2.5% 3.0%
------------- ------ ------ ------
<S> <C> <C> <C>
13.0%................................................... $22.77 $23.99 $25.34
12.5%................................................... 24.53 25.90 27.42
12.0%................................................... 26.48 28.03 29.74
</TABLE>
The Special Committee based its conclusion that the transaction was fair to
the Company's unaffiliated stockholders upon the totality of the circumstances
and the information available to it. The Special Committee considered the fact
that the discounted cash flow analysis produced equity values in excess of the
merger consideration under certain assumptions among all of the other factors
considered by it, and based its conclusion upon the totality of such
circumstances and information.
While the foregoing summary describes certain analyses and factors that
Jefferies & Company deemed material in its presentation to the Special
Committee, it is not a comprehensive description of all analyses and factors
considered by Jefferies & Company. The preparation of a fairness opinion is a
complex process that involves various determinations as to the most
appropriate and relevant methods of financial analysis and the application of
these methods to the particular circumstances and, therefore, such an opinion
is not readily susceptible to summary description. Jefferies & Company
believes that its analyses must be considered as a whole and that selecting
portions of its analyses and of the factors considered by it, without
considering all analyses and factors, would create an incomplete view of the
evaluation process underlying the Jefferies & Company opinion. Several
analytical methodologies were employed and no one method of analysis should be
regarded as critical to the overall conclusion reached by Jefferies & Company.
Each analytical technique has inherent strengths and weaknesses, and the
nature of the available information may further affect the value of particular
techniques. The conclusions reached by Jefferies & Company are based on all
analyses and factors taken as a whole and also on application of Jefferies &
Company's own experience and judgment. Such conclusions may involve
significant elements of subjective judgment and qualitative analysis.
Jefferies & Company therefore gives no opinion as to the value or merit
standing alone of any one or more parts of the analyses it performed. In
performing its analyses, Jefferies & Company considered general economic,
market and financial conditions and other matters, many of which are beyond
the control of Pinnacle. The analyses performed by Jefferies & Company are not
necessarily indicative of actual values or future results, which may be
significantly more or less favorable than those suggested by such analyses.
Accordingly, analyses relating to the value of a business do not purport to be
appraisals or to reflect the prices at which the business actually may be
purchased. Furthermore, no opinion is being expressed as to the prices at
which shares of Pinnacle Common Stock may be traded at any future time.
60
<PAGE>
The engagement letter, dated March 23, 2000 as amended April 16, 2000,
between Jefferies & Company and the Special Committee provides that, for its
services, Jefferies & Company is entitled to receive an opinion fee of
$400,000, payable upon delivery of the Jefferies & Company opinion. Jefferies
& Company's fee was not contingent upon approval of the Pinnacle Merger by the
Company's stockholders. Pinnacle has also agreed to reimburse Jefferies &
Company for certain of its out-of-pocket expenses, including legal fees, and
to indemnify and hold harmless Jefferies & Company and its affiliates and any
director, employee or agent of Jefferies & Company or any of its affiliates,
or any person controlling Jefferies & Company or its affiliates for certain
losses, claims, damages, expenses and liabilities relating to or arising out
of services provided by Jefferies & Company as financial advisor to Pinnacle.
The terms of the fee arrangement with Jefferies & Company, which Pinnacle and
Jefferies & Company believe are customary in transactions of this nature, were
negotiated at arm's length between Pinnacle and Jefferies & Company, and the
Special Committee was aware of such fee arrangements. Jefferies & Company
maintains a market in the shares of Pinnacle Common Stock. In the ordinary
course of its business, Jefferies & Company may trade in Pinnacle's securities
and securities for its own account and the account of its customers and,
accordingly, may at any time hold a long or short position in Pinnacle's
securities.
Jefferies & Company was retained based on Jefferies & Company's experience
as a financial advisor in connection with mergers and acquisitions and in
securities valuations generally.
Jefferies & Company is a nationally recognized investment banking firm. As
part of its investment banking business, Jefferies & Company is frequently
engaged in the valuation of businesses and their securities in connection with
mergers and acquisitions, negotiated underwritings, secondary distributions of
securities, private placements and other purposes.
Position of Pinnacle Acq Corp, PHCR, Harveys Casino Resorts and Voteco
Because the transaction may be considered a "going private" transaction,
the rules under the Exchange Act may be interpreted to require each of
Pinnacle Acq Corp, PHCR, Harveys Casino Resorts and Voteco to express its
belief as to the fairness of the transaction to the holders of Pinnacle Common
Stock other than the Management Stockholders because, under a potential
interpretation of the rules governing "going private" transactions, one or
more of Pinnacle Acq Corp, PHCR, Harveys Casino Resorts and Voteco may be
deemed to be an affiliate of the Company. Although representatives of Pinnacle
Acq Corp, PHCR, Harveys Casino Resorts and Voteco negotiated the transaction
with Pinnacle management and the Special Committee with directly opposing
interests and PHCR will acquire shares of Pinnacle Common Stock held by
existing Pinnacle stockholders in the transaction and, therefore, may have
interests that are in conflict with the interests of those stockholders, each
of Pinnacle Acq Corp, PHCR, Harveys Casino Resorts and Voteco believes that
the transaction is substantively and procedurally fair to the Company's
stockholders other than the Management Stockholders, on the basis of the
factors described below, in each case, based only on the more limited facts
and information available to them.
Each of Pinnacle Acq Corp, PHCR, Harveys Casino Resorts and Voteco believes
that the transaction is substantively fair to the holders of shares of
Pinnacle Common Stock, other than the Management Stockholders, on the basis of
the following factors:
. The current and past market price of Pinnacle Common Stock (see "Common
Stock Market Price and Dividend Information") in relation to the merger
consideration and the fact that the price of $24.00 per share (not taking
into account any contingent payment) represents a 39.1% premium to the
closing price of Pinnacle Common Stock on March 6, 2000 (the second to last
trading day prior to the public announcement that the Company had received
the Proposal) and a 21.5% premium to the closing price of Pinnacle Common
Stock on April 14, 2000 (the last trading day before the signing of the
definitive Merger Agreement was announced).
. Their independent consideration of the other factors listed above in "--
Recommendation of the Special Committee and the Board of Directors;
Fairness of the Pinnacle Merger."
61
<PAGE>
. Their review of the opinion of Jefferies & Company as set forth in this
Proxy Statement with respect to the fairness of the merger consideration
based on the analyses of such firm as set forth in this Proxy Statement
(including the several methods of measuring going concern value described
therein), subject to the assumptions and limitations of such conclusions
and analyses as set forth in such opinion and this Proxy Statement. See "--
Opinion of Financial Advisor to the Special Committee." Pinnacle Acq Corp,
PHCR, Harveys Casino Resorts and Voteco did not take any action to
specifically adopt the Jefferies & Company opinion. The Jefferies & Company
opinion was delivered to the Special Committee and the Pinnacle Board of
Directors, and none of Pinnacle Acq Corp, PHCR, Harveys Casino Resorts or
Voteco received any advice from Jefferies & Company as to the fairness of
the transaction or is entitled to rely on the Jefferies & Company opinion.
However, such opinion was one of the factors considered by Pinnacle Acq
Corp, PHCR, Harveys Casino Resorts and Voteco in making their determination
that the transaction is substantively fair to the holders of shares of
Pinnacle Common Stock other than the Management Stockholders.
. The fact that the per share purchase prices paid by the Company and the
Management Stockholders for Pinnacle Common Stock during the last two
years, based on information provided by the Company, did not exceed the
merger consideration. See "Common Stock Purchase Information."
. Pinnacle Acq Corp, PHCR, Harveys Casino Resorts and Voteco did not consider
the merger consideration in relation to the Company's net book value or
liquidation value because they do not believe that such measures have any
significant impact on the market trading price of Pinnacle Common Stock.
. Pinnacle Acq Corp, PHCR, Harveys Casino Resorts and Voteco did not consider
any firm offers made during the past two years by any unaffiliated person
for a merger or sale of substantially all of the assets of, or purchase of
a controlling interest in, the Company because Pinnacle Acq Corp, PHCR,
Harveys Casino Resorts and Voteco were not aware of any such offers.
In addition, each of Pinnacle Acq Corp, PHCR, Harveys Casino Resorts and
Voteco believes that the transaction is procedurally fair to the holders of
shares of Pinnacle Common Stock other than the Management Stockholders, on the
basis of the following factors:
. Each of Pinnacle Acq Corp, PHCR, Harveys Casino Resorts and Voteco
considered as positive factors the measures taken by the Pinnacle Board of
Directors and the Special Committee, including the formation of the Special
Committee, the retention of legal and financial advisors by the Special
Committee and the arm's-length nature of the negotiations. See "--
Recommendation of the Special Committee and the Board of Directors;
Fairness of the Pinnacle Merger."
. In addition, each of Pinnacle Acq Corp, PHCR, Harveys Casino Resorts and
Voteco considered the fact that, although the structure of the transaction
does not require approval by a majority of the outstanding shares of
Pinnacle Common Stock held by unaffiliated stockholders and although the
Management Stockholders have agreed to vote their shares in favor of the
approval and adoption of the Merger Agreement, such Management Stockholders
only own approximately 11.4% of the outstanding shares of Pinnacle Common
Stock.
. In making their determination that the transaction is procedurally fair to
the holders of shares of Pinnacle Common Stock other than the Management
Stockholders, each of Pinnacle Acq Corp, PHCR, Harveys Casino Resorts and
Voteco considered the fact that the transaction is not structured to
require approval by a majority of outstanding shares of Pinnacle Common
Stock held by unaffiliated stockholders. Despite this fact, however, each
of Pinnacle Acq Corp, PHCR, Harveys Casino Resorts and Voteco believes that
the transaction is procedurally fair to the holders of shares of Pinnacle
Common Stock other than the Management Stockholders because of the positive
factors described in the two immediately preceding bullet points.
In view of the wide variety of factors considered in connection with the
evaluation of the transaction, Pinnacle Acq Corp, PHCR, Harveys Casino Resorts
and Voteco did not find it practicable to, and did not attempt to, quantify,
rank or otherwise assign relative weights to the specific factors they
considered in reaching their conclusions regarding the fairness of the
transaction.
62
<PAGE>
Position of Enumerated Management Stockholders
Because the transaction may be considered a "going private" transaction,
the rules under the Exchange Act may also be interpreted to require each of
Messrs. R.D. Hubbard, G. Michael Finnigan, Paul R. Alanis, J. Michael Allen
and Bruce C. Hinckley (together, the "Enumerated Management Stockholders") to
express his belief as to the fairness of the transaction to the Company's
stockholders other than the Management Stockholders because, under a potential
interpretation of the rules governing "going private" transactions, one or
more of the Enumerated Management Stockholders may be deemed to be an
affiliate of the Company. Although the Enumerated Management Stockholders will
contribute shares of Pinnacle Common Stock to PHCR in exchange for shares of
PHCR common stock and have agreed that certain of their Pinnacle Stock Options
(which will fully vest on the closing of the Pinnacle Merger) will be
cancelled and replaced with fully vested options to purchase shares of PHCR
common stock, and therefore have interests in the Pinnacle Merger that are in
addition to or different from the interests of Pinnacle's stockholders
generally, each of the Enumerated Management Stockholders, in his capacity as
an officer and/or director of the Company, believes that the transaction is
substantively and procedurally fair to the Company's stockholders other than
the Management Stockholders on the basis of the factors described below, in
each case, based only on the more limited facts and information available to
them. However, the Enumerated Management Stockholders did not participate in
the deliberations of the Special Committee. Consequently, the Enumerated
Management Stockholders are not in a position to specifically adopt the
conclusions of the Special Committee with respect to the fairness of the
Pinnacle Merger to the Company's stockholders other than the Management
Stockholders. The Enumerated Management Stockholders' determination that the
Pinnacle Merger is fair was made after consideration of all factors they
determined to be relevant.
Each of the Enumerated Management Stockholders believes that the
transaction is substantively fair to the Company's stockholders other than the
Management Stockholders on the basis of the following factors:
. Each of the Enumerated Management Stockholders has independently
considered the factors listed above in "Recommendation of the Special
Committee and the Board of Directors; Fairness of the Pinnacle Merger."
. Each of the Enumerated Management Stockholders also has reviewed the
opinion of Jefferies & Company as set forth in this Proxy Statement with
respect to the fairness of the merger consideration based on the
analyses of such firm as set forth in this Proxy Statement (including
the several methods of measuring going concern value described therein),
subject to the assumptions and limitations of such conclusions and
analyses as set forth in such opinion and this Proxy Statement. See "--
Opinion of Financial Advisor to the Special Committee." The Enumerated
Management Stockholders did not take any action to specifically adopt
the Jefferies & Company opinion. However, such opinion was one of the
factors considered by the Enumerated Management Stockholders in making
their determination that the transaction is substantively fair to the
Company's stockholders other than the Management Stockholders.
. None of the Enumerated Management Stockholders purchased shares of
Pinnacle Common Stock within the last two years at prices at or above
the merger consideration.
In addition, each of the Enumerated Management Stockholders believes that
the transaction is procedurally fair to the Company's stockholders other than
the Management Stockholders, on the basis of the following factors:
. Each of the Enumerated Management Stockholders considered as positive
factors the measures taken by the Board of Directors and the Special
Committee, including the formation of the Special Committee; the
retention of independent legal and financial advisors by the Special
Committee; the fact that the Special Committee received a written
opinion from its independent financial advisor as to the fairness, from
a financial point of view, of the merger consideration, excluding any
possible contingent payment, to the Company's stockholders; the fact
that the Special Committee aggressively negotiated the terms of the
Merger Agreement and the Pinnacle Merger; the fact that at the outset of
the exclusivity period the Company had publicly announced that Colony
Capital had made a proposal
63
<PAGE>
to acquire the Company and the Company would not be subject to a break-
up fee if it accepted a proposal from another party prior to entering
into a definitive agreement with Colony Capital; and the unanimous
recommendation of the Special Committee. See "--Recommendation of the
Special Committee and the Board of Directors; Fairness of the Pinnacle
Merger."
In addition, each of the Enumerated Management Stockholders considered as a
positive factor the fact that, although the structure of the transaction does
not require approval by a majority of the outstanding shares of Pinnacle
Common Stock held by unaffiliated stockholders and although the Management
Stockholders have agreed to vote their shares in favor of the approval and
adoption of the Merger Agreement, such Management Stockholders only own
approximately 11.4% of the outstanding shares of Pinnacle Common Stock.
The Enumerated Management Stockholders believe these analyses and factors
provide a reasonable basis upon which to form their belief that the Pinnacle
Merger is fair to the Company's stockholders other than the Management
Stockholders. This belief should not, however, be construed as a
recommendation to the Company's public stockholders by the Enumerated
Management Stockholders to vote to approve and adopt the Pinnacle Merger.
The Enumerated Management Stockholders did not consider net book value or
liquidation value to be material factors in determining the fairness of the
Pinnacle Merger to the public stockholders. The Enumerated Management
Stockholders do not believe that these factors have any significant impact on
the market trading prices of Pinnacle Common Stock. The Enumerated Management
Stockholders did not rely on any report, opinion or appraisal in determining
the fairness of the Pinnacle Merger to the Company's stockholders other than
the Management Stockholders, but do not disagree with the conclusion expressed
by Jefferies & Company in its opinion to the Special Committee regarding the
fairness, from a financial point of view, of the merger consideration,
excluding any possible contingent payment, to the Company's stockholders.
Other than the proposal made by Colony Capital, the Enumerated Management
Stockholders are not aware of any firm offers made in the last 18 months by an
unaffiliated person to merge or consolidate with the Company, to acquire all
or any substantial part of the Company's assets or to acquire control of the
Company.
In view of the wide variety of factors considered in connection with the
evaluation of the transaction, each of the Enumerated Management Stockholders
did not find it practicable to, and did not attempt to, quantify, rank or
otherwise assign relative weights to the specific factors they considered in
reaching their conclusions regarding the fairness of the transaction.
Federal Income Tax Consequences of the Pinnacle Merger
The following is a summary of the material U.S. federal income tax
consequences of the Pinnacle Merger to holders of Pinnacle Common Stock in
general. This summary does not discuss all aspects of U.S. federal income
taxation which may be important to particular holders of Pinnacle Common Stock
in light of their individual investment circumstances, including certain types
of holders subject to special tax rules (e.g., financial institutions, broker
dealers, insurance companies, partnerships, tax-exempt organizations, and
foreign taxpayers), or to holders who acquired their shares of Pinnacle Common
Stock through the exercise of options or otherwise as compensation, holders
who as part of the Pinnacle Merger and related transactions receive stock in
PHCR, or holders who hold their Pinnacle Common Stock as part of a "straddle,"
"hedge" or "conversion transaction." In addition, this summary does not
address state, local or foreign tax consequences. Holders are urged to consult
their tax advisors regarding the federal, state, local and foreign income and
other tax consequences of the Pinnacle Merger as they apply to such holder's
specific circumstances.
The discussion below assumes that holders of Pinnacle Common Stock hold
such stock as "capital assets" (generally, property held for investment) under
the Internal Revenue Code of 1986, as amended (the "Code"). This summary is
based on U.S. federal income tax law currently in effect, which is subject to
change, possibly with retroactive effect. No rulings have been or will be
requested from the Internal Revenue Service (the "Service") with respect to
any of the matters discussed herein. There can be no assurance that the
Service would not take positions contrary to those described below or that a
court would not sustain the Service's position.
64
<PAGE>
The receipt of the merger consideration in the Pinnacle Merger by holders
of Pinnacle Common Stock will be a taxable transaction for federal income tax
purposes. Each holder's gain or loss per share of Pinnacle Common Stock will
generally be equal to the difference between the merger consideration received
per share and the holders basis in that particular share of the Pinnacle
Common Stock (subject to the discussion below relating to a stockholder's
contingent right to receive proceeds after closing). Such gain or loss will
generally be a capital gain or loss. In the case of individuals, trusts and
estates, such capital gain will be subject to a maximum federal income tax
rate of 20% for shares of Pinnacle Common Stock held for more than 12 months
prior to the date of disposition. Gain or loss must be calculated separately
for each block of stock held by a stockholder.
As described below in the section of this Proxy Statement titled "Merger
Agreement", at closing, a stockholder may receive not only cash but also a
Contingent Payment. If a stockholder receives cash and a Contingent Payment at
closing, and amounts due under the Contingent Payment are paid to the
stockholder in the same tax year as the closing, then the stockholder should
include the Contingent Payment in the calculation of gain or loss for the year
in which the closing occurs. If, on the other hand, the Contingent Payment
remains outstanding at the end of the year in which the closing occurs, there
is a degree of uncertainty regarding the proper U.S. federal income tax
treatment of the receipt of the Contingent Payment.
The Company believes that the most appropriate treatment is to value the
Contingent Payment at the time of the Pinnacle Merger and include such value
as part of the merger consideration for purposes of determining gain or loss
from the Pinnacle Merger. Installment sale reporting is not available with
respect to such amounts because the Pinnacle Common Stock is publicly traded.
When cash is distributed with respect to the Contingent Payment, a portion
will be subject to tax as interest income (taxable at ordinary income rates),
and the remainder will be subject to tax as a principal payment. To the extent
the total principal payments vary from the value the stockholder placed on the
right to receive the contingent merger consideration proceeds, the stockholder
would recognize capital gain or loss to account for the variation. In the case
of individuals, trusts and estates, any capital loss associated with the
principal payments in excess of three thousand dollars may only offset capital
gain and may not be carried back to prior years.
It is possible that the receipt of the Contingent Payment could be treated
differently for tax purposes than described above. First, in rare and unusual
circumstances where the contingent rights in question are not susceptible to
valuation at the closing, it is possible for a stockholder to take the
position that this transaction falls under the "open transaction" doctrine.
Under the open transaction doctrine, the stockholder would not be required to
value the Contingent Payment at the closing for purposes of computing gain or
loss for that year. Rather, gain would be computed for the year of closing
based only on the cash payments received and any loss would be deferred. When
the Contingent Payment was ultimately received, the taxpayer would either have
additional gain or would recognize any deferred loss. Second, it is also
possible that the Internal Revenue Service (the "IRS") could require a
stockholder to include the full amount of potential payments related to the
Contingent Payment in income in the year in which the closing takes place.
Third, the IRS could assert that the Contingent Payment is a debt instrument
(because the Contingent Payment is a contingent promise to pay money in the
future) that requires the inclusion of imputed interest income prior to the
receipt of payments attributable thereto. For these reasons, the appropriate
tax treatment with respect to the Contingent Payment is unclear.
A holder of Pinnacle Common Stock may be subject to backup withholding at
the rate of 31% with respect to merger consideration received pursuant to the
Pinnacle Merger, unless the holder (i) is a corporation or comes within
certain other exempt categories and, when required, demonstrates this fact or
(ii) provides a correct taxpayer identification number ("TIN"), certifies
concerning no loss of exemption from backup withholding and otherwise complies
with applicable requirements of the backup withholding rules. To prevent the
possibility of backup federal income tax withholding on payments made with
respect to shares of Pinnacle Common Stock pursuant to the Pinnacle Merger,
each holder must provide the Disbursement Agent with his current TIN by
completing a Form W-9 or Substitute Form W-9. A holder of Pinnacle Common
Stock who does not provide his or her correct TIN may be subject to penalties
imposed by the IRS, as well as backup withholding. Any amount withheld under
these rules will be credited against the holder's federal income tax
liability. The Company (or its agent) will report to the holders of Pinnacle
Common Stock and the IRS the amount of any "reportable payments," as defined
in Section 3406 of the Code, and the amount of tax, if any, withheld with
respect thereto.
65
<PAGE>
THE PINNACLE MERGER
Interests of Certain Persons in the Pinnacle Merger; Certain Relationships
In considering the recommendation of the Board of Directors with respect to
the Merger Agreement, Pinnacle's stockholders should be aware that the
following Management Stockholders of Pinnacle have interests in the Pinnacle
Merger that are in addition to or different from the interests of Pinnacle's
stockholders generally: R.D. Hubbard (Chairman of the Board), G. Michael
Finnigan (President and Chief Executive Officer of Realty Investment Group,
Inc., a subsidiary of the Company), Paul R. Alanis (Chief Executive Officer,
President and Chief Operating Officer), Loren Ostrow (Senior Vice President,
General Counsel and Secretary), J. Michael Allen (Senior Vice President and
Chief Operating Officer of the Company's Gaming Division), Clifford Kortman
(Vice President--Construction and Development of the Company's Gaming
Division), Bruce C. Hinckley (Chief Financial Officer, Vice President and
Treasurer), Richard Delaney (Vice President--Hotel, Food & Beverage
Operations), Chris Plant (Corporate Controller), and Robert A. Callaway
(Associate General Counsel). The Special Committee and the Board of Directors
were aware of these actual or potential conflicts of interest and considered
them along with other matters described under "Special Factors--Recommendation
of the Special Committee and Board of Directors; Fairness of the Pinnacle
Merger."
Retained Equity Interest; Voting and Contribution Agreement
In connection with the Pinnacle Merger, the Management Stockholders will
contribute shares of Pinnacle Common Stock to PHCR in exchange for shares of
PHCR common stock and will cancel Pinnacle Stock Options (which will fully
vest on the closing of the Pinnacle Merger) and receive new fully vested
options to purchase shares of PHCR common stock. As a result, the Management
Stockholders will have a continuing ownership interest in PHCR following the
Pinnacle Merger. See "Special Factors--Certain Effects of the Pinnacle Merger"
and "Voting and Contribution Agreement; Memorandum of Understanding."
The following table sets forth the shares that the Management Stockholders
currently plan to contribute and the Pinnacle Stock Options that they plan to
cancel and with respect to which they will receive new PHCR options. The table
also sets forth the cash to be received with respect to shares of Pinnacle
Common Stock not to be contributed to PHCR and Pinnacle Stock Options to be
cancelled but with respect to which PHCR options will not be received.
Although the Management Stockholders may elect to change the mix set forth
below of stock to be contributed and options to be cancelled and replaced with
new PHCR options, the aggregate value of such items will remain the same.
<TABLE>
<CAPTION>
Total Value of
Stock to Be
Number of Contributed and Total Cash
Options to Be Options to Be to Be
Number of Cancelled and Cancelled and Received in
Number of Number of Shares to Replaced with Replaced with Respect of
Shares Options Be New PHCR New PHCR Stock and
Name Owned Owned Contributed Options Options Options
---- --------- --------- ----------- ------------- --------------- -----------
<S> <C> <C> <C> <C> <C> <C>
R. D. Hubbard........... 2,619,820 282,000 1,349,545 0 $32,389,076 $34,079,604
G. Michael Finnigan..... 25,415 135,000 0 86,867 $ 1,000,000 $ 1,269,335
Paul R. Alanis.......... 300,000 400,000 300,000 273,756 $10,200,005 $ 1,743,745
Loren Ostrow(1)......... 50,000 125,000 50,000 90,176 $ 2,250,244 $ 481,007
J. Michael Allen........ 0 200,000 0 200,000 $ 2,371,875 $ 0
Cliff Kortman........... 0 92,500 0 66,131 $ 822,289 $ 318,649
Bruce Hinckley.......... 5,000 25,000 5,000 25,000 $ 477,813 $ 0
Richard Delaney......... 0 10,000 0 10,000 $ 92,500 $ 0
Robert Callaway......... 0 24,633 0 19,992 $ 200,000 $ 39,679
Chris Plant............. 50 18,300 0 18,300 $ 196,200 $ 0
--------- --------- --------- ------- ----------- -----------
Total................... 3,000,285 1,312,433 1,704,545 790,222 $50,000,000 $37,932,019
========= ========= ========= ======= =========== ===========
</TABLE>
--------
(1) The Ostrow Family Partnership holds a pecuniary interest in the shares Mr.
Ostrow holds.
66
<PAGE>
In addition, if an additional $50,000,000 equity investment is made by an
affiliate of Colony Capital (see "Special Factors--Purpose and Reasons for the
Pinnacle Merger"), each of Messrs. Hubbard and Finnigan will have the right to
contribute to PHCR an additional amount up to his pro rata share of such
investment in order to prevent the dilutive effect thereof. None of the
Management Stockholders has yet decided whether he will make such an
additional contribution.
The Management Stockholders and their affiliates in the aggregate currently
own 11.4% of the Pinnacle Common Stock. At June 30, 2000, the net book value
of the Company was approximately $330,112,000. For the twelve months ended
December 31, 1999, net earnings of the Company were approximately $44,047,000.
If the Pinnacle Merger and Harveys Merger are completed, the Management
Stockholders, in the aggregate, will own (assuming no additional investment in
PHCR by affiliates of Colony Capital) approximately 15% of PHCR's fully
diluted common stock (not taking into account shares underlying unvested
options) and will have, indirectly, a proportionate interest in the net book
value and net earnings of the Company. The following table sets forth each
Management Stockholder's interest in the Company's net book value and net
earnings in terms of both percentages and dollar amounts before and after the
Pinnacle Merger.
<TABLE>
<CAPTION>
Ownership Pre-Transaction Ownership Post-Transaction
--------------------------------------- -------------------------------------------
Dollar Value of Percentage Dollar Value of Interest
Percentage Interest in Interest in Net in
Interest in Net ----------------------- Book Value ---------------------------
Book Value and Net Book Net and Net Net Book Net
Management Stockholders Net Earnings(a) Value(b) Earnings(c) Earnings(d) Value(e)(f) Earnings(g)
----------------------- --------------- ----------- ----------- --------------- ------------ -----------
<S> <C> <C> <C> <C> <C> <C>
R.D. Hubbard............ 10.06% $33,209,267 $4,431,128 9.58% $ 31,624,730 $ 4,219,703
G. Michael Finnigan..... 0.56% $ 1,848,627 $ 246,663 0.50% $ 1,650,560 $ 220,235
Paul R. Alanis.......... 2.43% $ 8,021,722 $1,070,342 3.02% $ 9,969,382 $ 1,330,219
Loren Ostrow............ 0.61% $ 2,013,683 $ 268,687 0.67% $ 2,211,750 $ 295,115
J. Michael Allen........ 0.69% $ 2,277,773 $ 303,924 0.70% $ 2,310,784 $ 308,329
Cliff Kortman........... 0.32% $ 1,056,358 $ 140,950 0.24% $ 792,269 $ 105,713
Bruce Hinckley.......... 0.10% $ 330,112 $ 44,047 0.14% $ 462,157 $ 61,666
Richard Delaney......... 0.03% $ 99,034 $ 13,214 0.03% $ 99,034 $ 13,214
Robert Callaway......... 0.09% $ 297,101 $ 39,642 0.06% $ 198,067 $ 26,428
Chris Plant............. 0.06% $ 198,067 $ 26,428 0.06% $ 198,067 $ 26,428
----- ----------- ---------- ----- ------------ -----------
14.95% $49,351,744 $6,585,025 15.00% $ 49,516,800 $ 6,607,050
===== =========== ========== ===== ============ ===========
Harveys Management...... 0% $ 0 $ 0 2.88% $ 8,740,483(f) $ 1,268,554
===== =========== ========== ===== ============ ===========
Voteco/PHCR............. 0% $ 0 $ 0 77.49% $235,173,626(f) $34,132,020
===== =========== ========== ===== ============ ===========
</TABLE>
--------
(a) Percentage interest is based on the total number of shares and options
owned as disclosed on page 66 of this Proxy Statement, divided by the
number of shares and options outstanding as of July 28, 2000.
(b) Dollar value of interest in net book value is determined by multiplying
pre-transaction percentage interest by Pinnacle's net book value as of
June 30, 2000.
(c) Dollar value of interest in net earnings is determined by multiplying pre-
transaction percentage interest by Pinnacle's net earnings for the twelve
months ended December 31, 1999.
(d) Percentage interest reflects the estimated percentage interest in PHCR
post-transaction but does not include, in the aggregate, a 4.62% interest
in net book value and net earnings attributable to shares of PHCR common
stock underlying unvested options to be reserved for issuance pursuant to
a stock plan for the benefit of the Management Stockholders. These options
will vest over a period of five years and the allocation of such options
to particular Management Stockholders has not been determined.
(e) Dollar value of interest in net book value is determined by multiplying
post-transaction percentage interest by net book value referenced in (b)
above.
(f) The post-transaction net book value amounts do not reflect a decrease in
the Company's net book value which will result from the utilization in the
Pinnacle Merger and related transactions of a significant amount of the
Company's cash on hand at the closing.
67
<PAGE>
(g) Dollar value of interest in net earnings is determined by multiplying
post-transaction percentage interest by net earnings referenced in
(c) above.
For information regarding the merger consideration to be paid to members of
the Special Committee, see "Special Factors--Certain Effects of the Pinnacle
Merger."
Directors and Management of the Surviving Corporation
In accordance with the Memorandum of Understanding (described below) and
agreements among the parties thereto, upon consummation of the Pinnacle Merger
and subject to licensing and regulatory requirements, it is currently expected
that the Board of Directors of PHCR will include R. D. Hubbard, Chairman of
the PHCR Board, and Thomas J. Barrack, Jr. The PHCR Board of Directors also
may include other nominees determined by Colony Investors III, L.P., an
affiliate of Colony Capital formed to make private equity investments ("Colony
III"), or otherwise in accordance with agreements among the parties to the
Memorandum of Understanding, subject to licensing and regulatory restrictions.
In accordance with the Memorandum of Understanding and agreements among the
parties thereto, it is currently expected that Mr. Hubbard will be a member
of, and Mr. Barrack shall be designated as the Chairman of, the Executive
Committee of the PHCR Board. See "Voting and Contribution Agreement;
Memorandum of Understanding" and "--Plans for the Company After the Pinnacle
Merger--Board of Directors; Management."
Employment Agreements
Each of Messrs. Finnigan, Alanis, Ostrow, Allen and Kortman currently have
employment agreements with the Company. In connection with the Pinnacle
Merger, such agreements will be assumed by PHCR or its subsidiaries without
modification (except as necessary to reflect the Pinnacle Merger) and will
terminate, unless earlier terminated, on the respective dates set forth
therein.
Federal Income Tax Consequences to the Company, PHCR and Management
Stockholders
For federal income tax purposes, the Pinnacle Merger will be treated as a
sale by Pinnacle's stockholders of Pinnacle Common Stock to PHCR. Pinnacle
will recognize neither gain nor loss on such sale. PHCR will be treated as
having purchased shares of Pinnacle Common Stock. The exchange by the
Management Stockholders prior to the Pinnacle Merger of their Pinnacle Common
Stock for PHCR stock will qualify as a tax-free exchange pursuant to section
351 of the Internal Revenue Code. Accordingly, for federal income tax
purposes, such Management Stockholders will recognize gain only to the extent
of any cash received from PHCR. PHCR will not be subject to tax on its receipt
from such Management Stockholders of Pinnacle Common Stock.
Conduct of the Business of the Company if the Pinnacle Merger is Not
Consummated
If the Merger Agreement is not approved and adopted by the stockholders at
the Annual Meeting or if the Pinnacle Merger is not consummated, the Company
will continue to operate its business as presently operated.
Plans for the Company After the Pinnacle Merger
Acquired Shares; Continued Operation of the Company
Pursuant to the Merger Agreement, Pinnacle Acq Corp will be merged with and
into the Company, with the Company surviving as a wholly-owned subsidiary of
PHCR. As a result of the Pinnacle Merger, PHCR will acquire ownership of all
of the outstanding shares of capital stock of the Company. The shares of
Pinnacle Common Stock so acquired will be retired. PHCR has informed the
Company that, while no specific decisions have been made by the PHCR Board of
Directors with respect to the operations of the Company following the Pinnacle
Merger, except as otherwise described below or in other sections of this Proxy
Statement, it is expected that following the completion of the Pinnacle
Merger, PHCR will continue the business and operations of the Company and its
subsidiaries substantially as they currently are being conducted or are
proposed to be conducted.
Following the completion of the Pinnacle Merger, it is anticipated that the
operations of the Company will be integrated with the operations of Harveys
Casino Resorts. The nature, timing and other terms of this
68
<PAGE>
integration have not been determined and will not likely be known with any
certainty prior to the time of the Annual Meeting. The Board of Directors and
management of PHCR and the Company following the Pinnacle Merger will,
however, continue to evaluate the Company's business, operations, corporate
structure and organization, policies, management and personnel over time and
consider what other changes, if any, would be desirable and, subject to the
terms of the Stockholders Agreement (described below) and the terms of any
other agreements governing the relationship among the parties, will make
changes as they deem appropriate. See "Stockholders Agreement."
To support the tax position of the Management Stockholders with respect to
their shares of Pinnacle Common Stock contributed to PHCR, PHCR has agreed in
the Memorandum of Understanding that upon the closing of the Pinnacle Merger
it:
. will represent and warrant that it has no present plan or intention to
liquidate the Company following the Pinnacle Merger,
. will not liquidate the Company for two years after the closing date of
the Pinnacle Merger unless it provides to the Management Stockholders an
opinion of counsel, based on customary assumptions but otherwise
substantially unqualified, that the liquidation would not cause the
contributions to PHCR of Pinnacle Common Stock by such Management
Stockholders to fail to qualify as exchanges under Section 351 of the
Internal Revenue Code, and
. will deliver to each Management Stockholder on the closing date of the
Pinnacle Merger a letter dated as of the closing date from Colony III
and each other investment vehicle used by Colony Capital that holds an
interest in PHCR at such time representing and warranting to such
stockholder that each such investment vehicle has no present intention
or plan to sell, exchange or otherwise dispose of any of its interests
in PHCR. The representations, warranties and covenants described in the
preceding two bullet points above will survive any transfer of the
ownership of 51% of the equity interest in PHCR held by Colony III or
any of its affiliates.
In addition, in the event that the Inglewood Sale has not closed on or
prior to the fifth business day prior to the closing date of the Pinnacle
Merger, the Company following the Pinnacle Merger will use its commercially
reasonable efforts to consummate such sale during the period beginning on the
date following the closing date and continuing through to but not including
December 31, 2001. See "Merger Agreement--Conditions to the Merger." No
assurances can be given that the Inglewood land sale will be consummated
either prior to or after the closing date of the Pinnacle Merger, and no
assurances can be given as to the terms of any such sale should any such sale
occur.
The amount and terms of any financing to be incurred by PHCR or its
subsidiaries in connection with the Pinnacle Merger and other transactions
described in this Proxy Statement and the use of the proceeds of any such
financing will be determined by the PHCR Board of Directors. The PHCR Board of
Directors has not determined with certainty the amount, terms or use of
proceeds of any such financing. One of the conditions to Pinnacle Acq Corp's
obligation to consummate the Pinnacle Merger is the receipt by Pinnacle Acq
Corp and Harveys Acq Corp of cash proceeds of the "Financing." The "Financing"
means debt financing satisfying the terms specified in the Merger Agreement.
See "Merger Agreement--Conditions to the Pinnacle Merger" and "--Financing of
the Pinnacle Merger and the Harveys Merger."
PHCR has received a commitment letter with respect to a $900,000,000
aggregate principal amount senior secured credit facility, and PHCR and
certain of its affiliates have received "highly confident" letters with
respect to $550,000,000 aggregate principal amount of senior subordinated
debt. In addition to the Financing, it is expected that the Company will need
to have significant cash on hand at the closing in order for the Pinnacle
Merger and the other transactions contemplated by the Merger Agreement to be
consummated. Such cash will be utilized in making payments required to be made
in the transactions. If such cash is not on hand, then PHCR's ability to
consummate the Financing and the Pinnacle Merger will likely be materially
impaired. While the amount cannot be known with certainty, it is expected that
an aggregate of at least $1,600,000,000 will be required to enable the payment
in full of all amounts necessary to consummate the Pinnacle Merger and the
other
69
<PAGE>
transactions contemplated by the Merger Agreement in the case where no
Pinnacle indebtedness is assumed by the acquiror.
Pinnacle Acq Corp has agreed in the Merger Agreement to use commercially
reasonable efforts to obtain and effectuate the Financing, however, PHCR and
its affiliates are under no obligation to obtain any additional financing or
make any equity investment in PHCR or its subsidiaries. In addition, the
Voting Agreement provides that if affiliates of PHCR elect, in their sole
discretion, to make an equity investment in PHCR or its subsidiaries prior to
the closing of the Pinnacle Merger, such equity investment will be subject to
the reasonable approval of Mr. Hubbard. See "--Financing of the Pinnacle
Merger and the Harveys Merger," "Merger Agreement--Financing of the Pinnacle
Merger and the Harveys Merger" and "Voting and Contribution Agreement;
Memorandum of Understanding." Mr. Hubbard has given his approval for an
additional $50,000,000 equity investment to be made by an affiliate of Colony
Capital. See "Special Factors--Purpose and Reasons for the Pinnacle Merger."
Board of Directors; Management
The Company. At the effective time of the Pinnacle Merger, the directors
and executive officers of Pinnacle Acq Corp immediately prior to the effective
time will become the directors and executive officers of the Company.
The sole director and officer of Pinnacle Acq Corp is Thomas J. Barrack,
Jr. Mr. Barrack serves as President, Secretary and Treasurer of Pinnacle Acq
Corp.
PHCR. In accordance with the Memorandum of Understanding and agreements
among the parties thereto, upon consummation of the Pinnacle Merger and
subject to licensing and regulatory requirements, it is currently expected
that the PHCR Board of Directors will include R.D. Hubbard as Chairman and
Thomas J. Barrack, Jr. The PHCR Board of Directors also may include other
nominees determined by Colony III or otherwise in accordance with agreements
among the parties to the Memorandum of Understanding. The size of the PHCR
board following the Pinnacle Merger has not been determined and no other
determinations have been made as to board composition following the Pinnacle
Merger.
The Memorandum of Understanding also provides that following the Pinnacle
Merger the PHCR Board of Directors will delegate to an executive committee of
the PHCR Board of Directors, to the extent permitted under applicable law,
substantially all of its powers to govern the business and affairs of the
Company. In accordance with the Memorandum of Understanding and agreements
among the parties thereto, it is currently expected that Mr. Hubbard will be a
member of, and Mr. Barrack will be designated as the Chairman of, the
executive committee.
Certificate of Incorporation and Bylaws of the Company
As a result of the Pinnacle Merger, the certificate of incorporation of
Pinnacle Acq Corp, as in effect immediately prior to the effective time of the
Pinnacle Merger, will become the certificate of incorporation of the Company
after the effective time. The certificate of incorporation will be amended to
provide that the name of the Company will be a name to be selected by Pinnacle
Acq Corp prior to the effective time of the Pinnacle Merger. Also as a result
of the Pinnacle Merger, the bylaws of Pinnacle Acq Corp, as in effect
immediately prior to the effective time of the Pinnacle Merger, will become
the bylaws of the Company. In addition to any changes to the certificate of
incorporation and bylaws of Pinnacle Acq Corp which may be made by Pinnacle
Acq Corp prior to the effective time, the certificate of incorporation and
bylaws of the Company may be amended after the effective time in accordance
with their respective terms and as provided by law.
Delisting and Deregistration of Pinnacle Common Stock
Following the closing of the Pinnacle Merger, the Pinnacle Common Stock
will be delisted from the New York Stock Exchange and will become eligible for
termination of registration pursuant to Section 12(g)(4)
70
<PAGE>
of the Exchange Act. The Company intends to terminate the registration of the
Pinnacle Common Stock under the Exchange Act as soon as practicable following
the completion of the Pinnacle Merger. Upon such termination of registration,
the Company will cease to be a reporting company.
Other Plans or Proposals
Except as described in this Proxy Statement, none of Harveys Casino
Resorts, PHCR, Pinnacle Acq Corp, the Company or the Management Stockholders
has any present plans or proposals involving the Company or its subsidiaries
which relate to or would result in an extraordinary corporate transaction such
as a merger, reorganization, liquidation, or purchase, sale or transfer of a
material amount of assets; any material change in the present dividend rate or
policy, indebtedness or capitalization; or any other material change in the
Company's corporate structure or business.
Financing of the Pinnacle Merger and the Harveys Merger
The amount and terms of any financing to be incurred by PHCR or its
subsidiaries in connection with the Pinnacle Merger and the other transactions
described in this Proxy Statement and the use of the proceeds of any such
financing will be determined by the PHCR Board of Directors. The PHCR Board of
Directors has not determined with certainty the amount, terms or use of
proceeds of any such financing. However, PHCR has received a commitment letter
with respect to a $900,000,000 aggregate principal amount senior secured
credit facility, and PHCR and certain of its affiliates have received "highly
confident" letters with respect to $550,000,000 aggregate principal amount of
senior subordinated debt. Such commitment letter and such highly confident
letters are referred to in this Proxy Statement as the "Financing Letters." As
of the date of this Proxy Statement, the Financing Letters are in full force
and effect and have not been terminated. The Financing Letters are summarized
below.
Senior Secured Credit Facility
PHCR has received a commitment from Canadian Imperial Bank of Commerce,
Bankers Trust Company and Lehman Commercial Paper Inc. to provide, on a
several and not joint basis, a $900,000,000 senior secured credit facility
(the "Senior Credit Facility") in accordance with the allocations set forth in
the letter agreement providing such commitment. CIBC World Markets Corp has
agreed to use reasonable commercial efforts to arrange a syndicate of other
banks and financial institutions (including the above referenced lenders) to
provide a portion of the Senior Credit Facility. The obligations of PHCR under
the Senior Credit Facility are expected to be guaranteed by all of the direct
and indirect domestic subsidiaries (the "Guarantors") of PHCR, including
Harveys Casino Resorts and Pinnacle. The Senior Credit Facility is expected to
be secured by a security interest in substantially all the assets of PHCR and
the Guarantors and 65% of the stock of PHCR's foreign subsidiaries. The Senior
Credit Facility is expected to contain representations and warranties,
negative and affirmative covenants (including financial maintenance
covenants), conditions and events of default which are customarily required
for similar financings. The commitment to provide the Senior Credit Facility
is subject to conditions precedent customary for facilities of this nature.
Senior Subordinated Debt
PHCR and certain of its affiliates also have received "highly confident"
letters with respect to $550,000,000 of senior subordinated debt (the "Senior
Subordinated Debt"). Certain affiliates of PHCR have received a letter dated
April 12, 2000 from Bear Stearns stating that based on current market
conditions and the information received as of the date thereof regarding
Harveys Casino Resorts and Pinnacle, it is highly confident, as of the date
thereof, of its ability to privately place the Senior Subordinated Debt.
Similarly, PHCR has received a letter dated April 16, 2000 from Lehman
Brothers, confirming that, based upon current market conditions and its
present understanding of the transaction as of the date thereof, Lehman is
highly confident, as of the date thereof, of its ability to sell or place the
Senior Subordinated Debt. The placement and sale of the Senior Subordinated
Debt under both highly confident letters are subject to conditions precedent
customary for financing of this type. Neither of the highly confident letters
constitutes a commitment or an undertaking on the part of either Bear
71
<PAGE>
Stearns or Lehman Brothers to place or purchase the Senior Subordinated Debt
or provide any portion of the financing. The receipt of the highly confident
letters does not ensure the successful placement or completion of an offering
of senior subordinated debt.
Other Plans With Respect to Financing
If the financing described above is obtained, PHCR currently has no plans
to refinance or repay such financing, other than any portion of the Senior
Credit Facility consisting of a revolving credit facility, except in
accordance with the respective terms of the Senior Credit Facility and the
Senior Subordinated Debt. In the event that a portion of the Senior Credit
Facility consists of a revolving credit facility, PHCR intends to repay such
revolving credit facility with available cash flow. The board of directors and
management of PHCR following the merger will, however, continue to evaluate
the business, operations and financial condition of PHCR and its subsidiaries
over time and consider what other changes, if any, would be desirable and,
subject to the terms of any applicable agreements governing the relationship
among the parties, will make changes as they deem appropriate.
One of the conditions to Pinnacle Acq Corp's obligation to consummate the
Pinnacle Merger is the receipt by Pinnacle Acq Corp and Harveys Acq Corp of
cash proceeds of the "Financing." See "Merger Agreement--Conditions to the
Pinnacle Merger." "Financing" means debt financing satisfying the terms
specified in the Merger Agreement, which financing, together with any
indebtedness of the Company assumed in the Pinnacle Merger, is in an amount
sufficient to enable the payment, in full, of (1) the Pinnacle merger
consideration, (2) all payments in connection with the cancellation of the
Pinnacle stock options, (3) all other related payments in connection with the
Pinnacle Merger and the Harveys Merger and (4) related fees and expenses. See
"The Merger Agreement--Financing of the Pinnacle Merger and the Harveys
Merger." The sum of such amounts is not known and will not be known with any
certainty at the time of the Annual Meeting. It is expected that an aggregate
of at least $1,600,000,000 would be necessary to enable the payment in full of
such amounts in the case where no such Pinnacle indebtedness is assumed.
As described above, PHCR has received a commitment letter with respect to a
$900,000,000 aggregate principal amount senior secured credit facility, and
PHCR and certain of its affiliates have received "highly confident" letters
with respect to $550,000,000 aggregate principal amount of senior subordinated
debt. In addition to the Financing, it is expected that the Company will need
to have significant cash on hand at the closing in order for the Pinnacle
Merger and the other transactions contemplated by the Merger Agreement to be
consummated. Such cash will be utilized in making payments required to be made
in the transactions. If such cash is not on hand, then PHCR's ability to
consummate the Financing and the Pinnacle Merger will likely be materially
impaired. Pinnacle Acq Corp has agreed in the Merger Agreement to use
commercially reasonable efforts to obtain and effectuate the Financing,
however, PHCR and its affiliates are under no obligation to obtain any
additional financing or make any equity investment in PHCR or its
subsidiaries. In addition, the Voting Agreement provides that if affiliates of
PHCR elect, in their sole discretion, to make an equity investment in PHCR or
its subsidiaries prior to the closing of the Pinnacle Merger, such equity
investment will be subject to the reasonable approval of Mr. Hubbard. See
"Voting and Contribution Agreement; Memorandum of Understanding." Mr. Hubbard
has given his approval for an additional $50,000,000 equity investment to be
made by an affiliate of Colony Capital. See "Special Factors--Purpose and
Reasons for the Pinnacle Merger."
The amount and terms of any financing to be incurred by PHCR or its
subsidiaries in connection with the Pinnacle Merger and the other transactions
described in this Proxy Statement and the use of the proceeds of any such
financing will be determined by the PHCR Board of Directors. The PHCR Board of
Directors has not determined with certainty the amount, terms or use of
proceeds of any such financing.
As of the date of this Proxy Statement, PHCR has not entered into any
definitive loan agreements with respect to any financing and no assurance can
be given that PHCR will enter into definitive loan agreements with respect to
any financing or that any financing will be obtained. PHCR currently does not
have any alternative financing plans or arrangements in the event that
financing is not obtained. Both PHCR and Pinnacle Acq Corp are newly formed
entities, and prior to the Pinnacle Merger, will have no material assets.
72
<PAGE>
Regulatory Requirements
Antitrust Laws
Transactions such as the Pinnacle Merger are reviewed by the Antitrust
Division of the United States Department of Justice (the "DOJ") and the United
States Federal Trade Commission (the "FTC") to determine whether they comply
with applicable antitrust laws. Under the provisions of the Hart-Scott-Rodino
Antitrust Improvements Act of 1976, as amended (the "HSR Act"), the Pinnacle
Merger may not be consummated until such time as the applicable waiting period
under the HSR Act has expired or been terminated. The Merger Agreement also
provides that the expiration or termination of such applicable waiting period
is a contractural condition to the closing of the Pinnacle Merger. See "Merger
Agreement--Conditions to Closing." Pinnacle and one or more affiliates of PHCR
intend to file notification reports, together with requests for early
termination of the waiting period, with the DOJ and the FTC under the HSR Act
immediately following the Annual Meeting. At any time before or after
consummation of the Pinnacle Merger, the DOJ, the FTC or a private person or
entity could seek under the antitrust laws, among other things, to enjoin the
Pinnacle Merger or cause PHCR following the Pinnacle Merger to divest, in
whole or in part, Harveys Casino Resorts, Pinnacle or any other business
conducted by PHCR. There can be no assurance that a challenge to the Pinnacle
Merger will not be made or that, if such a challenge is made, Pinnacle and
PHCR will prevail.
Gaming Regulation
The Company's gaming operations are subject to extensive regulation, and
the Company now holds gaming licenses or permits in the six jurisdictions in
which it operates gaming activities (Nevada, Mississippi, Louisiana,
Argentina, California and Arizona) and has received a certificate of
suitability (pending completion of the project and receipt of a riverboat
owner's license) in Indiana, the location of the new Belterra Casino Resort.
In each such jurisdiction, certain regulatory requirements must be complied
with, applications filed, and/or certain approvals must be obtained in
connection with the Pinnacle Merger. The parties' obligations to consummate
the Pinnacle Merger are subject, among other things, to the condition that all
necessary gaming licenses, permits, findings of suitability and other
regulatory approvals and authorizations shall have been obtained. No
assurances can be given that the necessary gaming regulatory approvals and
authorizations will be obtained or that they will be obtained on a timely
basis. Review of the Pinnacle Merger by gaming regulatory authorities will
involve examination of the structure of the Company and its financial
stability after the Pinnacle Merger and will require the demonstration of
qualifications and suitability of key individuals associated with PHCR and
Voteco. The failure to obtain the required approval of the Pinnacle Merger, or
the failure to comply with the procedural requirements prescribed by any
applicable gaming regulatory authority, or the failure of the Company or such
key individuals to qualify or make disclosure or license applications as
required, or a determination that any limited partner of Colony III or any
other affiliate of Colony Capital is obligated to make any filings or be found
suitable under the laws and regulations of any applicable gaming regulatory
authority, may result in the loss of license or denial of application for
licensure in one or all jurisdictions.
The following is an abbreviated description of the various gaming
regulatory requirements applicable to the Pinnacle Merger. For a more detailed
description of these gaming regulatory requirements generally, please see
"Additional Information About The Company--Government Regulation" in this
Proxy Statement and "Regulatory Matters" in Item 1 of the Annual Report on
Form 10-K of Harveys Casino Resorts for the year ended November 30, 1999.
Nevada Gaming Regulations. The ownership and operation of casino gaming
facilities in Nevada are subject to the Nevada Gaming Control Act and the
regulations of the Nevada Gaming Commission and the Nevada State Gaming
Control Board (collectively, the "Nevada Act") and various local ordinances
and regulations. Pinnacle's gaming operations are subject to the licensing and
regulatory control of the Nevada Gaming Commission, the Nevada State Gaming
Control Board, the Clark County Liquor and Gaming Licensing Board and Washoe
County (collectively, the "Nevada Gaming Authorities").
73
<PAGE>
Regulations of the Nevada Gaming Commission provide that control of a
registered publicly traded corporation such as Pinnacle cannot be acquired
through a tender offer, merger, consolidation, acquisition of assets,
management or consulting agreements or any form of takeover whatsoever without
the prior approval of the Nevada Gaming Commission. PHCR will file
applications seeking the necessary approvals with the Nevada State Gaming
Control Board and the Nevada Gaming Commission. The Nevada State Gaming
Control Board reviews and investigates applications for approval and makes
recommendations on those applications to the Nevada Gaming Commission for
final action. There can be no assurance that these approvals will be granted
or will be granted on a timely basis or without burdensome conditions.
Furthermore, any such approval, if granted, does not constitute a finding,
recommendation or approval by the Nevada State Gaming Control Board or the
Nevada Gaming Commission as to the merits of the Pinnacle Merger. Any
representation to the contrary is unlawful.
In seeking approval to acquire control of Pinnacle, PHCR must satisfy the
Nevada Gaming Commission as to a variety of stringent standards. The Nevada
State Gaming Control Board and the Nevada Gaming Commission will consider all
relevant material facts in determining whether to grant this approval, and may
consider not only the effects of the Pinnacle Merger but also any other facts
that are deemed relevant. Such facts may include, among others, (1) the
business history of the applicant, including its record of financial
stability, integrity and success of its operations, as well as its current
business activities, (2) the adequacy of the proposed financing, and (3)
whether the Pinnacle Merger will create a significant risk that Pinnacle or
its subsidiaries will not satisfy their financial obligations as they become
due or satisfy all financial and regulatory requirements imposed by the Nevada
Act.
The Nevada State Gaming Control Board and the Nevada Gaming Commission will
also consider whether the acquisition of control of Pinnacle is in the best
interests of the State of Nevada under the multiple licensing criteria in the
Nevada Act. Among other factors set forth in such multiple licensing criteria,
they may consider whether the acquisition would pose problems or create a
monopoly, and what the result of the acquisition of control will be in respect
of the percentage of interest of Pinnacle to similarly situated competitors on
a statewide, countrywide and geographical basis in the following categories;
total number of slot machines, total number of games, total number of tables,
gross revenue, percentage tax, casino entertainment tax, number of rooms
available for the public, number of employees hired and total payroll.
Following receipt of the necessary approvals of the Nevada Gaming
Commission and completion of the Pinnacle Merger, Pinnacle will be registered
by the Nevada Gaming Commission as an intermediary company of its gaming
subsidiaries.
PHCR will file an application with the Nevada State Gaming Control Board
and the Nevada Gaming Commission to be registered as a publicly traded
corporation and to be found suitable as the sole stockholder of Pinnacle and
Harveys Casino Resorts at the time of completion of the Pinnacle Merger. In
addition, certain officers, directors and key employees of PHCR at the time of
completion of the Pinnacle Merger who will be actively and directly involved
in Pinnacle's and Harveys Casino Resorts' gaming activities may also be
required to be found suitable or licensed by the Nevada Gaming Authorities.
The Nevada Gaming Authorities may deny an application for licensing, a finding
of suitability or registration for any cause that they deem reasonable. A
finding of suitability is comparable to licensing, and both require the
submission of detailed personal and financial information followed by a
thorough investigation. All individuals required to file applications for
findings of suitability as officers and directors of PHCR at the time of
completion of the Pinnacle Merger will file applications with the Nevada State
Gaming Control Board and the Nevada Gaming Commission. Certain approvals may
also be required to be obtained in connection with the Financing and such
approvals will be applied for. There can be no assurances that these approvals
will be granted or will be granted within this time.
Mississippi Gaming Regulations. The ownership and operation of casino
gaming facilities in Mississippi are subject to the Mississippi Gaming Control
Act and various local regulations. Pinnacle's gaming operations in Mississippi
are subject to the licensing and regulatory control of the Mississippi Gaming
Commission.
74
<PAGE>
Regulations of the Mississippi Gaming Commission provide that control of a
registered publicly traded corporation such as Pinnacle cannot be acquired
through a tender offer, merger, consolidation, acquisition of assets,
management or consulting agreements or any form of takeover whatsoever without
the prior approval of the Mississippi Gaming Commission. PHCR will file an
application seeking the necessary approvals with the Mississippi Gaming
Commission. There can be no assurance that these approvals will be granted or
will be granted on a timely basis or without burdensome conditions.
Furthermore, any such approval, if granted, does not constitute a finding,
recommendation or approval by the Mississippi Gaming Commission as to the
merits of the Pinnacle Merger. Any representation to the contrary is unlawful.
In seeking approval to acquire control of Pinnacle, PHCR must satisfy the
Mississippi Gaming Commission as to a variety of stringent standards. The
Mississippi Gaming Commission will consider all relevant material facts in
determining whether to grant this approval, and may consider not only the
effects of the Pinnacle Merger but also any other facts that are deemed
relevant. Such facts may include, among others, (1) the business history of
the applicant, including its record of financial stability, integrity and
success of its operations, as well as its current business activities, and (2)
whether the Pinnacle Merger will create a significant risk that Pinnacle or
its subsidiaries will not satisfy their financial obligations as they become
due or satisfy all financial and regulatory requirements imposed by the
Mississippi Gaming Control Act.
The Mississippi Gaming Commission must approve PHCR as a holding company of
Pinnacle. Following receipt of the necessary approvals of the Mississippi
Gaming Commission and completion of the Pinnacle Merger, Pinnacle will be
registered by the Mississippi Gaming Commission as an intermediary company of
PHCR.
Certain officers, directors and key employees of Pinnacle prior to the
Pinnacle Merger, or PHCR after completion of the Pinnacle Merger, who will be
actively and directly involved in Pinnacle's gaming activities may also be
required to be found suitable or licensed by the Mississippi Gaming
Commission. The Mississippi Gaming Commission may deny an application for
licensing, a finding of suitability or registration for any cause that it
deems reasonable. A finding of suitability is comparable to licensing, and
both require the submission of detailed personal and financial information
followed by a thorough investigation. All individuals required to file
applications for findings of suitability as officers and directors of PHCR and
Pinnacle at the time of completion of the Pinnacle Merger will file
applications with the Mississippi Gaming Commission. Certain approvals may
also be required to be obtained in connection with the Financing and such
approvals will be applied for. There can be no assurances that these approvals
will be granted or will be granted within this time.
Louisiana Gaming Regulations. The ownership and operation of a riverboat
gaming vessel in Louisiana is subject to the Louisiana Riverboat Economic
Development and Gaming Control Act (the "Louisiana Act") and various local
regulations. The Company's gaming operations in Louisiana are subject to the
licensing and regulatory control of the Louisiana Gaming Control Board.
Regulations of the Louisiana Gaming Control Board provide that transfer of
a license is prohibited and that the sale, assignment, transfer, pledge or
disposition of securities which represent 5% or more of the total outstanding
shares issued by a holder of a license is subject to the prior approval of the
Louisiana Gaming Control Board. A petition to modify ownership has been filed
with the Louisiana Gaming Control Board by Louisiana-One Gaming and Casino
Magic of Louisiana, Corp., the Company's subsidiaries which hold Louisiana
riverboat gaming licenses, to approve the modification of the ownership
structure as a result of the Pinnacle Merger. There can be no assurance that
these approvals will be granted or granted on a timely basis or without
burdensome conditions. Furthermore, any such approval, if granted, does not
constitute a finding, recommendation or approval by the Louisiana Gaming
Control Board as to the merits of the Pinnacle Merger. Any representation to
the contrary is unlawful.
In seeking approval of the ownership change, a variety of stringent
standards of the Louisiana Gaming Control Board must be satisfied. The
Louisiana Gaming Control Board will consider all relevant material facts in
determining whether to grant this approval, and may consider not only the
effects of the Pinnacle Merger but
75
<PAGE>
also any other facts that are deemed relevant. Such facts may include, among
others, (1) the business history of the applicant, including its record of
financial stability, integrity and success of its operations, as well as its
current business activities, (2) the adequacy of the proposed financing, and
(3) whether the Pinnacle Merger will create a significant risk that the
Company or its subsidiaries will not satisfy their financial obligations as
they become due or satisfy all financial and regulatory requirements imposed
by the Louisiana Act.
Certain officers, directors and key employees of the Company prior to the
Pinnacle Merger, or PHCR and Voteco after completion of the Pinnacle Merger,
who will be actively and directly involved in the Company's gaming activities
may also be required to be found suitable or licensed by the Louisiana Gaming
Control Board. The Louisiana Gaming Control Board may deny an application for
licensing or a finding of suitability for any cause it deems reasonable. A
finding of suitability is comparable to licensing, and both require the
submission of detailed personal and financial information followed by a
thorough investigation. All individuals required to file applications for
finding of suitability as officers and directors of PHCR, Voteco and the
Company at the time of completion of the Pinnacle Merger will file
applications with the Louisiana Gaming Control Board. Certain approvals also
may be required to be obtained in connection with the Financing and such
approvals will be applied for. There can be no assurance that said approvals
will be granted or will be granted on a timely basis.
Indiana Gaming Regulations. The ownership and operation of riverboat
casinos docked at Indiana-based sites are subject to extensive state
regulation under the Indiana Riverboat Gaming Act (the "Indiana Act") and the
rules and regulations adopted by the Indiana Gaming Commission under the
Indiana Act.
Indiana Gaming Commission rules provide a procedure for transfer of an
ownership interest of 5% or more of a riverboat licensee that is a publicly
traded corporation. An applicant for approval of a transfer of an ownership
interest must complete and submit the appropriate application forms, including
personal disclosure forms of substantial owners and key persons. PHCR has
filed applications seeking approval of a transfer of ownership interest with
the Indiana Gaming Commission. The Indiana Gaming Commission conducts a
background investigation and upon completion of the investigation holds a
public hearing prior to taking final action on the transfer application. An
applicant to receive ownership interest seeks a privilege and assumes and
accepts any and all risk of adverse publicity, notoriety, embarrassment,
criticism, or other action or financial loss that may occur in connection with
the application process or the public disclosure of information requested.
In seeking approval of a transfer of ownership interest, PHCR must present
evidence to the Indiana Gaming Commission that it meets or possesses the same
stringent standards, qualifications or criteria for the initial award of a
riverboat owner's license. Standards, qualifications and criteria include,
among others (a) the level of skill, experience or knowledge in conducting a
riverboat operation of the applicant (or the applicant's substantial owner);
(b) the positive economic impact that the applicant's plan will have on the
entire State of Indiana; (c) the positive impact of any endorsements made by
the local government entity; (d) the criminal history of the applicant and the
applicant's substantial owner; (e) the good moral character and reputation of
the applicant and the applicant's substantial owners; (f) whether the
applicant or applicant's substantial owners has had a gaming or other license
revoked, suspended, restricted, or terminated or if renewal of a license was
denied; and (g) compliance with state and federal tax laws by the applicant
and the applicant's substantial owners.
There can be no assurance that these approvals will be granted or will be
granted on a timely basis or without burdensome conditions. Given the time
typically required for the requisite background investigations, it is likely
that Indiana Gaming Commission will not approve the transfer of ownership
interest prior to December 31, 2000. Although the Indiana Act does not require
approval of the transfer of ownership interest prior to consummation of the
Pinnacle Merger, any subsequent failure to receive approval of the Indiana
Gaming Commission of the transfer of ownership interest would have a material
adverse affect on PHCR. Furthermore, any such approval, if granted, does not
constitute a finding, recommendation or approval by the Indiana Gaming
Commission as to the merits of the Pinnacle Merger.
Each person who acquires beneficial ownership of 5% or more (or an
institutional investor that acquires beneficial ownership of 15% or more) of
any class of voting securities of a registered publicly traded corporation
76
<PAGE>
that is a riverboat licensee (or holding or intermediary company of a
riverboat licensee) must apply to the Indiana Gaming Commission for a finding
of suitability within 45 days after acquiring such securities. In addition,
certain officers, directors and key employees of PHCR at the time of
completion of the Pinnacle Merger who will be actively and directly involved
in Pinnacle's gaming activities may also be required to be found suitable or
licensed by the Indiana Gaming Commission. The Indiana Gaming Commission may
deny an application for licensing, a finding of suitability or registration
for any cause that it deems reasonable. A finding of suitability is comparable
to licensing, and both require the submission of detailed personal and
financial information followed by a background investigation. All individuals
subject to a finding of suitability as substantial owners or key persons of
PHCR at the time of completion of the Pinnacle Merger either have already been
found suitable or have filed the necessary applications with the Indiana
Gaming Commission.
Indiana Gaming Commission rules provide that any debt transaction of
$1,000,000 or more by a riverboat licensee, or a riverboat license applicant,
is subject to approval of the Indiana Gaming Commission. There can be no
assurances that these approvals will be granted or will be granted on a timely
basis.
Colorado Gaming Regulations. The ownership and operation of casino gaming
in Colorado is subject to the Colorado Limited Gaming Act and the regulations
promulgated thereunder (collectively, the "Colorado Regulations") by the
Colorado Limited Gaming Control Commission (the "Colorado Commission"). Under
the Colorado Regulations, Harveys Casino Resorts is a "publicly traded
corporation" since it is the reporting company subject to Section 15(d) of the
Securities Exchange Act of 1934, as amended.
Under the Colorado Regulations, the merger transactions would need to be
reported to the Colorado Division of Gaming (the "Colorado Division") within
10 days after their closing since they result in a new entity, PHCR,
indirectly owning 5% or more of Harveys Wagon Wheel Hotel/Casino, the Colorado
licensed subsidiary (the "Colorado Subsidiary"). In addition, under the
Colorado Regulations, since PHCR and Mr. Hubbard also would indirectly own 10%
or more of the Colorado Subsidiary, both are required to file for licensing as
an "associated person" of the Colorado Subsidiary. Although the prior approval
of the merger transactions, and PHCR and Mr. Hubbard as associated persons, by
the Colorado Commission is not legally required, the post-merger failure of
PHCR to be found suitable would jeopardize the Colorado Subsidiary's gaming
license and would require Harveys Casino Resorts and the Colorado Subsidiary
to disassociate themselves with PHCR, including, without limitation, refusing
to pay it any dividend or recognize its vote. Hence, if PHCR were not found
suitable, the transaction would need to be unwound or the Colorado
Subsidiary's gaming license could be revoked. Similarly, if Mr. Hubbard were
not found suitable, his stock in PHCR would need to be redeemed and he could
not be associated with PHCR. An applicant must prove by clear and convincing
evidence that it is qualified in accordance with the provisions of the
Colorado Regulations, which include an investigation into its moral character,
prior activities, criminal records, financial and personal background and
associations. The Colorado Commission has informed PHCR that, given the time
required for background investigations, it is likely that the Colorado
Commission will not be able to make a finding of suitability for Mr. Hubbard
and PHCR any earlier than November 2000.
The Colorado regulators also reserve the right to review Pinnacle as an
affiliated company of Harveys Casino Resorts and the Colorado Subsidiary. In
the event that the Colorado regulators find Pinnacle unsuitable, they could
disapprove the ownership by PHCR.
In addition, if there are individuals, other than Mr. Barrack and Mr.
Hubbard who are directors or officers of PHCR, or if there are other key
employees of PHCR, such individuals likely will be required to be found
suitable either as associated persons or key employees. The approval of such
suitability or licensing is not required prior to the closing of the merger
transactions; however, if such individuals are not found suitable or licensed,
then the Colorado Subsidiary's license would be in jeopardy unless PHCR,
Harveys Casino Resorts, or the Colorado Subsidiary, as applicable, terminates
its relationship with such individuals.
The Colorado regulators also reserve the right to review the suitability of
any persons or entities providing financing, directly or indirectly, to the
Colorado Subsidiary or with respect to the merger, Harveys Casino Resorts
77
<PAGE>
and PHCR. Although the Colorado Regulations do not require prior approval for
such financing, the Colorado regulators reserve the right to require the
termination of such financing if a person or entity is required to be found
suitable and is not found suitable.
There can be no assurance that any of the approvals required of the
Colorado regulators will be granted on a timely basis or without burdensome
conditions. PHCR and Mr. Hubbard have filed applications to be associated
persons of the Colorado Subsidiary and the Colorado Subsidiary has filed a
change in ownership application to take into consideration PHCR and Mr.
Hubbard's indirect ownership of the Colorado Subsidiary.
Iowa Gaming Regulations. The ownership and operation of gambling boats in
Iowa is subject to the authority of the Iowa Racing and Gaming Commission (the
"Iowa Commission"), chapters 99D and F of the Code of Iowa and the rules and
regulations promulgated thereunder and various local regulations.
The Iowa Commission has broad statutory authority to regulate, monitor and
supervise the activities of its various licensees. Following the issuance of a
gaming license, the Iowa Commission monitors and supervises the activities of
the licensees. Material contracts (over $50,000) to be entered into by the
licensee, changes in ownership of the licensee, management contracts and
acquisition of interest in other gambling activities by the licensee or its
owners must all be reported to and approved by the Iowa Commission. In
addition, any financing arrangements involving the Iowa licensees as
signatories must be approved by the Iowa Commission.
The Iowa Commission has been notified of the pending Pinnacle Merger. A
background filing has been made on behalf of Mr. Hubbard and requested
information has been supplied to the Iowa Commission in preparation for formal
presentations to be made to the Iowa Commission later in the year for the
purpose of obtaining approval of the Pinnacle Merger.
Other Jurisdictions. Approvals for the Pinnacle Merger also will be
required in the state of Washington. Approvals or filings with respect to the
Pinnacle Merger may also be required in California and Argentina. All required
applications and filings will be made.
Legal Proceedings
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. On June 2, 2000, the action was dismissed without
prejudice. See "Special Factors--Background of the Pinnacle Merger."
On March 21, 2000, Leta Hilliard filed a similar purported class action
lawsuit in the Superior Court of the State of California. The plaintiff in the
lawsuit claims that the Company and its directors failed to undertake an
appropriate process for evaluating the value of the Company 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 to 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.
Fees and Expenses
Except as disclosed in this Proxy Statement and as set forth in the Merger
Agreement, all fees and expenses incurred in connection with the Pinnacle
Merger, the Merger Agreement and any other transactions contemplated thereby
will be paid by the party incurring such fees and expenses, whether or not the
Pinnacle Merger is consummated, except that the Company will pay all expenses
relating to the printing, filing and mailing of the Proxy Statement.
78
<PAGE>
The Company will pay $150,000 to Mr. Reitnouer for his service as chairman
of the Special Committee and $50,000 to each other member of the Special
Committee for his service thereon.
The Company estimates that merger-related fees and expenses for both the
Company and PHCR will total approximately $36,825,000, as follows:
<TABLE>
<S> <C>
PHCR's Financing, Commitment and Advisory Fees............... $30,325,000
Filing Fees.................................................. 138,000
Special Committee's Legal and Financial Advisors' Fees and
Expenses.................................................... 1,000,000
Legal Fees and Expenses...................................... 4,500,000
Accounting Fees and Expenses................................. 100,000
Special Committee Fees....................................... 450,000
Printing, Solicitation and Mailing Costs..................... 200,000
Miscellaneous................................................ 112,000
-----------
Total........................................................ $36,825,000
===========
</TABLE>
Under certain circumstances, the Company is obligated to pay Pinnacle Acq
Corp a Termination Fee. See "Merger Agreement--Termination Fee."
Accounting Treatment
The Pinnacle Merger will be accounted for as a "purchase" in accordance
with generally accepted accounting principles. Consequently, the aggregate
consideration paid in connection with the Pinnacle Merger will be allocated to
the assets and liabilities of the Company based upon their fair values, with
any excess being treated as goodwill.
APPRAISAL RIGHTS
If the Pinnacle Merger is consummated, holders of shares of Pinnacle Common
Stock are entitled to appraisal rights under Section 262 of the Delaware
General Corporation Law ("Section 262"), provided that they comply with the
conditions established by Section 262.
Section 262 is reprinted in its entirety as Annex C to this Proxy
Statement. The following discussion is not a complete statement of the law
relating to appraisal rights and is qualified in its entirety by reference to
Annex C. This discussion and Annex C should be reviewed carefully by any
holder who wishes to exercise statutory appraisal rights or who wishes to
preserve the right to do so, as failure to comply with the procedures set
forth in Section 262 will result in the loss of appraisal rights.
A record holder of shares of Pinnacle Common Stock who makes the demand
described below with respect to such shares, who continuously is the record
holder of such shares through the effective time of the Pinnacle Merger, who
otherwise complies with the statutory requirements of Section 262 and who
neither votes in favor of the Pinnacle Merger nor consents thereto in writing
will be entitled to an appraisal by the Delaware Court of Chancery (the
"Delaware Court") of the fair value of his or her shares of Pinnacle Common
Stock. All references in this summary of appraisal rights to a "stockholder"
or "holders of shares of Pinnacle Common Stock" are to the record holder or
holders of shares of Pinnacle Common Stock. Except as set forth herein,
stockholders of the Company will not be entitled to appraisal rights in
connection with the Pinnacle Merger.
Under Section 262, where a merger is to be submitted for approval at a
meeting of stockholders, such as the Annual Meeting, not less than 20 days
prior to the meeting a constituent corporation must notify each of the holders
of its stock for whom appraisal rights are available that such appraisal
rights are available and include in each such notice a copy of Section 262.
This Proxy Statement shall constitute such notice to the record holders of
Pinnacle Common Stock.
79
<PAGE>
Holders of shares of Pinnacle Common Stock who desire to exercise their
appraisal rights must not vote in favor the Pinnacle Merger and must deliver a
separate written demand for appraisal to the Company prior to the vote by the
stockholders of the Company on the Pinnacle Merger. A demand for appraisal
must be executed by or on behalf of the stockholder of record and must
reasonably inform the Company of the identity of the stockholder of record and
that such stockholder intends thereby to demand appraisal of the Pinnacle
Common Stock. A proxy or vote against the Pinnacle Merger will not by itself
constitute such a demand. Within ten days after the effective time of the
Pinnacle Merger, the Company must provide notice of the effective time of the
Pinnacle Merger to all stockholders who have complied with Section 262.
A stockholder who elects to exercise appraisal rights should mail or
deliver his or her written demand to 330 North Brand Boulevard, Suite 1100,
Glendale, California 91203, Attention: Corporate Secretary.
A person having a beneficial interest in shares of Pinnacle Common Stock
that are held of record in the name of another person, such as a broker,
fiduciary, depositary or other nominee, must act promptly to cause the record
holder to follow the steps summarized herein properly and in a timely manner
to perfect appraisal rights. If the shares of Pinnacle Common Stock are owned
of record by a person other than the beneficial owner, including a broker,
fiduciary (such as a trustee, guardian or custodian), depositary or other
nominee, such demand must be executed by or for the record owner. If the
shares of Pinnacle Common Stock are owned of record by more than one person,
as in a joint tenancy or tenancy in common, such demand must be executed by or
for all joint owners. An authorized agent, including an agent for two or more
joint owners, may execute the demand for appraisal for a stockholder of
record; however, the agent must identify the record owner and expressly
disclose the fact that, in exercising the demand, such person is acting as
agent for the record owner. If a stockholder holds shares of Pinnacle Common
Stock through a broker who in turn holds the shares through a central
securities depository nominee such as Cede & Co., a demand for appraisal of
such shares must be made by or on behalf of the depository nominee and must
identify the depository nominee as record holder.
A record holder, such as a broker, fiduciary, depositary or other nominee,
who holds shares of Pinnacle Common Stock as a nominee for others, may
exercise appraisal rights with respect to the shares held for all or less than
all beneficial owners of shares as to which such person is the record owner.
In such case, the written demand must set forth the number of shares covered
by such demand. Where the number of shares is not expressly stated, the demand
will be presumed to cover all shares of Pinnacle Common Stock outstanding in
the name of such record owner.
Within 120 days after the effective time of the Pinnacle Merger, either the
Company or any stockholder who has complied with the required conditions of
Section 262 may file a petition in the Delaware Court, with a copy served on
the Company in the case of a petition filed by a stockholder, demanding a
determination of the fair value of the shares of all dissenting stockholders.
There is no present intent on the part of the Company to file an appraisal
petition and stockholders seeking to exercise appraisal rights should not
assume that the Company will file such a petition or that the Company will
initiate any negotiations with respect to the fair value of such shares.
Accordingly, holders of Pinnacle Common Stock who desire to have their shares
appraised should initiate any petitions necessary for the perfection of their
appraisal rights within the time periods and in the manner prescribed in
Section 262. Within 120 days after the effective time of the Pinnacle Merger,
any stockholder who has theretofore complied with the applicable provisions of
Section 262 will be entitled, upon written request, to receive from the
Company a statement setting forth the aggregate number of shares of Pinnacle
Common Stock not voting in favor of the Pinnacle Merger and with respect to
which demands for appraisal were received by the Company and the number of
holders of such shares. Such statement must be mailed (i) within 10 days after
the written request therefor has been received by the Company or (ii) within
10 days after the expiration of the period for the delivery of demands as
described above, whichever is later.
If a petition for an appraisal is timely filed, at the hearing on such
petition, the Delaware Court will determine which stockholders are entitled to
appraisal rights. The Delaware Court may require the stockholders who have
demanded an appraisal for their shares and who hold stock represented by
certificates to submit their certificates of stock to the Register in Chancery
for notation thereon of the pendency of the appraisal proceedings;
80
<PAGE>
and if any stockholder fails to comply with such direction, the Delaware Court
may dismiss the proceedings as to such stockholder. Where proceedings are not
dismissed, the Delaware Court will appraise the shares of Pinnacle Common
Stock owned by such stockholders, determining the fair value of such shares
exclusive of any element of value arising from the accomplishment or
expectation of the Pinnacle Merger, together with a fair rate of interest, if
any, to be paid upon the amount determined to be the fair value.
Although the Company believes that the merger consideration is fair, no
representation is made as to the outcome of the appraisal of fair value as
determined by the Delaware Court and stockholders should recognize that such
an appraisal could result in a determination of a value higher or lower than,
or the same as, the merger consideration. Moreover, the Company does not
anticipate offering more than the merger consideration to any stockholder
exercising appraisal rights and reserves the right to assert, in any appraisal
proceeding, that, for purposes of Section 262, the "fair value" of a share of
Pinnacle Common Stock is less than the merger consideration. In determining
"fair value", the Delaware Court is required to take into account all relevant
factors. In Weinberger v. UOP, Inc., the Delaware Supreme Court discussed the
factors that could be considered in determining fair value in an appraisal
proceeding, stating that "proof of value by any techniques or methods which
are generally considered acceptable in the financial community and otherwise
admissible in court" should be considered and that "[f]air price obviously
requires consideration of all relevant factors involving the value of a
company." The Delaware Supreme Court has stated that in making this
determination of fair value the court must consider market value, asset value,
dividends, earnings prospects, the nature of the enterprise and any other
facts which could be ascertained as of the date of the merger which throw any
light on future prospects of the merged corporation. Section 262 provides that
fair value is to be "exclusive of any element of value arising from the
accomplishment or expectation of the merger." In Cede & Co. v. Technicolor,
Inc., the Delaware Supreme Court stated that such exclusion is a "narrow
exclusion [that] does not encompass known elements of value," but which rather
applies only to the speculative elements of value arising from such
accomplishment or expectation. In Weinberger, the Delaware Supreme Court
construed Section 262 to mean that "elements of future value, including the
nature of the enterprise, which are known or susceptible of proof as of the
date of the merger and not the product of speculation, may be considered."
The cost of the appraisal proceeding may be determined by the Delaware
Court and charged against the parties as the Delaware Court deems equitable
under the circumstances. However, costs do not include attorneys' and expert
witness fees. Each dissenting stockholder is responsible for his or her
attorneys' and expert witness expenses, although, upon application of a
dissenting stockholder of the Company, the Delaware Court may order that all
or a portion of the expenses incurred by any dissenting stockholder in
connection with the appraisal proceeding, including without limitation,
reasonable attorneys' fees and the fees and expenses of experts, be charged
pro rata against the value of all shares of stock entitled to appraisal.
Any holder of shares of Pinnacle Common Stock who has duly demanded
appraisal in compliance with Section 262 will not, after the effective time of
the Pinnacle Merger, be entitled to vote for any purpose any shares subject to
such demand or to receive payment of dividends or other distributions on such
shares, except for dividends or distributions payable to stockholders of
record at a date prior to the effective time of the Pinnacle Merger.
At any time within 60 days after the effective time of the Pinnacle Merger,
any stockholder will have the right to withdraw such demand for appraisal and
to accept the terms offered in the Pinnacle Merger; after this period, the
stockholder may withdraw such demand for appraisal only with the consent of
the Company. If no petition for appraisal is filed with the Delaware Court
within 120 days after the effective time of the Pinnacle Merger, stockholders'
rights to appraisal shall cease, and all holders of shares of Pinnacle Common
Stock will be entitled to receive the consideration offered pursuant to the
Merger Agreement. Inasmuch as the Company has no obligation to file such a
petition, and the Company has no present intention to do so, any holder of
shares of Pinnacle Common Stock who desires such a petition to be filed is
advised to file it on a timely basis. Any stockholder may withdraw such
stockholder's demand for appraisal by delivering to the Company a written
withdrawal of his or her demand for appraisal, except (i) that any such
attempt to withdraw made more than
81
<PAGE>
60 days after the effective time of the Pinnacle Merger will require written
approval of the Company and (ii) that no appraisal proceeding in the Delaware
Court shall be dismissed as to any stockholder without the approval of the
Delaware Court, and such approval may be conditioned upon such terms as the
Delaware Court deems just.
FAILURE TO COMPLY STRICTLY WITH ALL OF THE PROCEDURES SET FORTH IN SECTION
262 WILL RESULT IN THE LOSS OF A STOCKHOLDER'S STATUTORY APPRAISAL RIGHTS.
CONSEQUENTLY, ANY STOCKHOLDER WISHING TO EXERCISE APPRAISAL RIGHTS IS URGED TO
CONSULT LEGAL COUNSEL BEFORE ATTEMPTING TO EXERCISE SUCH RIGHTS.
MERGER AGREEMENT
The terms and conditions of the Pinnacle Merger are contained in the Merger
Agreement, a copy of which is attached as Annexes A and A1 to this Proxy
Statement. Stockholders are urged to read the Merger Agreement carefully. All
material terms and conditions of the Merger Agreement are summarized below and
are qualified in their entirety by reference to the complete text of the
Merger Agreement, which is incorporated herein by reference. Capitalized terms
not otherwise defined in the following description have the meanings set forth
in the Merger Agreement.
General
The Merger Agreement provides that at the Effective Time (as defined
below), Pinnacle Acq Corp will be merged with and into the Company in
accordance with the Delaware General Corporation Law (the "DGCL"). Following
the Pinnacle Merger, Pinnacle shall continue as the surviving corporation (the
"Pinnacle Surviving Corporation") and the separate corporate existence of
Pinnacle Acq Corp will cease.
Effective Time
The Merger Agreement provides that the Pinnacle Merger will become
effective at the time the Certificate of Merger is duly filed with the
Secretary of State of the State of Delaware, or at such later time as PHCR,
Pinnacle, and Pinnacle Acq Corp shall agree and specify in the Certificate of
Merger (the "Effective Time"). Such filing will be made on or prior to the
closing date of the Pinnacle Merger. Such closing date shall be no later than
the third business day after the date on which all of the conditions to the
parties' obligations to consummate the Pinnacle Merger have been satisfied or
waived unless another date is agreed to in writing by PHCR, the Company and
Pinnacle Acq Corp. Such conditions include the receipt by Pinnacle Acq Corp of
the necessary gaming licenses, permits and approvals from the gaming
authorities of the states of Arizona, California, Colorado, Indiana, Iowa,
Louisiana, Mississippi, Nevada and Washington, the Washoe County Board of
Commissioners, the Yakama Tribal Gaming Commission, the National Indian Gaming
Commission and the Provincial Government of Neuquen, Argentina (taken
together, "Gaming Authorities"). See "--Conditions to the Pinnacle Merger."
Conversion of Pinnacle Shares and Stock Options; Contingent Payment
Shares of Pinnacle Common Stock
As of the Effective Time, each share of Pinnacle Common Stock outstanding
immediately prior to the Effective Time (other than (i) shares held by PHCR,
Pinnacle and its subsidiaries or Pinnacle Acq Corp, (ii) shares with respect
to which holders have perfected their appraisal rights in accordance with
Delaware law, (iii) Hubbard Redemption Shares (as defined below), and (iv)
Contributed Shares (as defined below)) will be converted into the right to
receive $24.00 in cash, without interest, subject to increase by up to $1.00
per share as described below. All shares of Pinnacle Common Stock held by
Pinnacle or any of its subsidiaries as treasury shares, or by Pinnacle Acq
Corp, will be cancelled, and each issued and outstanding share of Pinnacle Acq
Corp stock will be converted into an equivalent share of common stock of the
Pinnacle Surviving Corporation.
82
<PAGE>
The $24.00 per share merger consideration may be increased by up to an
additional $1.00 in cash per share, contingent upon the closing of the sale by
Pinnacle of Pinnacle's 97 acres of surplus land in Inglewood, California
("Inglewood Sale") with certain minimum required net proceeds prior to
December 31, 2001 (the "Contingent Payment"). If the after tax proceeds (using
an assumed 42% tax rate) to Pinnacle of the Inglewood Sale are equal to or
greater than $40,750,000, then the Contingent Payment shall equal $1.00 per
share. If the after tax proceeds of the Inglewood Sale are less than or equal
to $13,054,000, then the Contingent Payment shall equal zero. If the after tax
proceeds of the Inglewood Sale are less than $40,750,000, but more than
$13,054,000, then the Contingent Payment shall equal a prorated fraction of
$1.00, as described below. See "--Calculation of Prorated Contingent Payment."
The merger consideration (including the adjustment for the Contingent
Payment) is referred to in this discussion as the "Pinnacle Merger
Consideration."
In the event that the Inglewood Sale occurs on or prior to the fifth
Business Day prior to the Closing Date, the Pinnacle Merger Consideration will
equal the sum of $24.00 and the Contingent Payment, if any, both to be paid in
cash. In the event that the Inglewood Sale has not closed on or prior to the
fifth Business Day prior to the Closing Date of the Pinnacle Merger, then the
Pinnacle Merger Consideration shall equal $24.00 in cash, plus the right to
receive the applicable Contingent Payment, if any, provided that the Inglewood
Sale closes prior to December 31, 2001.
Any right to receive the Contingent Payment, if any, will not represent an
equity or other ownership interest in PHCR or the Pinnacle Surviving
Corporation, will not be transferable except by operation of law or will, will
not be represented by any form of certificate or instrument, and will not bear
interest. Any right to receive the Contingent Payment, if any, also will not
entitle the holder to any voting or other rights as a stockholder of PHCR or
the Pinnacle Surviving Corporation. In the event that the Inglewood Sale does
not close by December 31, 2001, the Contingent Payment will be $0 regardless
of proceeds. On December 31, 2001, the right to receive the Contingent Payment
shall expire and thereafter holders shall have no rights to Inglewood Sale
proceeds if the Inglewood Sale has not closed prior to that date.
For the purposes of this section, "Hubbard Redemption Shares" shall mean
that portion of the shares of Pinnacle Common Stock owned by R.D. Hubbard,
Chairman of the Board and Chief Executive Officer of Pinnacle, which will not
be contributed to PHCR pursuant to the Voting Agreement and will instead be
redeemed by Pinnacle immediately prior to the Effective Time for a price equal
to the Pinnacle Merger Consideration (including any right to receive the
applicable Contingent Payment, if any). It is expected that 1,020,285 shares
owned by Mr. Hubbard will be repurchased in this manner. "Contributed Shares"
shall mean shares of Pinnacle Common Stock held by the Management Stockholders
which are to be contributed to PHCR immediately prior to the Effective Time in
exchange for shares of PHCR Common Stock. See "--Voting Agreement" and "--
Contribution of Stock by the Management Stockholders."
Pinnacle Stock Options
Immediately prior to the Effective Time, Pinnacle will cause all
outstanding Pinnacle Stock Options (except for certain Pinnacle Stock Options
held by Management Stockholders which are to be cancelled in accordance with
the Voting Agreement and replaced with fully vested options to acquire PHCR
common stock), whether or not vested, to be cancelled in exchange for the
right to receive a cash payment equal to (1) the number of shares of Pinnacle
Common Stock subject to such Pinnacle Stock Option immediately prior to the
fifth Business Day prior to the Closing Date multiplied by (2) the excess, if
any, of the cash amount of the Pinnacle Merger Consideration over the per
share exercise price of such Pinnacle Stock Option. In addition, in the event
that the Inglewood Sale shall not have closed on or prior to the fifth
Business Day prior to the Closing Date, holders of Pinnacle Stock Options with
an exercise price of less than $24.00 shall have the right to receive any
applicable Contingent Payment for each share covered by such Pinnacle Stock
Option.
Atlantic Land Corporation is the holder of an option to purchase 46,920
shares of Pinnacle Common Stock at an exercise price of $24.78 per share (the
"Atlantic Land Warrant"). The Atlantic Land Warrant is only "in
83
<PAGE>
the money" to the extent that the cash portion of the Pinnacle Merger
Consideration (taking into account any Contingent Payment to be paid in cash
at the Effective Time) exceeds $24.78 per share. Pinnacle will use
commercially reasonable efforts to cause the option agreement governing the
Atlantic Land Warrant to be amended to provide for each of the following: (i)
in the event the Inglewood Sale shall have closed on or prior to the fifth
Business Day prior to the Closing Date, then the Atlantic Land Warrant shall
be converted into the right to receive an amount in cash equal to 46,920 (the
number of shares of Pinnacle Common Stock subject to the Atlantic Land Warrant
immediately prior to the Effective Time) times the excess (if any) of the cash
amount of the Pinnacle Merger Consideration (taking into account any
Contingent Payment to be paid in cash at the Effective Time) over the exercise
price per share ($24.78) of the Atlantic Land Warrant immediately prior to the
Effective Time, (ii) in the event the Inglewood Sale shall not have closed on
or prior to the fifth Business Day prior to the Closing Date, the holder of
the Atlantic Land Warrant shall receive only the right to receive any
applicable Contingent Payment with respect to each underlying share of
Pinnacle Common Stock, and (iii) as of the Effective Time, the Atlantic Land
Warrant shall be cancelled and shall cease to exist.
Calculation of Prorated Contingent Payment
If the Inglewood Sale closes prior to December 31, 2001 and the after tax
proceeds to Pinnacle from the Inglewood Sale are greater than $13,054,000 but
less than $40,750,000, then the amount of the Contingent Payment will be a
prorated fraction of $1.00. In essence, the prorated fraction is computed by
dividing the after tax proceeds over and above $13,054,000 by the number of
fully diluted shares (or, if the Contingent Payment is computed after the
Effective Time, then by the number of Contingent Payment rights, in either
case taking into account the aggregate spread with respect to Pinnacle Stock
Options having exercise prices below $24.00 per share), except that the first
$0.78 per fully diluted share or Contingent Payment right that would otherwise
be distributed to the holder of the Atlantic Land Warrant would be distributed
pro rata to the holders of all other fully diluted shares. To the extent that
the prorated Contingent Payment exceeds $0.78 per fully diluted share, then
all holders of fully diluted shares, including the holder of the Atlantic Land
Warrant, would share in such payment. The precise formula for computing the
amount of the Contingent Payment is set forth in Section 10.11 of the Merger
Agreement.
Surrender of Shares and Payment
Immediately prior to the Effective Time, Pinnacle Acq Corp will designate a
bank or trust company to act as paying agent (the "Paying Agent") and on or
prior to the Effective Time will deposit with the Paying Agent funds in an
amount needed for payment of the Pinnacle Merger Consideration upon surrender
of stock certificates by stockholders.
DO NOT SEND IN YOUR STOCK CERTIFICATES AT THIS TIME. YOU WILL RECEIVE A
LETTER OF TRANSMITTAL AND FURTHER INSTRUCTIONS AS SOON AS REASONABLY
PRACTICABLE AFTER THE EFFECTIVE TIME OF THE PINNACLE MERGER.
Each holder of shares of Pinnacle Common Stock that have been converted
into the right to receive the Pinnacle Merger Consideration will be entitled
to receive the Pinnacle Merger Consideration upon surrender of the holder's
certificate or certificates representing such shares to the Paying Agent,
together with a properly executed letter of transmittal. The stock certificate
or certificates surrendered will be canceled. After the Effective Time, stock
certificates for Pinnacle Common Stock will represent for all purposes only
the right to receive the Pinnacle Merger Consideration. Holders of Pinnacle
Common Stock will have no further ownership rights in Pinnacle Common Stock
and there will be no further registration of transfers of shares of Pinnacle
Common Stock. If certificates representing shares of Pinnacle Common Stock are
presented for transfer after the Effective Time, they will be canceled and
exchanged for the Pinnacle Merger Consideration pursuant to the terms of the
Merger Agreement. No interest will be paid or will accrue on the consideration
payable upon the surrender of any certificate. The Paying Agent will withhold
or deduct for taxes as required under applicable law.
Any amounts made available to the Paying Agent pursuant to the Merger
Agreement for payment of the Pinnacle Merger Consideration that remain
unclaimed by holders of shares of Pinnacle Common Stock twelve
84
<PAGE>
months after the Effective Time will, upon the Pinnacle Surviving
Corporation's request, be delivered to an entity to be chosen by the Pinnacle
Surviving Corporation. Any such holder who has not exchanged shares of
Pinnacle Common Stock prior to that time will be entitled to look only to such
entity for payment of the holder's claim for the Pinnacle Merger
Consideration. None of Pinnacle, Pinnacle Acq Corp, PHCR, the Pinnacle
Surviving Corporation or the Paying Agent will be liable to any Pinnacle
stockholder or any other person for any unclaimed amounts that are delivered
to a government official pursuant to any abandoned property, escheat or
similar law.
The Contingent Payment, if any, will be paid to holders who have properly
surrendered their certificates without the need to take any other action.
Contribution of Stock by the Management Stockholders
Under the Voting Agreement, the Management Stockholders will contribute the
Contributed Shares to PHCR immediately prior to the Effective Time in exchange
for shares of common stock of PHCR. In addition, the Management Stockholders
have agreed that certain Pinnacle Stock Options they hold, which would become
fully vested by virtue of the Pinnacle Merger, will be cancelled and replaced
with new fully vested stock options to acquire PHCR common stock. The value of
all Pinnacle Common Stock to be contributed by the Management Stockholders and
all Pinnacle Stock Options to be cancelled by the Management Stockholders and
replaced will equal $50,000,000. See "Voting and Contribution Agreement;
Memorandum of Understanding."
The Harveys Merger
PHCR, a wholly-owned subsidiary of Harveys Casino Resorts, has formed two
wholly-owned subsidiaries, Pinnacle Acq Corp and Harveys Acq Corp.
Simultaneously with the Pinnacle Merger, Harveys Acq Corp will merge with and
into Harveys Casino Resorts (the "Harveys Merger") with Harveys Casino Resorts
surviving as a wholly-owned subsidiary of PHCR.
Currently, Voteco owns approximately 97.5% of the voting common stock of
Harveys Casino Resorts, and it is currently expected that following the
Pinnacle Merger and the Harveys Merger would own approximately 82.7% of the
voting power of PHCR's common stock (assuming no additional investment in PH
Casino Resorts is made by affiliates of Colony Capital).
Representations and Warranties
In the Merger Agreement, each of Pinnacle, on the one hand, and PHCR and
Pinnacle Acq Corp, on the other hand, have made customary representations and
warranties to the other party or parties with respect to their organization,
operations and financial and other matters. The representations and warranties
in the Merger Agreement do not survive the closing of the Pinnacle Merger.
Conduct of Business Pending the Pinnacle Merger
In the Merger Agreement, Pinnacle has agreed that during the term of the
Agreement, Pinnacle and its subsidiaries will carry on their respective
businesses in the ordinary course of business, keep available the services of
current officers and employees and preserve their ongoing business
relationships consistent with past practice. Pinnacle has also agreed that it
shall not, and shall not permit any of its subsidiaries to, among other
things:
(a) issue any capital stock or other voting securities (other than the
issuance of Pinnacle Common Stock upon the exercise of Pinnacle Stock
Options), sell or pledge any shares of its capital stock, split or combine
any outstanding stock, redeem or purchase any outstanding stock other than
as required by gaming laws, or declare or pay any dividends or
distributions in respect of capital stock other than the declaration and
payment of dividends or distributions by any direct or indirect wholly-
owned subsidiary of Pinnacle to its parent;
(b) amend its Certificate of Incorporation or By-laws or comparable
organizational documents;
85
<PAGE>
(c) except in connection with the transactions contemplated by the
Merger Agreement, voluntarily take any action that would result in the
failure to maintain the listing of the Pinnacle Common Stock on the New
York Stock Exchange;
(d) develop or acquire any projects, assets or lines of business, other
than purchases of inventory, furnishings, or equipment in the ordinary
course of business, expenditures consistent with Pinnacle's current capital
budget, or certain specifically identified acquisitions or projects
contemplated in the Merger Agreement;
(e) sell, lease, mortgage or otherwise encumber or dispose of any of its
properties or assets other than in the ordinary course of business;
(f) incur any indebtedness, including through the issuance of debt
securities or guaranties, or forgive any existing indebtedness of any
person to Pinnacle or its subsidiaries, exceeding $20,000,000 in the
aggregate, other than working capital borrowings in the ordinary course of
business, projects contemplated in the Merger Agreement and specific
projects at existing facilities consistent with Pinnacle's current capital
budget; or make any loans, advances or investments other than advances to
employees, suppliers or customers in the ordinary course of business and
other than budgeted projects;
(g) settle any audit relating to material taxes, make any material tax
election or amend any material tax return;
(h) pay, settle or satisfy any material liabilities, other than in the
ordinary course of business, or in accordance with their terms of
liabilities reserved against the Base Balance Sheet, or the optional
redemption of the 13% First Mortgage Notes due 2003 issued by Casino Magic
of Louisiana, Corp. at prices and on terms consistent with the existing
indenture governing such debt, or, except in the ordinary course of
business waive the benefit of any confidentiality, standstill or similar
agreement;
(i) make any change in the compensation payable to any officers,
directors, employees, agents or consultants, other than general increases
for employees who are not officers, directors or affiliates in the ordinary
course or salary increases and bonuses payable to Pinnacle officers
pursuant to existing agreements or regular annual reviews in the ordinary
course or enter into or amend any employee benefit plan with, or make any
loans to, any of its officers, directors, employees, affiliates, agents or
consultants or make any change in its existing borrowing or lending
arrangements for or on behalf of any of such persons;
(j) pay or make any accrual or arrangement for any payment pursuant to
any employee benefit plan to any officers, directors, or employees other
than in the ordinary course of business; adopt or pay, grant, issue,
accelerate or accrue salary or other benefits pursuant to any such plan,
other than as required under applicable law or the current terms of any
such plan; or amend in any material respect any such plan in a manner
inconsistent with the foregoing;
(k) except as required by law, enter into any collective bargaining
agreement;
(l) except pursuant to agreements existing on the date of the Merger
Agreement, or specifically identified in the Merger Agreement, make any
payments (other than regular compensation payable to officers and employees
of Pinnacle in the ordinary course of business), or other distributions to,
or enter into any transaction, agreement or arrangement with, any officers,
directors, stockholders or affiliates of Pinnacle or any of its
subsidiaries, or the affiliates, associates or family members of any such
parties, or do any of the foregoing with respect to employees, agents or
consultants other than in the ordinary course of business;
(m) except in the ordinary course of business and except as otherwise
permitted by the Merger Agreement, modify or amend in a manner adverse to
Pinnacle or its subsidiaries the material economic terms of any material
contract or agreement or terminate any material contract or agreement or
waive, release or assign any material rights or claims;
(n) fail to make any scheduled principal or interest payment on
indebtedness evidenced by debt instruments to which Pinnacle or any of its
subsidiaries is a party; or
(o) authorize any of, or commit or agree to take any of, the foregoing
actions except as otherwise permitted by the Merger Agreement.
86
<PAGE>
Pinnacle will be permitted to expend amounts consistent with and in the
manner prescribed by the budget related to the development opportunities and
activities for the Belterra Casino Resort, including, without limitation, the
hiring of employees and the entering into of employment agreements with senior
management personnel, to the extent contained in the budget.
Pinnacle will be permitted to consummate the sales of Boomtown Biloxi,
Casino Magic Bay St. Louis and Turf Paradise substantially on the terms and
subject to the conditions contained in the respective definitive agreements in
effect as of the date of the Merger Agreement. Pinnacle shall also be
permitted to consummate the Inglewood Sale substantially in accordance with
the terms and conditions of the draft purchase agreement provided to Pinnacle
Acq Corp, provided that the net proceeds are not less than $13,054,000.
Pinnacle shall also be permitted to consummate certain other specified asset
dispositions on terms approved by Pinnacle's Board of Directors, in good
faith. Pinnacle shall not amend, waive, or modify any of the terms or
conditions contained in the agreements relating to the pending sales of
Boomtown Biloxi, Casino Magic Bay St. Louis and Turf Paradise (or in the case
of the Inglewood Sale, the draft purchase agreement) without the prior written
consent of Pinnacle Acq Corp, except where such amendments, waivers or
modifications would not reasonably be expected to significantly delay the
consummation of the transactions contemplated by the Merger Agreement, or
impair in any material respect the ability of Pinnacle to perform its
obligations under the Merger Agreement, and which are not materially adverse
to the original terms of such principal asset disposition.
Immediately prior to the Effective Time, Pinnacle will redeem the shares of
Pinnacle Common Stock owned by R.D. Hubbard on the date of the Merger
Agreement that are not being contributed to PHCR under the Voting Agreement.
See "Voting and Contribution Agreement; Memorandum of Understanding". The
purchase price to be paid for such shares will be a price equal to the
Pinnacle Merger Consideration (including the right to receive the applicable
Contingent Payment, if any). It is expected that 1,020,285 shares owned by Mr.
Hubbard will be repurchased in this manner. The purpose of this repurchase is
to mitigate a tax disadvantage of the transaction structure which affected Mr.
Hubbard but did not affect the other Management Stockholders or the public
stockholders and therefore to allow him to have the same tax treatment as
Pinnacle's stockholders generally.
On August [ ], 2000, the Company, PHCR and Pinnacle Acq Corp entered into a
letter agreement, a copy of which is attached as Annex A1 hereto, which
amended the Merger Agreement to provide that the Company shall use its
reasonable best efforts to hold the Annual Meeting as soon as practicable
after the filing of the definitive proxy statement with the SEC. In such
letter agreement, PHCR and Pinnacle Acq Corp waived their right under the
Merger Agreement to terminate the Merger Agreement if the Merger Agreement had
not been approved by the Company's stockholders by September [ ], 2000, the
date originally specified in the Merger Agreement. The parties agreed,
however, that the deadline for Pinnacle to exercise its right to terminate the
Merger Agreement upon entering into a definitive agreement with respect to a
Competitive Proposal would remain at such date. PHCR and Pinnacle Acq Corp
would have the right to terminate the Merger Agreement if it has not been
approved by the Pinnacle stockholders on or prior to [ ], 2000 or such
other later date as Pinnacle Acq Corp and PHCR shall determine in their sole
discretion.
Conditions to the Pinnacle Merger
The obligations of Pinnacle, Pinnacle Acq Corp and PHCR to consummate the
Pinnacle Merger are subject to the satisfaction or waiver of a number of
conditions.
Conditions to Each Parties Obligations
The respective obligations of each party are subject to the following
conditions:
(a) The holders of a majority of the outstanding shares of Pinnacle
Common Stock shall have approved and adopted the Merger Agreement;
(b) No statute, rule, regulation, executive order, decree, temporary
restraining order, injunction or any other legal restraint preventing the
consummation of the Pinnacle Merger or the transactions contemplated by the
Merger Agreement shall be in effect; and
87
<PAGE>
(c) Any waiting period (and any extension thereof) applicable to the
Pinnacle Merger under the HSR Act shall have expired or shall have been
terminated. See "The Pinnacle Merger--Regulatory Requirements."
Conditions to Obligations of Pinnacle Acq Corp
The obligations of Pinnacle Acq Corp are further subject to the following
conditions:
(a) All licenses, permits, registrations, consents, findings of
suitability and other approvals required to be obtained from any gaming
authorities or governmental entity in order to permit Pinnacle Acq Corp and
Pinnacle to consummate the Pinnacle Merger, to permit Harveys Acq Corp and
Harveys to complete the Harveys Merger, and to permit the Pinnacle
Surviving Corporation and the Harveys surviving corporation and each of
their respective subsidiaries to conduct their respective businesses in the
same manner as before the Effective Time shall have been obtained or made,
as applicable; provided that the condition shall not be deemed satisfied if
any Gaming Approval requires any consent, approval, license, other
authorization or application with respect to any limited partner of Colony
III or its affiliates;
(b) Pinnacle shall have performed, in all material respects, all
obligations and complied with all covenants required by the Merger
Agreement to be performed or complied with prior to the Effective Time and
all representations and warranties given by Pinnacle in the Merger
Agreement shall be true and accurate in all material respects except that
representations and warranties qualified as to materiality shall be true
and accurate in all respects;
(c) Since April 17, 2000, no events have occurred which reasonably would
be expected to have a material adverse effect (as defined below) on
Pinnacle or the transactions contemplated by the Merger Agreement;
(d) Pinnacle Acq Corp and Harveys Acq Corp shall have received the cash
proceeds of the Financing (see "--Financing of the Pinnacle Merger and the
Harveys Merger");
(e) To the extent required, Pinnacle Acq Corp shall have received valid
consents and related tenders under the outstanding principal amount of debt
of Pinnacle and Harveys pursuant to tender offers for such debt, and
Pinnacle Acq Corp also shall have received the requisite consents under the
instruments under which such debt was issued for any amendments of such
instruments necessary to effect the transactions contemplated by the Merger
Agreement, and any such amendments shall have become effective;
(f) The pending sales of Boomtown Biloxi, Casino Magic Bay St. Louis and
Turf Paradise shall have been consummated on substantially the terms and
conditions contained in the respective definitive agreements for such
transactions and for at least a minimum amount of net proceeds (the Turf
Paradise sale closed in June 2000 and the Boomtown Biloxi and Casino Magic
Bay St. Louis sales closed in August 2000);
(g) The transactions contemplated by the Voting Agreement shall have
been consummated immediately prior to the Effective Time;
(h) The aggregate number of Pinnacle Dissenting Shares shall not exceed
5% of the total number of shares of Pinnacle Common Stock outstanding
immediately prior to the Annual Meeting; and
(i) All material phases of the Belterra Casino Resort (other than the
golf course and performance theater) shall have been substantially
completed and open to the public by not later than September 15, 2000, and
the cost associated with the Belterra Casino Resort shall not be, in the
aggregate, more than $207,000,000, and the Belterra Casino Resort (other
than the golf course and performance theater) will have been completed in
substantial conformity with the written budgets, plans and policies
previously provided to Pinnacle Acq Corp.
As used in the Merger Agreement, the term "material adverse change" or
"material adverse effect" with respect to any person means any change or
effect that is individually or in the aggregate materially adverse to the
business, prospects, properties, assets or financial condition or results of
operations of such person and its subsidiaries, taken as a whole; provided,
however, that in no event shall the following, either individually or in
88
<PAGE>
the aggregate, in and of itself be deemed to constitute a "material adverse
change" or a "material adverse effect": (i) the effects of changes that are
applicable to the national financial, banking, currency or capital markets in
general, individually or in the aggregate, solely in and of itself, (ii) the
failure by Pinnacle to meet independent, third party analysts' projections of
earnings, revenue or other financial performance measures solely in and of
itself, provided, however, that the underlying facts, circumstances, operating
results or prospects which cause Pinnacle to fail to meet such projections may
be considered in determining whether a "material adverse change" or a
"material adverse effect" has occurred or (iii) the effects of certain events
or circumstances (including the actual occurrence of any proposed action)
specified in the Merger Agreement.
Conditions to Obligations of Pinnacle
The obligations of Pinnacle are further subject to the following
conditions:
(a) All licenses, permits, registrations, consents, findings of
suitability and other approvals required to be obtained from any gaming
authorities in order to permit Pinnacle Acq Corp to consummate the Pinnacle
Merger shall have been obtained or made, as applicable; and
(b) Pinnacle Acq Corp shall have performed, in all material respects,
all obligations and complied with all covenants required by the Merger
Agreement to be performed or complied with prior to the Effective Time and
all representations and warranties given by Pinnacle Acq Corp in the Merger
Agreement shall be true and accurate in all material respects except that
representations and warranties qualified as to materiality shall be true
and accurate in all respects.
As of the date of this Proxy Statement, except as described below and
elsewhere in this Proxy Statement with respect to the opening of the Belterra
Casino Resort, the Company has no knowledge of any material uncertainties as
to any of the conditions to the Pinnacle Merger; however, there can be no
assurances that all of the conditions to the Pinnacle Merger will be
satisfied.
As described above, one of the conditions to Pinnacle Acq Corp's obligation
to consummate the Pinnacle Merger is 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 Resort shall not
exceed $207,000,000. On July 31, 2000, the Company's Miss Belterra riverboat
casino was struck by a barge en route to its berthing site at the Belterra
Casino Resort. As a result of the accident, the scheduled August 21, 2000
opening of the Belterra Casino Resort will be delayed until after September
15, 2000. Therefore, the condition to Pinnacle Acq Corp's obligations under
the Merger Agreement related to the opening of the Belterra Casino Resort 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 regarding the Belterra Casino Resort.
On August 11, 2000, the Miss Belterra arrived at a dry dock 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 the
Belterra Casino Resort when the extent of the damage and the length of delay
have been ascertained. See "Parties to the Pinnacle Merger--The Company--
Belterra Casino Resort in Indiana."
Another condition to Pinnacle Acq Corp's obligation to consummate the
Pinnacle Merger is the receipt by Pinnacle Acq Corp of the cash proceeds of
the Financing. PHCR has received a commitment letter with respect to the
Senior Credit Facility and highly confident letters with respect to the Senior
Subordinated Debt. As of the date of this Proxy Statement, the commitment
letter and highly confident letters are in full force and effect and
89
<PAGE>
have not been terminated. However, PHCR's ability to obtain the Financing is
subject to prevailing market conditions and other conditions customary to the
respective types of financing. As of the date of this Proxy Statement, PHCR
has not entered into any definitive loan agreements with respect to any
financing and no assurance can be given that PHCR will enter into definitive
loan agreements with respect to any financing or that any financing will be
obtained. PHCR currently does not have any alternative financing plans or
arrangements in the event that financing is not obtained. See "The Pinnacle
Merger--Financing of the Pinnacle Merger and the Harveys Merger."
Also, in addition to the Financing, it is expected that the Company will
need to have significant cash on hand at the closing in order for the Pinnacle
Merger and the other transactions contemplated by the Merger Agreement to be
consummated. Such cash will be utilized in making payments required to be made
in the transactions. If such cash is not on hand, then PHCR's ability to
consummate the Financing and the Pinnacle Merger will likely be materially
impaired. See "The Pinnacle Merger--Financing of the Pinnacle Merger and the
Harveys Merger."
Pinnacle Acq Corp has agreed in the Merger Agreement to use commercially
reasonable efforts to obtain and effectuate the Financing; however, PHCR and
its affiliates are under no obligation to obtain any additional financing or
make any equity investment in PHCR or its subsidiaries. In addition, the
Voting Agreement provides that if affiliates of PHCR elect, in their sole
discretion, to make an equity investment in PHCR or its subsidiaries prior to
the closing of the Pinnacle Merger, such equity investment will be subject to
the reasonable approval of Mr. Hubbard. See "Voting and Contribution
Agreement; Memorandum of Understanding." Mr. Hubbard has given his approval
for an affiliate of Colony Capital to make a $50,000,000 equity investment.
See "Special Factors--Purpose and Reasons for the Pinnacle Merger."
Expenses of the Pinnacle Merger
The Merger Agreement provides that, whether or not the Pinnacle Merger is
consummated, Pinnacle, Pinnacle Acq Corp and PHCR will each pay their own
costs and expenses in connection with the Pinnacle Merger except that, if the
Merger Agreement is terminated under certain circumstances, Pinnacle must pay
Pinnacle Acq Corp a termination fee of $25,000,000. See "--Termination Fee"
and "--Termination."
Financing of the Pinnacle Merger and the Harveys Merger
It is a condition to the obligations of Pinnacle Acq Corp to consummate the
Pinnacle Merger that Pinnacle Acq Corp and Harveys Acq Corp shall have
received the proceeds of debt financing on terms no less favorable to the
borrower than:
. a total of $900,000,000 of senior debt at a blended rate not to exceed
9.5%, and
. a total of $550,000,000 of subordinated notes at a rate not to exceed
11.5%,
which, together with any indebtedness of the Company assumed in the Pinnacle
Merger, is in an amount sufficient to enable the payment, in full, of (1) the
Pinnacle Merger Consideration, (2) all payments in connection with the
cancellation of the Pinnacle Stock Options, (3) all other related payments in
connection with the Pinnacle Merger and the Harveys Merger and (4) related
fees and expenses. Debt financing satisfying such terms is referred to in this
Proxy Statement as the "Financing."
Pinnacle Acq Corp has agreed in the Merger Agreement to use its
commercially reasonable efforts to obtain and effectuate the Financing.
Pinnacle has agreed in the Merger Agreement to use its commercially reasonable
efforts to cooperate with and assist Pinnacle Acq Corp in obtaining and
effectuating the Financing. However, "commercially reasonable efforts" shall
not require Pinnacle Acq Corp to expend money in excess of specified fees and
expenses, seek or provide any equity or supplemental investment in connection
with the Pinnacle Merger or related transactions, or amend in any manner
adverse to Pinnacle Acq Corp any of the terms of the Financing. See "The
Pinnacle Merger--Financing of the Pinnacle Merger and the Harveys Merger."
90
<PAGE>
Neither Pinnacle Acq Corp nor PHCR shall, and each shall cause Harveys not
to, voluntarily enter into any agreement, commitment or understanding with
respect to or concerning any financing, acquisition, disposition or corporate
transaction not contemplated by the Merger Agreement or the Voting Agreement
which would, as of the date of such transaction, reasonably be expected to
materially impair the ability of PHCR to obtain the Financing.
Indemnification and Insurance
The Merger Agreement provides that the existing indemnification obligations
set forth in the charter documents of Pinnacle and its subsidiaries shall be
maintained and not amended, repealed or modified for a period of six years
after the Effective Time in a manner that would adversely affect the rights
thereunder of individuals who at or prior to the Effective Time of the
Pinnacle Merger were directors, officers, employees or agents of the Company.
In addition, the Merger Agreement provides that for six years after the
Effective Time, Pinnacle will provide directors' and officers' liability
insurance to cover persons covered by Pinnacle's and its subsidiaries'
directors' and officers' liability insurance policy in effect on the date of
the Merger Agreement (which insurance shall be of at least the same coverage,
with comparable carriers, and shall contain terms and conditions no less
favorable to such persons) with respect to those matters covered by such
policy.
No Solicitation
The Merger Agreement provides that Pinnacle will not, nor will it permit
any of its subsidiaries to, nor will it authorize or permit any agent,
officer, director or employee of, or any investment banker, attorney or other
advisor or representative of, Pinnacle or any of its subsidiaries to, directly
or indirectly:
. solicit or initiate, or encourage any inquiries regarding or the
submission of, any Takeover Proposal (as defined below) (including,
without limitation, any proposal or offer to Pinnacle's stockholders) or
. participate in any discussions or negotiations regarding, or furnish to
any person or entity any non-public information with respect to, or take
any other action to facilitate the making of any proposal that would
constitute a Takeover Proposal.
However, Pinnacle may, in response to an unsolicited, written Competitive
Proposal (as defined below) (or Takeover Proposal which, based on the advice
of its financial advisors, the Board of Directors of Pinnacle determines in
good faith is reasonably likely to result in a Competitive Proposal):
. furnish information with respect to Pinnacle to the person or entity who
made such unsolicited proposal, and
. participate in negotiations with such person or entity regarding such
Competitive Proposal (or Takeover Proposal which, based on the advice of
its financial advisors, the Board of Directors of Pinnacle determines in
good faith is reasonably likely to result in a Competitive Proposal) if:
. in the opinion of the Board of Directors of Pinnacle, after
consultation with outside legal counsel, such failure to act would
be inconsistent with its fiduciary duties to Pinnacle's stockholders
under applicable law,
. Pinnacle advises Pinnacle Acq Corp promptly of any request for non-
public information or of any Takeover Proposal, or any proposal with
respect to any Takeover Proposal, the material terms and conditions
of such request or Takeover Proposal, and the identity of the Person
making any such Takeover Proposal or inquiry,
. Pinnacle uses reasonable efforts to keep Pinnacle Acq Corp informed
of the status and details (including amendments or proposed
amendments) of any such request, Takeover Proposal or inquiry, and
. Pinnacle takes such action pursuant to an executed confidentiality
agreement with customary terms and conditions and, in any case,
which includes customary standstill provisions which prohibit such
party from seeking to directly or indirectly accomplish a Takeover
Proposal except
91
<PAGE>
with the consent of the Board of Directors of Pinnacle, and which
expressly permits Pinnacle to fulfill its obligations under the two
immediately preceding bullet points listed above.
The Merger Agreement also provides that neither the Board of Directors of
Pinnacle nor any committee thereof will:
. withdraw or modify, or publicly propose to withdraw or modify in a
manner adverse to Pinnacle Acq Corp, the approval or recommendation by
the Pinnacle Board of Directors or any such committee of the Merger
Agreement or the Pinnacle Merger,
. approve or recommend, or publicly propose to approve or recommend, any
Takeover Proposal, or
. cause Pinnacle to enter into any agreement with respect to any Takeover
Proposal.
Notwithstanding the foregoing, the Pinnacle Board of Directors or the
Special Committee, may withdraw or modify its approval or recommendation of
the Merger Agreement or the Pinnacle Merger, or approve or recommend a
Competitive Proposal, prior to stockholder approval of the Merger Agreement or
the Pinnacle Merger (including as the same may be modified hereafter),
. to the extent required by the fiduciary duties to Pinnacle's
stockholders under applicable law,
. after consultation with outside legal counsel,
. subject to the terms of this and the following paragraph, and
. in each case at any time after five days following receipt by Pinnacle
Acq Corp of notice, which notice specifies the material terms and
conditions of such Competitive Proposal and identifies the person making
such Competitive Proposal. Pinnacle Acq Corp will have the opportunity,
until the end of the fifth day after it receives such a notice, to make
an offer to the Board of Directors of Pinnacle.
Neither the Board of Directors of Pinnacle nor any committee of the Board
of Directors may withdraw, or modify or publicly propose to withdraw, or
modify in a manner adverse to Pinnacle Acq Corp, its approval or
recommendation of the Merger Agreement or the Pinnacle Merger or approve or
recommend a Competitive Proposal unless and until it shall have determined, in
its good faith judgment that:
. the value of the consideration (based on the opinion, with only
customary qualifications, of an independent financial advisor of good
national reputation in such matters) of such proposal exceeds the value
of each of the Pinnacle Merger Consideration and any alternative
proposal presented by Pinnacle Acq Corp or any of its affiliates and
. such proposal is more favorable to Pinnacle's stockholders than the
Pinnacle Merger and any alternative proposal presented by Pinnacle Acq
Corp or any of its affiliates.
In addition, if Pinnacle enters into an agreement with respect to any
Competitive Proposal, it will, concurrently with entering into such agreement,
pay, or cause to be paid, to Pinnacle Acq Corp the $25,000,000 termination
fee. See "--Termination Fee."
Nothing in the Merger Agreement prohibits Pinnacle from taking and
disclosing to Pinnacle's stockholders a position with respect to a tender
offer by a third party if, in the good faith judgment of the Board of
Directors or the Special Committee, following consultation with outside
counsel, failure to so disclose would be a violation of its obligations under
applicable law. However, neither Pinnacle nor its Board of Directors, the
Special Committee, nor any other committee thereof will withdraw or modify, or
propose publicly to withdraw or modify, its position with respect to the
Pinnacle Merger or the Merger Agreement, except in accordance with the
preceding paragraphs.
As used in this Proxy Statement:
"Competitive Proposal" means, other than the transactions contemplated by
the Merger Agreement:
. any proposal or offer from any person relating to any direct or indirect
acquisition or purchase of assets of Pinnacle or any of its Material
Subsidiaries (defined below) comprising 50% or more of Pinnacle's
92
<PAGE>
consolidated assets or over 50% of any class of equity securities of
Pinnacle or any of its Material Subsidiaries, or
. any tender offer or exchange offer that, if consummated, would result in
any person or entity beneficially owning 50% of any class of equity
securities of Pinnacle or any of its Material Subsidiaries, or
. any merger, consolidation, business combination, liquidation,
dissolution or similar transaction involving Pinnacle with a third
party,
in each case, with respect to which the Board of Directors of Pinnacle
determines in its good faith judgment that
. the value of the consideration (based on the opinion, with only
customary qualifications, of an independent financial advisor of good
national reputation in such matters) of such proposal exceeds the value
of each of the Pinnacle Merger Consideration and any alternative
proposal presented by Pinnacle Acq Corp or any of its affiliates and
. such proposal is more favorable to Pinnacle's stockholders than the
Pinnacle Merger and any alternative proposal presented by Pinnacle Acq
Corp or any of its affiliates.
Notwithstanding the foregoing, the consummation of (a) the sales of
Boomtown Biloxi, Casino Magic Bay St. Louis and Turf Paradise substantially on
the terms and subject to the conditions contained in the respective definitive
agreements in effect as of the date of the Merger Agreement (or as amended or
modified in accordance with the Merger Agreement), and (b) the Inglewood Sale
and certain other asset dispositions identified in the Merger Agreement, in
each case on terms approved by Pinnacle's Board of Directors, in good faith,
shall not be deemed to constitute a Competitive Proposal.
"Takeover Proposal" means (other than the transactions contemplated by the
Merger Agreement):
. any proposal or offer from any person relating to any direct or indirect
acquisition or purchase of assets (including capital stock of any
subsidiaries) of Pinnacle or any of its subsidiaries comprising 10% or
more of Pinnacle's consolidated assets or of over 10% of any class of
equity securities of Pinnacle or any of its Material Subsidiaries, or
. any tender offer or exchange offer that if consummated would result in
any person beneficially owning 10% or more of any class of equity
securities of Pinnacle or any of its Material Subsidiaries or which
would require approval under any gaming law, or
. any merger, consolidation, business combination, recapitalization,
liquidation, dissolution or similar transaction involving Pinnacle (or
any of its Material Subsidiaries) and a third party.
Notwithstanding the foregoing, consummation of (a) the sales of Boomtown
Biloxi, Casino Magic Bay St. Louis and Turf Paradise substantially on the
terms and subject to the conditions contained in the respective definitive
agreements in effect as of the date of the Merger Agreement (or as amended or
modified in accordance with the Merger Agreement), and (b) the Inglewood Sale
and certain other asset dispositions specifically identified in the Merger
Agreement, in each case on terms approved by Pinnacle's Board of Directors, in
good faith, and (c) any transaction which would otherwise constitute a
Takeover Proposal but which is consented to by PHCR in writing prior to the
initiation of any substantive negotiations or discussions with respect
thereto, shall not be deemed to constitute a Takeover Proposal.
"Material Subsidiary" shall mean each of: Boomtown Hotel & Casino, Inc., a
Nevada corporation; Louisiana--I Gaming, a Louisiana Partnership in Commendam;
Biloxi Casino Corp., a Mississippi corporation; Casino Magic of Louisiana,
Corp., a Louisiana corporation; and Belterra Resort (Indiana), LLC, an Indiana
limited liability company.
93
<PAGE>
Termination
The Merger Agreement may be terminated at any time prior to the Effective
Time by mutual written consent of Pinnacle, PHCR and Pinnacle Acq Corp.
Termination Rights of All Parties. The Merger Agreement may be terminated
by either Pinnacle or Pinnacle Acq Corp if any of the following occurs:
(a) Injunction. Any governmental entity has issued an order or taken any
other action permanently enjoining or prohibiting payment for or acceptance
for payment of the Pinnacle Common Stock and such order has become final
and nonappealable. The party seeking to terminate the Merger Agreement must
have complied with its reasonable efforts covenant in the Merger Agreement.
With respect to a party to the Merger Agreement, the reasonable efforts
covenant requires that party to, among other things, use all reasonable
efforts to consummate and make effective the Pinnacle Merger, the Financing
and the other transactions contemplated by the Merger Agreement, subject to
specified exceptions.
(b) Outside Closing Date. The Effective Time has not occurred by January
15, 2001. However, Pinnacle Acq Corp may, at its option, extend that date
for up to two months if the parties can obtain reasonable assurances that a
hearing with respect to each outstanding required approval from each of the
gaming authorities is or can reasonably be expected to be scheduled prior
to March 15, 2001. Furthermore, Pinnacle Acq Corp may, at its option,
extend the January 15, 2001 date for up to six months if Pinnacle Acq Corp
can demonstrate that there is a reasonable likelihood that it will receive
the gaming approvals by such date, and Pinnacle Acq Corp delivers to
Pinnacle one or more commitment letters and "highly confident" letters
reflecting amounts that are at least sufficient to cover the Financing with
expiration dates at least coextensive with the date of such extension.
(c) No Gaming Approval. Either Pinnacle or Pinnacle Acq Corp receives a
final and nonappealable written statement from a gaming authority stating
that such gaming authority has disapproved or will not give approval to the
Merger Agreement, which disapproval would cause Pinnacle Acq Corp to be
unable to consummate the Pinnacle Merger, or if Pinnacle Acq Corp has
finally withdrawn (with no intent to resubmit) its gaming application with
such gaming authority.
(d) No Stockholder Approval. At a duly held stockholders meeting of
Pinnacle or any adjournment thereof at which the Merger Agreement is voted
upon, the requisite vote of the stockholders in favor of the adoption of
the Merger Agreement is not obtained.
(e) Termination of Financing Letters. The Financing Letters have been
withdrawn or terminated by the issuing lenders, and Pinnacle Acq Corp is
unable, despite the exercise of its reasonable efforts, to obtain one or
more replacement commitment letters and/or "highly confident" letters
reflecting amounts that are at least sufficient to cover the Financing,
within 20 Business Days following such withdrawal or termination.
Additional Termination Rights of Pinnacle Acq Corp. The Merger Agreement
also may be terminated by Pinnacle Acq Corp if any of the following occurs:
(a) Outside Meeting Date. Pinnacle's stockholders have not approved the
Merger Agreement on or prior to [ ], 2000, or
(b) Withdrawal of Recommendation by Pinnacle Board. The Board of
Directors of Pinnacle amends, modifies or withdraws its recommendation or
publicly proposes to amend, modify in a manner adverse to Pinnacle Acq
Corp, or withdraw its recommendation of the Pinnacle Merger or the Merger
Agreement, or if, following a Takeover Proposal, Pinnacle fails to comply
with the "No Solicitation" provisions outlined above including any required
notice, or fails to comply with its reasonable efforts covenant in the
Merger Agreement.
Additional Termination Right of Pinnacle Upon Execution of Definitive
Agreement for Competitive Proposal. The Merger Agreement may be terminated by
Pinnacle if:
. on or prior to September [ ], 2000, to the extent required by the
fiduciary duties to the Company's stockholders, after consultation
with outside legal counsel, the Pinnacle Board of Directors or the
Special Committee approves a Competitive Proposal,
94
<PAGE>
. prior to such approval, the Company's Board of Directors complied
with the provisions of the Merger Agreement requiring the Company to
give notice to Pinnacle Acq Corp and to give Pinnacle Acq Corp the
opportunity to make an alternative proposal,
. concurrently with the termination of the Merger Agreement, the
Company enters into a definitive agreement with respect to the
Competitive Proposal, and
. concurrently with the termination of the Merger Agreement, the
Company pays to Pinnacle Acq Corp the $25,000,000 termination fee.
See "--No Solicitation" and "--Termination Fee."
Termination Fee
Pinnacle has agreed to pay to Pinnacle Acq Corp $25,000,000 (the
"Termination Fee") upon demand if any of the following occurs:
. if Pinnacle Acq Corp or Pinnacle, as applicable, terminates the Merger
Agreement because of "No Stockholder Approval," as described above, and
prior to such termination a Significant Takeover Proposal (which definition
is identical to that of a Takeover Proposal, with the exception that the
10% thresholds have been raised to 20%) shall have been made,
. if Pinnacle Acq Corp terminates the Merger Agreement because of "Withdrawal
of Recommendation by Pinnacle Board", as described above
. as described under "Additional Termination Right of Pinnacle Upon Execution
of Definitive Agreement for Competitive Proposal" above, or
. if prior to any other termination of the Merger Agreement because the
"Outside Meeting Date" or "Outside Closing Date" described above shall have
occurred (which termination does not follow from the failure of Pinnacle
Acq Corp to cause the conditions to Pinnacle's obligation to close
described under "--Conditions to the Pinnacle Merger--Conditions to
Obligations of Pinnacle" above to not be satisfied), as described above,
(x) a Competitive Proposal (disregarding the determination of the Board) or
(y) a Significant Takeover Proposal shall have been made on or after March
2, 2000, and within 12 months of such termination, a transaction
constituting a Significant Takeover Proposal is consummated or Pinnacle
enters into an agreement (which is thereafter consummated) with respect to,
or the Board of Directors of Pinnacle or a committee thereof approves or
recommends, or publicly proposes to approve or recommend, a Significant
Takeover Proposal (which is thereafter consummated), subject to certain
exceptions.
Amendment
The Merger Agreement may be amended at any time by mutual agreement of
Pinnacle, PHCR and Pinnacle Acq Corp. However, after approval of the Merger
Agreement by the Pinnacle stockholders, no amendment which would require
further approval of such stockholders may be made without the further approval
of such stockholders.
Limited Joint and Several Liability of Harveys Casino Resorts
Harveys Casino Resorts has agreed to be jointly and severally liable with
PHCR and Pinnacle Acq Corp for any claims brought against PHCR or Pinnacle Acq
Corp under the Merger Agreement as to which PHCR and Pinnacle Acq Corp are
liable. However, in no event shall the aggregate liability of Harveys Casino
Resorts relating to any such claim or arising under such agreement, or
otherwise pertaining to the Merger Agreement, exceed $15,000,000. In addition,
Harveys Casino Resorts will have the benefit of and the right to assert any
and all defenses to such claims and any and all setoffs that are available to
PHCR or Pinnacle Acq Corp or both as primary obligors under the Merger
Agreement.
95
<PAGE>
VOTING AND CONTRIBUTION AGREEMENT; MEMORANDUM OF UNDERSTANDING
All material terms and conditions of the Voting and Contribution Agreement
and the Memorandum of Understanding are summarized below and are qualified in
their entirety by reference to the entire text of the respective documents,
which are incorporated herein by reference to Exhibits (d)(2) and (d)(3),
respectively, of the Schedule 13E-3 filed with respect to the Pinnacle Merger.
Stockholders are urged to read the Voting and Contribution Agreement and
Memorandum of Understanding carefully. Capitalized terms not otherwise defined
in the following description have the meanings set forth in the Merger
Agreement.
Voting and Contribution Agreement
Concurrently with the execution of the Merger Agreement and as a condition
for PHCR and Pinnacle Acq Corp to enter into the Merger Agreement, the
Management Stockholders entered into a Voting and Contribution Agreement with
PHCR (the "Voting Agreement"). In the Voting Agreement, the Management
Stockholders, among other things,
. have agreed to vote their shares of Pinnacle Common Stock in favor of
the Pinnacle Merger, the Merger Agreement and the transactions
contemplated thereby, and have granted to PHCR an irrevocable proxy
coupled with an interest to vote their shares in favor of the Pinnacle
Merger, the Merger Agreement and the transactions contemplated thereby;
. have agreed to vote their shares of Pinnacle Common Stock against any
Takeover Proposal, and any amendment of Pinnacle's certificate of
incorporation or bylaws or other proposal or transaction involving
Pinnacle or any of its subsidiaries that would in any manner impede,
interfere with, materially delay, frustrate, prevent or nullify or
result in a breach of any covenant, representation or warranty or any
other obligation or agreement of Pinnacle or any Management Stockholder
under or with respect to, the Pinnacle Merger, the Merger Agreement or
any of the other transactions contemplated by the Merger Agreement or
the Voting Agreement;
. have agreed not to solicit any Takeover Proposal or participate in any
discussions or negotiations regarding a Takeover Proposal or provide
nonpublic information with respect to a Takeover Proposal, provided that
a Management Stockholder may furnish nonpublic information with respect
to Pinnacle to, or participate in negotiations with respect to a
Takeover Proposal with the person making the Takeover Proposal, if such
Management Stockholder is instructed to do so in writing by the Board of
Directors of Pinnacle; and
. have agreed not to transfer their shares of Pinnacle Common Stock or
Pinnacle Stock Options.
The no-solicitation provisions in the Voting Agreement also apply to
affiliates, agents, partners, employees of, and any investment banker,
attorney or other advisor or representative of a Management Stockholder.
All of the 3,000,285 shares of Pinnacle Common Stock currently owned by the
Management Stockholders are subject to the Voting Agreement. Such shares
represent in the aggregate approximately 11.4% of the outstanding shares of
Pinnacle Common Stock as of the date hereof. In addition, any additional
shares of Pinnacle Common Stock acquired by the Management Stockholders,
including pursuant to vested and unvested stock options to purchase an
additional 1,312,433 shares of Pinnacle Common Stock, will be subject to the
Voting Agreement.
In addition, each of the Management Stockholders agreed in the Voting
Agreement
. to contribute, immediately prior to the effective time of the Pinnacle
Merger, a certain number of such Management Stockholder's shares of
Pinnacle Common Stock to PHCR in exchange for shares of PHCR's common
stock and/or
. to cancel a certain number of such Management Stockholder's Pinnacle
Stock Options (which shall become fully vested in connection with the
Merger Agreement) and to receive new fully vested options
96
<PAGE>
to purchase shares of PHCR's common stock with the exercise price set at
an amount so that the aggregate value of the new options will equal the
aggregate option spread of such Management Stockholder's Pinnacle Stock
Options so cancelled.
Based on the merger consideration, the value of all shares of Pinnacle
Common Stock to be contributed and all Pinnacle Stock Options to be cancelled
and with respect to which PHCR options will be received, and the value of all
shares of PHCR common stock to be issued in exchange for the stock contributed
and PHCR options to be received by the Management Stockholders with respect to
such Pinnacle Stock Options, is $50,000,000 in the aggregate.
While the Management Stockholders may decide prior to the Closing to change
the mix of stock contributed and stock options cancelled, the aggregate value
of such items will remain at $50,000,000. It is currently contemplated that R.
D. Hubbard will contribute 1,349,545 shares of Pinnacle Common Stock to PHCR,
Paul Alanis will contribute 300,000 shares, Loren Ostrow will contribute
50,000 shares and Bruce Hinckley will contribute 5,000 shares in exchange for
shares of PHCR common stock in the aggregate. If the Inglewood Sale is not
closed on or prior to the fifth Business Day prior to the Closing Date, then
the Management Stockholders also will have the right to receive any applicable
Contingent Payment for each share of Pinnacle Common Stock contributed to
PHCR. In addition, if an additional $50,000,000 equity investment is made by
an affiliate of Colony Capital (see "Special Factors--Purpose and Reasons for
the Pinnacle Merger"), each of Messrs. Hubbard and Finnigan will have the
right to contribute to PHCR an additional amount up to his pro rata share of
such investment in order to prevent the dilutive effect thereof. None of the
Management Stockholders has yet decided whether he will make such an
additional contribution.
The Management Stockholders currently contemplate cancelling Pinnacle Stock
Options covering the following number of shares of Pinnacle Common Stock with
respect to which PHCR options will be received: Mr. Hubbard, 0 shares; Mr.
Finnigan, 86,867 shares; Mr. Alanis, 273,756 shares; Mr. Ostrow, 90,176
shares; Mr. Allen, 200,000 shares; Mr. Kortman, 66,131 shares; Mr. Hinckley,
25,000 shares; Mr. Delaney, 10,000 shares; Mr. Plant, 18,300 shares; and Mr.
Callaway, 19,992 shares. It is anticipated that most of the Management
Stockholders will exercise Pinnacle Stock Options prior to the Closing on a
cashless basis and contribute the shares of Pinnacle Common Stock so acquired
to PHCR. It is contemplated that the Pinnacle Board of Directors will take
action to amend the stock option agreements covering Pinnacle Stock Options
held by the Management Stockholders to permit such a cashless exercise. In
connection with such exercise, PHCR has agreed to loan certain of such
Management Stockholders money, subject to the limitations and on the terms
described below, to pay any taxes due in connection with such exercise. See
"--Memorandum of Understanding."
As a result of these contributions, immediately following the Effective
Time, it is currently expected that the Management Stockholders will own, in
the aggregate, approximately 15.6% of the voting power of PHCR common stock
(assuming no additional investment in PHCR by affiliates of Colony Capital).
The contribution of the shares of Pinnacle Common Stock to PHCR and the
cancellation of Pinnacle Stock Options, which will be replaced by PHCR
options, by the Management Stockholders are intended to be effected on a tax-
free basis for the Management Stockholders since such transactions would take
place simultaneously with the Pinnacle Merger and the Harveys Merger. In
connection with such contribution and cancellation and replacement, PHCR and
each of the Management Stockholders will enter into the Stockholders
Agreement. See "Stockholders Agreement."
The Voting Agreement contemplates that, immediately prior to the Effective
Time, Mr. Hubbard shall sell to Pinnacle the shares of Pinnacle Common Stock
owned by Mr. Hubbard which are not being contributed to PHCR. This repurchase
by Pinnacle prior to the Pinnacle Merger is intended to mitigate a tax
disadvantage of the transaction structure which affects Mr. Hubbard but does
not affect the other Management Stockholders or the public stockholders. The
purchase price to be paid for these shares would be equal to the Pinnacle
Merger Consideration (including any right to receive the applicable Contingent
Payment, if any).
The Voting Agreement terminates (i) if the closing of the Pinnacle Merger
has occurred, (ii) if the Pinnacle Merger has been consummated in accordance
with the terms of the Merger Agreement or (iii) if the Merger Agreement has
been terminated in accordance with the termination provision thereof.
97
<PAGE>
Memorandum of Understanding
Concurrently with the execution of the Merger Agreement and the Voting
Agreement, the Management Stockholders also entered into a binding Memorandum
of Understanding with PHCR (the "MOU"). In addition to providing for the roll-
over of Pinnacle Common Stock and Pinnacle Stock Options described above, the
MOU provides that:
. a Management Stockholder may, immediately following the Pinnacle Merger,
perform a cashless exercise of his options to purchase PHCR stock or,
immediately prior to the Closing, his Pinnacle Stock Options,
. PHCR will make available to such Management Stockholders (other than
Messrs. Hubbard, Finnigan and Alanis) interest bearing loans, in an
aggregate amount not to exceed $2,500,000 and with a four year maturity,
to pay taxes incurred in connection with the cashless exercise of the
options,
. each of the Management Stockholders (other than Messrs. Finnigan and
Hubbard) who is also an employee of Pinnacle will have the right,
individually, to require PCHR to repurchase his shares of PHCR stock and
PHCR will have the right to acquire such shares, upon the termination of
such employee's employment with PHCR, and
. at the closing of the Pinnacle Merger the Management Stockholders would
receive restricted stock grants and be eligible to receive unvested
stock options to purchase PHCR stock.
At the Closing, PHCR will grant 604,464 shares of restricted PHCR common
stock to the Management Stockholders in the following amounts (which may vary
to a limited degree based on the amount of the Contingent Payment actually
made, if any):
<TABLE>
<CAPTION>
Number
of
Name shares
---- -------
<S> <C>
R. D. Hubbard........................................................ 391,561
G. Michael Finnigan.................................................. 12,089
Paul Alanis.......................................................... 123,311
Loren Ostrow......................................................... 27,204
J. Michael Allen..................................................... 28,674
Cliff Kortman........................................................ 9,941
Bruce Hinckley....................................................... 5,776
Richard Delaney...................................................... 1,118
Chris Plant.......................................................... 2,372
Robert Callaway...................................................... 2,418
</TABLE>
Such stock shall be fully vested when granted, but shall be subject to special
forfeiture restrictions and deferral arrangements.
The MOU provides that an additional 530,223 shares of PHCR common stock
will be reserved for issuance of stock options pursuant to a stock option plan
for the benefit of members of senior management of Pinnacle. The division of
such new options among such members of senior management shall reasonably be
determined by Mr. Alanis, consistent with industry standards and subject to
the approval of PHCR. Except in the case of Messrs. Hubbard and Finnigan,
shares issued or issuable under the terms outlined in this paragraph and in
the preceding paragraph are subject to a right of repurchase by PHCR, pursuant
to the Stockholders Agreement. Any new options granted to each of Messrs.
Alanis, Allen, Ostrow and Kortman shall vest 20% on each of the first five
anniversaries of the Closing subject to certain exceptions.
The MOU provides that any PHCR stock or options issued under the MOU shall
be subject to the Stockholders Agreement.
98
<PAGE>
Each of the Management Stockholders will also enter into a noncompetition
agreement with Pinnacle under which such Management Stockholder will agree not
to:
. engage in owning, operating and developing casinos, hotels or race track
interests associated or materially competitive with casinos, hotels or
race track interests owned directly or indirectly by PHCR (or where PHCR
has announced its present intention to develop such properties or
interests),
. solicit any employee, agent or consultant of Pinnacle to terminate such
person's relationship with Pinnacle or
. solicit any counterparty to any contract with the Company to terminate
such counterparty's contract or other relationship with Pinnacle.
With respect to Mr. Hubbard, these restrictions would only be effective
during the period he serves on the Board of PHCR and following the time he
ceases to be a director of PHCR, for a period of one year in the case of the
noncompetition provision and two years in the case of the nonsolicitation
provisions. In addition, such provisions shall not restrict Mr. Hubbard's
ownership, operation and development of casinos, hotels or race track
interests in New Mexico so long as PHCR or any of its affiliates does not own
any casinos, hotels or race track interests in New Mexico or in a market
outside of New Mexico that competes directly with the markets inside New
Mexico. If PHCR or its affiliates acquires a material interest in or otherwise
develops any casinos, hotels or race track interests in New Mexico or in a
market outside New Mexico that competes directly with the markets inside New
Mexico, Mr. Hubbard shall be permitted to continue to operate and develop
casinos, hotels or race track interests, located in New Mexico and owned or
operated in whole or in part by him on the date of such acquisition or
development or as to which Mr. Hubbard has announced a present intention to
acquire or develop. Mr. Finnigan shall only be subject to the noncompetition
provision during the period that he serves as an employee of Pinnacle. For
Management Stockholders other than Messrs. Hubbard and Finnigan, these
restrictions are effective during the period of employment and following the
termination of employment for a period of up to one year in the case of the
noncompetition provision and for two years in the case of the nonsolicitation
provisions.
Under the MOU, all existing employment agreements of the Management
Stockholders shall be assumed without modification except to the extent
necessary to reflect the subject transaction and the structure of Pinnacle and
its affiliates.
The MOU also covers certain corporate governance matters. Subject to
licensing and regulatory restrictions, and in accordance with the MOU and
agreements among the parties thereto, upon consummation of the Pinnacle
Merger, it is currently expected that the Board of Directors of PHCR will
include R. D. Hubbard, Chairman of the PHCR Board, as well as Thomas J.
Barrack, Jr. The PHCR Board of Directors also may include other nominees
determined by Colony III or otherwise in accordance with agreements among the
parties to the MOU. In accordance with the MOU and agreements among the
parties thereto, it is currently expected that Mr. Hubbard will be a member
of, and Mr. Barrack shall be designated as the Chairman of, the Executive
Committee of the PHCR Board. The PHCR Board will delegate to the Executive
Committee substantially all of its powers to govern the business and affairs
of Pinnacle. Affiliates of Colony III designated for the Board of Directors
(other than PHCR and its subsidiaries) shall also constitute a majority of the
compensation committee of the board, if any.
STOCKHOLDERS AGREEMENT
PHCR, Voteco, Colony III and the Management Stockholders have agreed to
enter into a Stockholders Agreement governing their relationship with respect
to one other following the closing of the transaction. For purposes of this
discussion, Voteco, Colony III and the Management Stockholders collectively
are referred to as the "PHCR Stockholders." All of the shares of PHCR common
stock to be issued to the PHCR Stockholders will be subject to the
Stockholders Agreement.
99
<PAGE>
The proposed Stockholders Agreement will have terms substantially similar
to those summarized below. This section summarizes all material terms and
conditions of the proposed Stockholders Agreement and is qualified in its
entirety by reference to the definitive Stockholders Agreement to be entered
into on the closing date of the transaction. To the extent that any of the
provisions of the Stockholders Agreement are inconsistent with the terms of
the MOU entered into among PHCR and the Management Stockholders, the
provisions of the MOU will govern and control. See "Voting and Contribution
Agreement; Memorandum of Understanding."
Restrictions on Transfer of PHCR Common Stock
The Stockholders Agreement will prohibit any PHCR Stockholder from directly
or indirectly selling, assigning, hypothecating or otherwise transferring any
shares of PHCR common stock owned by it, except following the closing of a
registered public offering of PHCR's common stock (an "IPO"), and except for
transfers expressly permitted by the Stockholders Agreement, without the
express written consent of Voteco, which consent may be granted or denied in
Voteco's sole and absolute discretion. Neither PHCR nor any of the PHCR
Stockholders has any current plans with respect to a registered public
offering of either PHCR's common stock or Pinnacle Common Stock. However, an
IPO is one of the many alternatives which the Board of Directors and
management of PHCR and the Company will continue to evaluate following the
Pinnacle Merger.
Transfers expressly permitted by the Stockholders Agreement include:
. the transfer of PHCR common stock by any Management Stockholder to PHCR,
Voteco, Colony III or their respective affiliates, provided that the
transferee has all necessary gaming approvals and agrees in writing to
be bound by the provisions of the Stockholders Agreement,
. the transfer by any PHCR Stockholder to its respective controlling
stockholder, 80% or more owned subsidiary or, in the case of an
individual stockholder, spouse or immediate family member, provided that
the transferee has all necessary gaming approvals, and
. any sale or other disposition by a Management Stockholder pursuant to
his or her tag-along rights described below. See "--Tag-along Rights of
Management Stockholders."
In addition, the Stockholders Agreement will prohibit a Management
Stockholder from transferring any of his or her shares of PHCR common stock
if, after giving effect to and as a result of that transfer, that Management
Stockholder would hold a different proportion of voting and non-voting PHCR
common stock.
Right of First Offer by Management Stockholders
Each time that a Management Stockholder proposes to transfer any shares of
PHCR common stock owned by him or her, that Management Stockholder must first
offer the shares of PHCR common stock he or she proposes to transfer (the
"Offered Shares") to PHCR. In the event that PHCR does not elect to purchase
any or all of the Offered Shares within the time period specified in the
Stockholders Agreement, the right to purchase the Offered Shares passes
automatically from PHCR to Voteco and Colony III. If all of the Offered Shares
are not purchased by PHCR, Voteco or Colony III within the time period
specified in the Stockholders Agreement, then such Management Stockholder has
the right, for a specified period of time, to sell or otherwise dispose of the
remaining Offered Shares at the price, and upon terms and conditions not
materially more favorable to the proposed purchaser in the aggregate than the
terms and conditions, at which the Offered Shares were offered to PHCR, Voteco
and Colony III.
The right of first offer does not apply to:
. any repurchase of equity securities by PHCR upon the retirement or
termination of a Management Stockholder except as described below, or
. any transfers by Management Stockholders expressly permitted by the
Stockholders Agreement.
The right of first offer provision terminates following the consummation of
an IPO.
100
<PAGE>
Termination of Employment of Employee Stockholder
If a Management Stockholder ceases to be employed by PHCR and the
repurchase by PHCR of PHCR common stock owned by that Management Stockholder
is not governed by any other agreement between PHCR and that Management
Stockholder, then all of the shares of PHCR common stock owned by that
Management Stockholder become subject to the right of first offer described
above at a proposed offer price equal to the "fair market value" of such
shares on the date of termination of the Management Stockholder's employment
with PHCR. "Fair market value" means the closing sale price of such shares if
PHCR common stock of the same class is publicly traded or, if PHCR common
stock of the same class is not publicly traded, then fair market value will be
determined by negotiation between the PHCR Board of Directors and the
Management Stockholder or, in the event that the PHCR Board of Directors and
the Management Stockholder cannot agree, by arbitration.
The foregoing paragraph does not apply to Management Stockholders who are
employees of PHCR. The repurchase by PHCR of shares of PHCR common stock owned
by Management Stockholders who are employees of PHCR is governed by the MOU.
See "Voting and Contribution Agreement; Memorandum of Understanding."
Tag-along Rights of Employee Stockholders
If Voteco or Colony III proposes to offer a certain percentage of the
shares of PHCR common stock owned by Voteco or Colony III to any non-
affiliate, then each of the Management Stockholders has the right to elect to
include, at his or her sole option, in that offer the same relative percentage
of shares of PHCR common stock owned by such Management Stockholder; provided
that Voteco and Colony III will have the right to acquire any shares of PHCR
common stock which any Management Stockholder elects to include in the offer
on the same terms and at the same times as such shares would otherwise be sold
to the non-affiliate.
However, Management Stockholders (other than Messrs. Hubbard and Finnigan
as described below under "--Additional Rights of Messrs. Hubbard and
Finnigan") have no tag-along rights if:
. after the consummation of the offer Voteco, Colony III and their
respective affiliates will own in the aggregate at least 80% of the
outstanding common equity of PHCR, if on or before an IPO,
. after the consummation of the offer Voteco, Colony III and their
respective affiliates will own in the aggregate at least 50% of the
outstanding common equity of PHCR, if after an IPO, or
. if the number of shares of PHCR common stock to be offered by Voteco,
Colony III or any of their respective affiliates represents in the
aggregate no greater than 20% of the aggregate shares of PHCR common
stock held by Voteco or Colony III as of the date of the Stockholders
Agreement.
Sale of PHCR or Public Offering of PHCR Common Stock
If Voteco, Colony III or any of their respective affiliates proposes at any
time to sell to a non-affiliate shares of PHCR common stock representing 90%
or more of the outstanding common equity of PHCR or proposes to undertake an
IPO, the Management Stockholders agree to consent to and raise no objections
(including, without limitation, asserting appraisal or similar rights)
against:
. any sale by Voteco, Colony III or their respective affiliates to a non-
affiliate having all requisite gaming law approvals of shares of PHCR
common stock representing 90% or more of the outstanding common equity
of PHCR, or
. any IPO which Voteco, Colony III or any of their respective affiliates
proposes to undertake.
In addition, each of the Management Stockholders agrees to take additional
actions to facilitate such sale or IPO, including:
. voting all of the shares of PHCR common stock held by him or her, if a
vote of stockholders is required, to approve such sale,
. selling all of the shares of PHCR common stock held by him or her at the
price and on the terms and conditions upon which Voteco, Colony III or
their respective affiliates propose to sell or otherwise dispose of the
shares of PHCR common stock held by them,
101
<PAGE>
. if requested by Voteco, Colony III or their respective affiliates,
consenting to and raising no objections to any recapitalization or
reclassification of the equity securities of PHCR, including any related
amendment to the certificate of incorporation of PHCR, required to
facilitate such sale or IPO, provided that with respect to each class of
PHCR common stock all shares of that class are treated identically in
the recapitalization, reclassification and amendment, as applicable, and
. taking all other actions in his or her capacity as a stockholder that
Voteco, Colony III or their respective affiliates reasonably deem
necessary or desirable in connection with the consummation of such sale
or IPO.
Such actions include agreeing to be subject to "lock-up" restrictions in
the case of an IPO that are no more restrictive than those to which the other
Management Stockholders having commensurate job duties and responsibilities
are subject (or if such Management Stockholder is not employed by PHCR at such
time, then no more restrictive than those to which any other PHCR Stockholder
is subject) and in the case of a sale that are no more restrictive than those
to which any other PHCR Stockholder is subject.
Any lock-up restrictions to which Messrs. Hubbard and Finnigan are to be
subject will have additional limitations, as discussed below under "--
Additional Rights of Messrs. Hubbard and Finnigan."
Registration Rights
Holders of PHCR common stock will have incidental registration rights if,
after an IPO, PHCR proposes to register any of its common stock under the
Securities Act in connection with a public offering solely for cash, other
than by a registration in connection with an acquisition or in a manner which
would not permit registration of shares of PHCR common stock held by the PHCR
Stockholders.
In addition, Mr. Hubbard will have one demand registration right. See "--
Additional Rights of Messrs. Hubbard and Finnigan."
Additional Rights of Messrs. Hubbard and Finnigan
In connection with the Stockholders Agreement, Colony III will enter into
agreements with each of Mr. Hubbard and Mr. Finnigan. These agreements will
grant Messrs. Hubbard and Finnigan the following additional rights with
respect to their shares of PHCR common stock:
. the right to sell or dispose of shares pursuant to the tag-along rights
described above without giving effect to the provisions relating to the
percentage ownership of Colony III, Voteco and their respective
affiliates after the offer (see the second paragraph under "--Tag-along
Rights of Employee Stockholders" above),
. a "lock-up" restriction in the case of an IPO or a sale of PHCR that is
coextensive with that of Colony III (see "--Sale of PHCR or Public
Offering of PHCR Common Stock" above), and
. in the case of Mr. Hubbard, one demand registration right, subject to
customary terms and conditions and any lock-up required in connection
with an IPO.
In addition, so long as Mr. Hubbard beneficially owns at least 50% of the
outstanding shares of PHCR common stock owned by him immediately following the
effective time of the Pinnacle Merger (taking into account restricted stock
and stock options issued by PHCR), without Mr. Hubbard's approval, which
approval shall not be unreasonably withheld or delayed, Colony III shall not
consent to any waiver of the Stockholders Agreement or the MOU, or any of the
agreements contemplated by either of the Stockholders Agreement or the MOU,
that would materially adversely affect Mr. Hubbard's rights under the
Stockholders Agreement.
Termination of Stockholders Agreement
The Stockholders Agreement will terminate upon the earliest to occur of:
. termination by written agreement of Voteco, Colony III and the other
PHCR Stockholders party to the Stockholders Agreement,
102
<PAGE>
. Management Stockholders or any of their respective controlling
stockholders, 80% or more owned subsidiaries or, in the case of an
individual Management Stockholder, spouses or immediate family members,
no longer beneficially own any shares of PHCR common stock (except if
the foregoing results from a transfer in violation of the Stockholders
Agreement), or
. Voteco, Colony III or their respective affiliates own shares of PHCR
common stock representing less than 25% of the outstanding common equity
of PHCR (except if the foregoing results from a transfer in violation of
the Stockholders Agreement).
In addition, a Management Stockholder will cease to be a party to or have
any rights under the Stockholders Agreement if and when that Management
Stockholder ceases to beneficially own any shares of PHCR common stock.
COMMON STOCK MARKET PRICE AND DIVIDEND INFORMATION
Market Price Information
Pinnacle Common Stock is traded on the New York Stock Exchange under the
symbol "PNK." The table below sets forth the high and low closing sales prices
per share of Pinnacle Common Stock on the New York Stock Exchange for each
quarterly period for the two most recent fiscal years and for the current
fiscal year to date.
<TABLE>
<CAPTION>
High Low
---- ---
<S> <C> <C>
First Quarter, Fiscal Year 1998.............................. $22.19 $ 11.75
Second Quarter, Fiscal Year 1998............................. $13.25 $ 11.00
Third Quarter, Fiscal Year 1998.............................. $12.38 $ 10.00
Fourth Quarter, Fiscal Year 1998............................. $10.56 $ 8.13
First Quarter, Fiscal Year 1999.............................. $10.44 $ 8.25
Second Quarter, Fiscal Year 1999............................. $17.00 $ 10.50
Third Quarter, Fiscal Year 1999.............................. $18.69 $ 14.75
Fourth Quarter, Fiscal Year 1999............................. $23.13 $ 15.13
First Quarter, Fiscal Year 2000.............................. $23.50 $16.625
</TABLE>
On March 6, 2000, the second to last trading day prior to the public
announcement that the Company had received a proposal regarding the proposed
transaction, the high, low and closing sales prices per share of Pinnacle
Common Stock on the New York Stock Exchange were $17.375, $16.75 and $17.25,
respectively. On April 14, 2000, the last trading day before the announcement
of the signing of the definitive Merger Agreement, the high, low and closing
sales prices per share of Pinnacle Common Stock on the New York Stock Exchange
were $19.75, $19.0625 and $19.75, respectively. On August [ ], 2000, the last
trading day before the date of this Proxy Statement, the high, low and closing
sales prices per share of Pinnacle Common Stock on the New York Stock Exchange
were $[ ], $[ ] and $[ ], respectively.
Dividend Information
No dividends have been paid during the past two years with respect to
Pinnacle Common Stock. In addition, the Company's bank credit agreement, and
the Indenture dated as of August 1, 1997, as amended by the First Supplemental
Indenture thereto dated February 5, 1999, relating to the Company's 9 1/2%
Senior Subordinated Notes due 2007 and the Indenture dated February 18, 1999
relating to the Company's 9 1/4% Senior Subordinated Notes due 2007 each
prohibits or limits the Company from declaring or paying any dividends on its
capital stock. Similarly, the Merger Agreement prohibits or limits the Company
from declaring, setting aside or paying any dividends on its capital stock
during the term of the Merger Agreement. See "Merger Agreement--Conduct of
Business Pending the Pinnacle Merger."
103
<PAGE>
COMMON STOCK PURCHASE INFORMATION
Purchases by the Company
During the third quarter of 1998, the Company purchased 500,000 shares of
Pinnacle Common Stock. The purchase price of such shares ranged from $10.0625
to $11.75. The weighted average purchase price during such period was
$11.0625. Except as described below, the Company made no other purchases of
Pinnacle Common Stock during the past two years.
From time to time, the Company purchases shares of Pinnacle Common Stock
for directors' accounts under the Amended and Restated Directors Deferred
Compensation Plan. See "Proposal 2: Election of Directors--Amended and
Restated Directors Deferred Compensation Plan." During the past two years, the
Company purchased an aggregate of 39,329 shares of Pinnacle Common Stock for
the directors' accounts.
Purchases by Management Stockholders
During the third quarter of 1998, Paul Alanis purchased 300,000 shares of
Pinnacle Common Stock for prices ranging from $10.00 to $10.875 (with a
weighted average purchase price of $10.6875).
During the third quarter of 1999, Bruce Hinckley purchased 5,000 shares of
Pinnacle Common Stock for prices ranging from $14.625 to $14.75 (with a
weighted average purchase price of $14.75).
During the fourth quarter of 1999, G. Michael Finnigan exercised options to
purchase 30,000 shares of Pinnacle Common Stock for prices ranging from $17.00
to $17.125 (with a weighted average purchase price of $17.125). Mr. Finnigan
exercised such options on a cashless basis and immediately sold the shares he
so acquired.
Except as described above, no directors or executive officers of the
Company purchased shares of Pinnacle Common Stock during the past two years.
104
<PAGE>
PROPOSAL 2:
ELECTION OF DIRECTORS
(Item No. 2 on Proxy Card)
At the Annual Meeting, holders of Pinnacle Common Stock will be asked to
vote on the election of nine directors who will constitute the full Board of
Directors of the Company. The nine nominees receiving the highest number of
votes from holders of shares of Pinnacle Common Stock represented and voting
at the Annual Meeting will be elected to the Board of Directors. Abstentions
and broker non-votes will not be counted as voting at the meeting and
therefore will not have an effect on the election of the nominees listed
below.
Each director elected will hold office until the earlier of the next annual
meeting of the Company (and until his successor is elected and qualified) or
the effective time of the Pinnacle Merger. If the Pinnacle Merger is
completed, all of the directors will be replaced at the effective time by the
Board of Directors of Pinnacle Acq Corp.
The nominees listed below constitute the entire current Board of Directors
of the Company.
General
Each proxy received will be voted for the election of the persons named
below, unless the stockholder signing such proxy withholds authority to vote
for one or more of these nominees in the manner described in the proxy.
Although it is not contemplated that any nominee named below will decline or
be unable to serve as a director, in the event any nominee declines or is
unable to serve as a director, the proxies will be voted by the proxy holders
as directed by the Board of Directors.
There are no family relationships between any director, nominee or
executive officer and any other director, nominee or executive officer of the
Company. Except as described below, there are no arrangements or
understandings between any director, nominee or executive officer and any
other person pursuant to which he has been or will be selected as a director
and/or executive officer of the Company. See "--Information Regarding the
Directors of the Company."
THE BOARD OF DIRECTORS RECOMMENDS A VOTE "FOR" ELECTION OF ALL OF THE
NOMINEES LISTED BELOW.
Information Regarding the Directors of the Company
The following table lists the persons nominated by the Board of Directors
for election as directors of the Company and provides their ages and current
positions with the Company. Biographical information for each nominee is
provided below.
<TABLE>
<CAPTION>
Name Age Position
---- --- --------
<S> <C> <C>
R.D. Hubbard (a)............ 64 Chairman of the Board of Directors
Paul R. Alanis.............. 51 Director, Chief Executive Officer, President and Chief Operating Officer
Robert T. Manfuso (b)....... 62 Director
James L. Martineau (b)...... 59 Director
Gary G. Miller (c).......... 49 Director
Michael Ornest (c).......... 42 Director
Timothy J. Parrott (a)...... 52 Director
Lynn P. Reitnouer (a), (b).. 67 Director
Marlin Torguson............. 55 Director
</TABLE>
--------
(a) Member of Executive Committee
(b) Member of Compensation Committee
(c) Member of Audit Committee
105
<PAGE>
Mr. Hubbard has been a Director of the Company since 1990; Chairman of the
Board of Directors of the Company since September 1991; Chief Executive
Officer of the Company from September 1991 to June 2000, Chairman of the Board
and Chief Executive Officer, Hollywood Park Operating Company from February
1991 to September 1999; President, Hollywood Park Operating Company from
February to July 1991; Chairman, AFG Industries, Inc. and its parent company,
Clarity Holdings Corp. (glass manufacturing), and director of AFG Industries,
Inc.'s subsidiaries, from 1978 to July 1993; Chairman of the Board (and 60%
stockholder until March 1994), Sunflower (The Woodlands Race Tracks--greyhound
racing and horse racing) from 1988 to March 1994; President, Director, and
majority owner, Ruidoso Downs Racing, Inc. (horse racing) since 1988; Chairman
of the Board, Chief Executive Officer and sole stockholder, Multnomah Kennel
Club, Inc. (greyhound racing) from December 1991 to April 1998; and owner and
breeder of numerous thoroughbreds and quarter horses since 1962.
Mr. Alanis has been a Director of the Company since October 1999; Chief
Executive Officer of the Company since June 2000; President and Chief
Operating Officer of the Company since January 1999; President, Horseshoe
Gaming, Inc. (gaming operations), which is the manager and a member of
Horseshoe Gaming, LLC, and Horseshoe GP, Inc., a wholly-owned subsidiary of
Horseshoe Gaming, LLC, from January 1996 to December 1998, with a business
address of 150 S. Los Robles Avenue, Suite 880, Pasadena, California 91101;
President, KII-Pasadena, Inc. since December 1988 (real estate and casino
consulting), with a business address of 150 S. Los Robles Avenue, Suite 410,
Pasadena, California 91101; and President, Koar International, Inc. from 1991
to 1995 (real estate and casino consulting), with a business address of 150 S.
Los Robles Avenue, Suite 410, Pasadena, California 91101.
Mr. Manfuso has been a Director of the Company since 1991; Director,
Hollywood Park Operating Company from February 1991 to January 1992; Partner,
Manfuso Brothers Investments (personal investments) since 1980, with a
business address of 2730 University Boulevard West, Suite 430, Wheaton,
Maryland 20902; Co-Chairman of the Board, Laurel Racing Association (horse
race track management) from 1984 to February 1994; Vice Chairman of the Board,
The Maryland Jockey Club (horse racing) from 1986 to February 1994; Executive
Vice President, Laurel Racing Association from 1984 to May 1990; Executive
Vice President, The Maryland Jockey Club from 1986 to June 1990; Director,
Maryland Horse Breeders Association from 1984 to 1992; and Member, Executive
Committee, Maryland Million since 1991.
Mr. Martineau has been a Director of the Company since May 1999; President
(and Founder), Viracon, Inc. (auto glass corporation) from 1970 to 1996;
Executive Vice President, Apogee Enterprises, Inc. (which acquired Viracon,
Inc. in 1973) from 1996 to 1998; Director, Apogee Enterprises, Inc. since
1973, with a business address of 7900 Xerxes Avenue, Suite #1800, Minneapolis,
Minnesota 58431; Director, Northstar Photonics (telecommunications business)
since December 1998, with a business address of 3750 Annapolis Lane North,
#135, Plymouth, Minnesota 55447; Chairman, Genesis Portfolio Partners, LLC,
(start-up company development) since August 1998, with a business address of
3889 Central Avenue NE, #536, Columbia Heights, Minnesota 55421; Director,
Borgen Systems since 1994; and Trustee, Owatonna Foundation since 1973.
Mr. Miller has been a Director of the Company since May 1999; Chairman and
Chief Executive Officer, Fore Star Golf (golf management) since 1993, with a
business address of 301 Commerce, Suite 1470, Fort Worth, Texas 76102;
President, Cumberland Capital Corporation (personal investments) since 1990,
with a business address of 301 Commerce, Suite 1470, Fort Worth, Texas 76102;
Executive Vice President--Finance and Administration, Treasurer, Director, AFG
Industries, Inc. from 1977 to 1993; Director, Nordic Tugs since January 1999;
and Director, United Stationers, Inc. from 1992 to October 1998.
Mr. Ornest has been a Director of the Company since October 1998 (and his
family has been a stockholder of the Company since 1962); private investor
since 1983, with a business address of c/o Pinnacle Entertainment, Inc., 330
North Brand Boulevard, Suite 1100, Glendale, California 91203; Director of the
Ornest Family Partnership since 1983; Director of the Ornest Family Foundation
since 1993; Director of the Toronto Argonauts Football Club from 1988 to 1990;
President of the St. Louis Arena and Vice President of the St. Louis Blues
Hockey Club from 1983 to 1986; and Managing Director of the Vancouver
Canadians Baseball Club, Pacific Coast League from 1979 to 1980.
106
<PAGE>
Mr. Parrott has been a Director of the Company since June 1997; Consultant
to the Company from November 1998 to present; Chairman of the Board and Chief
Executive Officer, Boomtown, Inc. (gaming operations) from September 1992 to
October 1998, with a business address of Interstate 80 and Boomtown Road,
Verdi, Nevada, 89439; President and Treasurer, Boomtown, Inc. from June 1987
to September 1992; Director, Boomtown, Inc. since 1987; Chairman of the Board
and Chief Executive Officer, Boomtown Hotel & Casino, Inc. since May 1988;
Chief Executive Officer, Parrott Investment Company (a family-held investment
company with agricultural interests in California) since April 1995; and
Director, The Chronicle Publishing Company since April 1995.
Mr. Reitnouer has been a Director of the Company since 1991; Director,
Hollywood Park Operating Company from September 1991 to January 1992; Partner,
Crowell Weedon & Co. (stock brokerage) since 1969; Director and Chairman of
the Board, COHR, Inc. from 1986 to 1999; Director and Chairman, Forest Lawn
Memorial Parks Association since 1975; and Trustee, University of California
Santa Barbara Foundation (and former Chairman) since 1992.
Mr. Torguson has been a Director of the Company since October 1998;
Chairman of the Board, Casino Magic Corp. (gaming operations) since December
1994; President and Chief Executive Officer, Casino Magic from April 1992
through November 1994; Chief Financial Officer and Treasurer, Casino Magic
from April 1992 to February 1993; 50% owner and a Vice President, G.M.T.
Management Co. (casino management and operations) from December 1983 to
December 1994; and entrepreneur and private investor since 1995.
In accordance with the requirements of the Agreement and Plan of Merger
dated as of April 23, 1996 governing the Boomtown merger, the Company's Board
was expanded upon completion of the Boomtown merger to eleven directors, seven
of whom (Messrs. Hubbard, Harry Ornest, J.R. Johnson, Manfuso, Reitnouer,
Herman Sarkowsky and Warren B. Williamson) had been serving as members of the
Company's Board (the "Company Directors") and four of whom (Messrs. Parrott,
Richard Goeglein, Peter L. Harris and Delbert W. Yocam) had been members of
the Boomtown Board of Directors (the "Boomtown Directors"). The Company agreed
to cause its Board of Directors and any nominating committee thereof to take
the necessary steps to nominate the initial Boomtown Directors or their
replacements (selected by a majority of the Boomtown Directors) for re-
election at the first three annual stockholders meetings following June 30,
1997. On March 29, 1999, with the consent of Mr. Parrott, the sole Boomtown
Director then on the Company's Board, the Company's Board of Directors amended
the By-Laws to eliminate the requirement that the Boomtown Directors or their
replacements be nominated for re-election.
In connection with the Casino Magic acquisition, Mr. Torguson agreed to
vote his Casino Magic shares (which amounted to approximately 21.5% of the
then outstanding common stock of Casino Magic) in favor of the acquisition by
the Company. The Company agreed to appoint Mr. Torguson to the Board of
Directors of the Company. See "--Certain Relationships and Related
Transactions."
Board Meetings, Board Committees and Director Compensation
The full Board of Directors of the Company had three formal meetings in
1999 and acted by unanimous written consent on one occasion. During 1999, each
incumbent director of the Company attended at least 75% of the aggregate of
(i) the three meetings of the Board of Directors, and (ii) the total number of
meetings of the committees on which he served (during the periods that he
served).
The Company has a standing Executive Committee, which is chaired by Mr.
Hubbard and currently consists of Messrs. Hubbard, Reitnouer, and Parrott. The
Executive Committee has and may exercise all the powers and authority of the
Board of Directors in the management of the business and affairs of the
Company to the fullest extent authorized by Delaware law. The Executive
Committee had three formal meetings in 1999 and acted by unanimous written
consent on thirteen occasions.
The Company has a standing Audit Committee, which is chaired by Mr. Miller
and currently consists of Messrs. Miller and Ornest. The functions of the
Audit Committee are to provide an avenue of communication
107
<PAGE>
between the Board of Directors and the independent external auditors, the
Company's financial management and the internal auditors; to assure the
independence of the Company's independent auditors and the adequacy of
disclosure to stockholders and to the public; to consider matters of
accounting policy; and to recommend independent auditors to the Board of
Directors for approval. The Audit Committee met two times in 1999 and acted by
unanimous written consent on one occasion.
The Company has a standing Compensation Committee, which is chaired by Mr.
Reitnouer and currently consists of Messrs. Reitnouer, Martineau and Manfuso.
The functions of the Compensation Committee are to make recommendations to the
Board of Directors regarding the annual salaries and other compensation of the
officers of the Company, to provide assistance and recommendations with
respect to the compensation policies and practices of the Company and to
assist with the administration of the Company's compensation plans. The
Compensation Committee met three times in 1999 and acted by unanimous written
consent on ten occasions.
The Executive Committee acts as the Company's nominating committee. The
Executive Committee generally does not consider nominees recommended by the
Company's stockholders.
All directors hold office until the next annual meeting of stockholders and
until their successors are duly elected and qualified, or until his earlier
death, retirement, resignation or removal from office. Directors are entitled
to receive an annual retainer of $25,000 per year plus $1,000 for each Board
meeting attended, which they may take in cash or in deferred compensation
under the Company's Amended and Restated Directors Deferred Compensation Plan
as outlined below. In addition, non-employee directors are entitled to receive
a minimum of 2,000 Pinnacle Stock Options per year. Members of the Executive
Committee, Audit Committee and Compensation Committee also receive $1,000 for
each committee meeting attended, and such amounts are also eligible for the
Amended and Restated Directors Deferred Compensation Plan.
On August 5, 1999, each of Messrs. Martineau, Miller and Ornest was granted
a non-qualified stock option to purchase 5,000 shares of Pinnacle Common Stock
at an exercise price of $14.75 per share. One-third of the shares purchasable
upon exercise of these options will vest on each of the first, second and
third anniversary of the grant date. All of these options expire on the tenth
anniversary of the grant date and, except for the option granted to Mr.
Martineau, were granted under the Company's 1996 Stock Option Plan.
On October 29, 1999, each of Messrs. Manfuso, Martineau, Miller, Ornest,
Parrott, Reitnouer, Sarkowsky (who resigned from the Board of Directors in
March 2000) and Torguson was granted a non-qualified stock option to purchase
2,000 shares of Pinnacle Common Stock at an exercise price of $17.3125 per
share. One-third of the shares purchasable upon exercise of these options was
vested on the grant date, with an additional one-third to vest on each of the
first and second anniversary of the grant date. All of these options expire on
the tenth anniversary of the grant date and, except for the options granted to
Messrs. Manfuso, Martineau and Reitnouer, were granted under the Company's
1996 Stock Option Plan.
In connection with the Pinnacle Merger, the options held by Messrs.
Martineu, Miller, Ornest, Parrott, Reitnouer, Sarkowsky and Torguson will be
treated in the same manner as Pinnacle Stock Options held by persons who are
not members of the Board of Directors. See "Merger Agreement--Conversion of
Pinnacle Shares and Stock Options; Contingent Payment Rights" and "Special
Factors--Certain Effects of the Pinnacle Merger."
Amended and Restated Directors Deferred Compensation Plan
Participation in the Company's Amended and Restated Directors Deferred
Compensation Plan (the "Directors Plan") is limited to directors of the
Company, and each eligible director may elect to defer all or a portion of his
annual retainer and any fees for meetings attended. Any such deferred
compensation is credited to a deferred compensation account, either in cash or
in shares of Pinnacle Common Stock, at each director's election. As of the
date the director's compensation would otherwise have been paid, and depending
on the director's election, the director's deferred compensation account will
be credited with either (i) cash, (ii) the
108
<PAGE>
number of full and/or fractional shares of Pinnacle Common Stock obtained by
dividing the amount of the director's compensation for the calendar quarter or
month which he elected to defer, by the average of the closing price of
Pinnacle Common Stock on the principal stock exchange on which Pinnacle Common
Stock is listed (or, if the common shares are not listed on a stock exchange,
the Nasdaq National Market System) on the last ten business days of the
calendar quarter or month for which such compensation is payable or (iii) a
combination of cash and shares of Pinnacle Common Stock as described in clause
(i) and (ii). All cash amounts credited to the director's deferred
compensation account bear interest at an amount to be determined from time to
time by the Board of Directors.
If a director has elected to receive shares of Pinnacle Common Stock in
lieu of his retainer and the Company declares a dividend, such director's
deferred compensation account is credited at the end of each calendar quarter
with the number of full and/or fractional shares of Pinnacle Common Stock
obtained by dividing the dividends which would have been paid on the shares
credited to the director's deferred compensation account as of the dividend
record date, if any, occurring during such calendar quarter if such shares had
been shares of issued and outstanding Pinnacle Common Stock on such date, by
the closing price of Pinnacle Common Stock on the principal stock exchange on
which Pinnacle Common Stock is listed (or, if the common shares are not listed
on a stock exchange, the Nasdaq National Market System) on the date such
dividend(s) was paid. In addition, if the Company declares a dividend payable
in shares of Pinnacle Common Stock, the director's deferred compensation
account is credited at the end of each calendar quarter with the number of
full and/or fractional shares of Pinnacle Common Stock which such shares would
have been entitled to if such shares had been shares of issued and outstanding
Pinnacle Common Stock on the record date for such stock dividend(s).
Participating directors do not have any interest in the cash and/or
Pinnacle Common Stock credited to their deferred compensation accounts until
distributed in accordance with the Directors Plan, nor do they have any voting
rights with respect to such shares until shares credited to their deferred
compensation accounts are distributed. The rights of a director to receive
payments under the Directors Plan are no greater than the rights of an
unsecured general creditor of the Company. Each participating director may
elect to have the aggregate amount of cash and shares credited to his deferred
compensation account distributed to him in one lump sum payment or in a number
of approximately equal annual installments over a period of time not to exceed
fifteen years. The lump sum payment or the first installment will be paid as
of the first business day of the calendar quarter immediately following the
cessation of the director's service as a director of the Company. Prior to the
beginning of any calendar year, a director may elect to change the method of
distribution, but amounts credited to a director's account prior to the
effective date of such change may not be affected, but rather will be
distributed in accordance with the election at the time such amounts were
credited to the director's deferred compensation account.
The maximum number of shares of Pinnacle Common Stock that can be issued
pursuant to the Directors Plan is 275,000 shares. The Company is not required
to reserve or set aside funds or shares of Pinnacle Common Stock for the
payment of its obligations pursuant to the Directors Plan. The Company is
obligated to make available, as and when required, a sufficient number of
shares of Pinnacle Common Stock to meet the needs of the Directors Plan. The
shares of Pinnacle Common Stock to be issued under the Directors Plan may be
either authorized and unissued shares or reacquired shares.
Amendment, modification or termination of the Directors Plan may not (i)
adversely affect any eligible director's rights with respect to amounts then
credited to his account or (ii) accelerate any payments or distributions under
the Directors Plan (except with regard to bona fide financial hardships).
Upon consummation of the Pinnacle Merger, any and all shares of Pinnacle
Common Stock held in directors' deferred compensation accounts will be
converted into the right to receive the Pinnacle Merger Consideration
(including any adjustment for the Contingent Payment) in the same manner as
shares of Pinnacle Common Stock held by stockholders other than members of the
Board of Directors. It is expected that the right to receive the merger
consideration held in such deferred compensation accounts will mature, and
that such consideration will be distributed, in accordance with the Directors
Plan.
109
<PAGE>
Compensation Committee Interlocks and Insider Participation
Mr. Reitnouer served on the Compensation Committee from January 1, 1999 to
December 31, 1999. Messrs. Johnson and Williamson were members of the
Compensation Committee from January 1, 1999 to May 1999. Messrs. Martineau and
Manfuso were members of the Compensation Committee from May 1999 to December
31, 1999. None of the members of the Compensation Committee were officers or
employees or former officers or employees of the Company or its subsidiaries,
except that Mr. Williamson served as Secretary of the Company from September
1991 to August 1996.
Executive Officers
Executive officers serve at the discretion of the Board of Directors,
subject to rights, if any, under contracts of employment. See "--Executive
Compensation." The current executive officers of the Company are as follows:
<TABLE>
<CAPTION>
Name Age Position
---- --- --------
<C> <C> <S>
R.D. Hubbard........................ 64 Chairman of the Board of Directors
Paul R. Alanis...................... 51 Chief Executive Officer, President
and Chief Operating Officer
J. Michael Allen.................... 52 Senior Vice President, Chief
Operating
Officer of Gaming Operations
G. Michael Finnigan................. 51 President and Chief Executive Officer
of Realty Investment Group, Inc., a
wholly-owned subsidiary of the
Company
Bruce C. Hinckley................... 53 Vice President, Chief Financial
Officer and Treasurer
</TABLE>
Biographical information for Mr. Hubbard and Mr. Alanis is provided above.
See "--Information Regarding Directors of the Company."
Mr. Allen has served as the Company's Senior Vice President and Chief
Operating Officer, Gaming Operations, since January 1999; Chief Operating
Officer, Horseshoe Gaming, Inc. (gaming operations) from October 1, 1995 to
December 31, 1998, with a business address of 4024 Industrial Road, Las Vegas,
NV 89103, and, prior to that, General Manager, Horseshoe Casino Center (gaming
operations) from May 1994 to October 1995, with a business address of Robinson
Property Group, L.P. dba Horseshoe Casino & Hotel, 1021 Casino Center Drive,
Robinsonville, MS; and Principal of Gaming Associates, Inc. from September
1992 to May 1994.
Mr. Finnigan has served as the President and Chief Executive Officer of
Realty Investment Group, Inc., a wholly-owned subsidiary of the Company which
conducts all of the Company's real estate business and related development
activities, since December 1998; Chief Financial Officer and Executive Vice
President of the Company and Hollywood Park Operating Company from March 1989
to March 31, 1999; President, Sports and Entertainment, from January 1996 to
December 1998; President, Gaming and Entertainment, from February 1994 to
January 1996; Treasurer of the Company and Hollywood Park Operating Company
from March 1992 to March 31, 1999; Chairman of the Board, Southern California
Special Olympics since 1996; Chairman of the Board, Centinela Hospital since
1996; and Director, Shoemaker Foundation since 1993.
Mr. Hinckley joined the Company in February 1999 and has served as its
Chief Financial Officer, Vice President and Treasurer since April 1, 1999;
Executive Vice President, Chief Financial Officer and Secretary, Iwerks
Entertainment, Inc. (movie simulation theaters) from September 1996 to
February 1999, with a business address of 4540 W. Valerio, Burbank, CA;
financial consultant from September 1995 to September 1996; and Vice
President, Controller and Chief Accounting Officer, Caesars World, Inc.
(casino and hotel company) from November 1985 to September 1995, with a
business address of 1801 Century Park East, Los Angeles, CA 90067. Mr.
Hinckley is a certified public accountant.
110
<PAGE>
Executive Compensation
The following tables summarize the annual and long-term compensation of,
and Pinnacle Stock Options held by, the Company's Chief Executive Officer and
the four additional most highly compensated executive officers whose annual
salaries and bonuses exceeded $100,000 in total during the fiscal year ended
December 31, 1999 (collectively, the "Named Officers"). None of the Named
Officers held stock appreciation rights during the years reported in the
tables.
Summary Compensation Table
<TABLE>
<CAPTION>
Long Term
Compensation
------------
Annual
Compensation Awards
----------------- Securities
Name and Principal Salary Bonus Other Annual Underlying All Other
Position Year ($) ($) Compensation Options Compensation
------------------ ---- -------- -------- ------------ ------------ ------------
<S> <C> <C> <C> <C> <C> <C>
R. D. Hubbard........... 1999 $500,000 $700,000 $0 100,000 $ 1,339(a)
Chairman of the Board
and Chief 1998 500,000 160,000 0 50,000 2,370(b)
Executive Officer 1997 400,000 40,235 0 45,000 4,740(b)
Paul R. Alanis.......... 1999 $600,000 $400,000 $ 0 0 $ 1,735(c)
President and Chief
Operating 1998 0 0 0 400,000
Officer 1997 0 0 0 0
J. Michael Allen........ 1999 $389,657 $125,000 $ 0 0 $ 1,735(d)
Senior Vice President
and Chief 1998 0 0 0 200,000
Operating Officer of 1997 0 0 0 0
Gaming Operations
G. Michael Finnigan..... 1999 $400,000 $500,000 $ 0 40,000 $ 1,003(e)
President and Chief
Executive 1998 307,600 75,000 0 35,000 23,633(f)
Officer of Realty 1997 307,608 0 0 25,000 3,555(b)
Investment Group, Inc.
Bruce C. Hinckley....... 1999 $192,514 $ 75,000 $ 0 25,000 $ 1,756(g)
Vice President, Chief
Financial 1998 0 0 0 0
Officer and Treasurer 1997 0 0 0 0
</TABLE>
--------
(a) Includes the Company matching contribution under the Company's 401(k) Plan
of $790, and $549 of payment by the Company for premiums with respect to
term life insurance.
(b) Reflects Hollywood Park matching contributions under the Hollywood Park
401(k) Plan.
(c) Includes the Company matching contribution under the Company's 401(k) Plan
of $1,666, and $69 of payment by the Company for premiums with respect to
term life insurance.
(d) Includes the Company matching contribution under the Company's 401(k) Plan
of $1,666, and $69 of payment by the Company for premiums with respect to
term life insurance.
(e) Includes the Company matching contribution under the Company's 401(k) Plan
of $790 and $213 of payment by the Company for premiums with respect to
term life insurance.
(f) Includes the Company matching contribution under the Company's 401(k) Plan
of $2,370, and $21,262 of distribution related to the termination of the
Hollywood Park's Supplemental Executive Retirement Plan.
(g) Includes the Company matching contribution under the Company's 401(k) Plan
of $1,687, and $69 of payment for premiums with respect to term life
insurance.
Executive Deferred Compensation Plan
Effective March 15, 2000, the Company adopted the First Amendment to the
Executive Deferred Compensation Plan ("Executive Plan"), which allows certain
highly compensated employees of the Company and its subsidiaries (each an
"Employer") to defer, on a pre-tax basis, a portion of their base annual
salaries,
111
<PAGE>
bonuses, and cash payments received upon a change in control (as defined in
the Executive Plan) in consideration of the cancellation of stock options held
by such persons ("Option Cancellation Payment"). The Executive Plan is
administered by the Compensation Committee of the Board of Directors and
participation in the Executive Plan is limited to employees who are (i)
determined by an Employer to be includable within a select group of management
or highly compensated employees, (ii) specifically selected by an Employer and
(iii) approved by the Compensation Committee. A participating employee may
elect to defer up to 75% of his or her base annual salary, up to 100% of his
or her bonus per year and up to 100% of his or her Option Cancellation
Payment. Any such deferred compensation is credited to a deferral contribution
account. A participating employee is at all times fully vested in his or her
deferred contributions, as well as any appreciation or depreciation
attributable thereto.
For purposes of determining the rate of return credited to a deferral
contribution account, each participating employee must select from a list of
hypothetical investment funds among which deferred contributions shall be
allocated. Although a participating employee's deferred compensation will not
be invested directly in the selected hypothetical investment funds, his or her
deferral compensation account shall be adjusted according to the performance
of such funds.
Participating employees may elect in advance to receive their deferral
contribution account balances upon retirement in a lump sum or in annual
payments of five, ten or fifteen years (except that, if an employee's account
balance is less than $10,000, such balance will be paid as a lump sum). A
participating employee may make an advance election to defer retirement
distributions until age 75. In the event a participating employee dies or
suffers a disability (as defined in the Executive Plan) during employment,
such employee's account balance shall be paid (i) in one lump sum if the
account balance is less than $10,000, or (ii) if the account balance is
$10,000 or more, in five annual installments unless the employee has elected,
in advance and with the Compensation Committee's approval, to receive a lump
sum distribution. In the event of a voluntary or involuntary termination of
employment for any reason other than retirement, disability or death, a
participating employee shall receive his or her account balance (i) in one
lump sum if the account balance is less than $10,000, or (ii) if the account
balance is $10,000 or more, in five annual installments unless the employee
has elected, in advance and with the Compensation Committee's approval, to
receive a lump sum distribution; provided, however, that if such termination,
retirement, disability or death occurs within 18 months of a change in control
(as defined in the Executive Plan), then the employee's deferral contribution
account balance shall be paid in the form of one lump sum payment not later
than 30 days after the termination, retirement, disability or death.
A participating employee may make an advance election to receive interim
distributions from a deferral compensation account prior to retirement, but
not earlier than three years after the election is made. Such interim
distributions are distributed as lump sum payments. In the event of a
financial emergency (such as a sudden illness or accident, a loss of property
due to casualty or other extraordinary and unforeseeable events beyond the
employee's control), a participating employee may petition the Compensation
Committee to suspend deferrals and/or to request withdrawal of a portion of
the account to satisfy the emergency. A participating employee may request to
receive all of his or her account balance, without regard to whether benefits
are due or the occurrence of a financial emergency; any distribution made
pursuant to such a request shall be subject to forfeiture of 10% of the total
account balance and temporary suspension of the employee's participation in
the Executive Plan.
An Employer may terminate, amend or modify the Executive Plan with respect
to its participating employees at any time, except that (i) no termination,
amendment or modification may decrease or restrict the value of a
participating employee's account balance and (ii) no amendment or modification
shall be made after a change in control which adversely affects the vesting,
calculation or payment of benefits or any other rights or protections of any
participating employee. Upon termination of the Executive Plan, all amounts
credited to participating employees' accounts shall be distributed in lump
sums.
Stock Option Plans
In 1993 and 1996, the stockholders of the Company adopted stock option
plans ("Stock Option Plans"), which provided for the issuance of up to 625,000
and 900,000 shares of the Company's Pinnacle Common Stock
112
<PAGE>
upon exercise of the Pinnacle Stock Options, respectively. Except for the
provisions governing the number of shares issuable thereunder, and except for
certain provisions which reflect changes in tax and securities laws, the
provisions of the Stock Option Plans are substantially similar. The Stock
Option Plans are administered and terms of option grants are established by
the Compensation Committee of the Board of Directors. Under the Stock Option
Plans, Pinnacle Stock Options alone or coupled with stock appreciation rights
may be granted to selected key employees, directors, consultants and advisors
of the Company. Pinnacle Stock Options become exercisable according to a
vesting period as determined by the Compensation Committee at the date of
grant, and expire on the earlier of one month after termination of employment,
six months after the death or permanent disability of the optionee, or the
expiration of the fixed option term set by the Compensation Committee at the
grant date (not to exceed ten years from the grant date). The exercise prices
of all Pinnacle Stock Options granted under the Stock Option Plans are
determined by the Compensation Committee on the grant date, provided that the
exercise price of an incentive stock option may not be less than the fair
market value of Pinnacle Common Stock at the date of grant.
As of December 31, 1999, the 1996 Stock Option Plan was the only plan with
Pinnacle Stock Option awards available for grant; all of the 625,000 shares
eligible for issuance under the 1993 Stock Option Plan had been granted. Of
the 900,000 shares eligible for issuance under the 1996 Stock Option Plan,
Pinnacle Stock Options to purchase 554,449 had been granted. In addition,
721,077 and 256,136 shares of Pinnacle Common Stock were issuable upon
exercise of Pinnacle Stock Options granted under pre-merger stock option plans
of Boomtown and Casino Magic, respectively, which the Company assumed in each
merger. The Company has filed registration statements with the SEC covering an
aggregate of 3,505,332 shares of Pinnacle Common Stock issuable upon exercise
of Pinnacle Stock Options granted under the Stock Option Plans, Boomtown's
stock option plans and Casino Magic's stock option plans.
All of the Company's stock option plans will terminate as of the effective
time of the Pinnacle Merger. Immediately following such effective time, no
holder of a Pinnacle Stock Option or any participant in any of the Company's
stock option plans will have any right thereunder to acquire any capital stock
of the Company, Pinnacle Acq Corp or PHCR pursuant to such options or such
plans. See "Merger Agreement--Conversion of Pinnacle Shares and Stock Options;
Contingent Payment."
Options Grants in Last Fiscal Year
The following table summarizes the Pinnacle Stock Option grants to Named
Officers during the year ended December 31, 1999. None of the Named Officers
held stock appreciation rights during the year ended December 31, 1999.
<TABLE>
<CAPTION>
Individual Grants
--------------------------------------------------------------------------
Potential
Realizable Value at
Assumed Annual
Number of Percent of Rates of Stock
Securities Total Options Price Appreciation
Underlying Granted to Exercise Or for Option Term
Options Employees in Base Price Expiration -------------------
Name Granted (#) Fiscal Year ($/Sh) Date 5% ($) 10% ($)
---- ----------- ------------- ----------- ------------- -------- ----------
<S> <C> <C> <C> <C> <C> <C>
R.D. Hubbard......... 100,000 36% $9.625 Mar. 29, 2009 $605,000 $1,534,000
G. Michael Finnigan.. 40,000 15% 9.625 Mar. 29, 2009 242,000 614,000
Bruce C. Hinckley.... 25,000 9% 9.6875 Mar. 17, 2009 151,000 386,000
</TABLE>
113
<PAGE>
Aggregated Options Exercises in Last Fiscal Year and Fiscal Year-End Options
Values
The following table sets forth information with respect to the exercise of
Pinnacle Stock Options during the year ended December 31, 1999, and the final
year end value of unexercised Pinnacle Stock Options. None of the Named
Officers held stock appreciation rights during the year ended December 31,
1999.
<TABLE>
<CAPTION>
Number of
Securities
Underlying
Unexercised
Shares Options At
Acquired Fiscal Year-End Value of Unexercised
On Value (#) In-the-Money Options
Exercise Realized Exercisable/ At Fiscal Year-End ($)
Name (#) ($) Unexercisable Exercisable/Unexercisable
---- -------- -------- --------------- -------------------------
<S> <C> <C> <C> <C>
R. D. Hubbard........... 0 $ 0 133,000/149,000 $1,452,941 / $1,699,434
Paul R. Alanis.......... 0 $ 0 200,000/200,000 $2,059,375 / $2,059,375
J. Michael Allen........ 0 $ 0 100,000/100,000 $1,029,688 / $1,029,688
G. Michael Finnigan..... 30,000 $213,912 63,332/71,668 $ 666,239 / $782,199
Bruce C. Hinckley....... 0 $ 0 0/25,000 $ 0 / $318,750
</TABLE>
Employment Contracts, Termination of Employment and Change-in-Control
Arrangements
The Company has entered into a three-year employment agreement with Paul R.
Alanis, effective January 1, 1999. Mr. Alanis' annual compensation is
$600,000, with an annual bonus of not less than $100,000 and up to $600,000.
The bonus is payable as follows: (a) $100,000 if Mr. Alanis remains employed
by the Company for the year in question; (b) $200,000 based on the Company's
actual earnings before interest, taxes, depreciation and amortization as
compared to budget, and not exceeding the capital budget; and (c) the
remaining $300,000 to be awarded at the discretion of the Board of Directors.
If Mr. Alanis terminates his employment for good reason, or if the Company
terminates Mr. Alanis without cause, Mr. Alanis will receive an annual salary
of $700,000 through the balance of the contract period, and retain his health
and disability insurance for six months after termination. Mr. Alanis will
also immediately vest in all Pinnacle Stock Option grants.
The Company has entered into a three-year employment agreement with J.
Michael Allen, effective January 1, 1999. Mr. Allen's annual compensation is
$400,000, with a possible bonus of up to $200,000. The bonus is payable as
follows: (a) $100,000 based on the Company's actual earnings before interest,
taxes, depreciation and amortization as compared to budget, and not exceeding
the capital budget, and (b) $100,000 at the discretion of the Board of
Directors. If Mr. Allen terminates his employment for good reason, or if the
Company terminates him without cause, and so long as he does not compete with
the Company or its subsidiaries in the gaming business prior to the end of the
employment contract term, he will be entitled to $400,000 per year for the
balance of the employment contract term, with health and disability insurance
coverage for six months. Mr. Allen will also immediately vest in all Pinnacle
Stock Option grants.
The Company has entered into a three-year employment agreement with G.
Michael Finnigan, effective January 1, 1999. Mr. Finnigan's annual
compensation is $400,000 with an annual bonus of up to $200,000. The bonus is
payable as follows: (a) an amount at the discretion of the Board in the first
year, and (b) in each of the remaining years, $100,000 based on Realty
Investment Group, Inc.'s performance, and $100,000 at the discretion of the
Board of Directors. If Mr. Finnigan terminates his employment for good reason
(defined for present purposes as a material breach of the employment agreement
by the Company and failure to timely remedy such breach), or if the Company
terminates him without cause, Mr. Finnigan will receive his annual
compensation for one year (including salary and bonus), with health and
disability coverage for six months. Mr. Finnigan will also immediately vest in
all of his Pinnacle Stock Options.
Each of the employment agreements described above will be assumed by PHCR
or its subsidiaries in connection with the Pinnacle Merger. See "Voting and
Contribution Agreement; Memorandum of Understanding."
114
<PAGE>
Compensation Committee Report on Executive Compensation
The Compensation Committee of the Board of Directors, which is composed
entirely of independent outside directors, is responsible for making
recommendations to the Board regarding the annual salaries and other
compensation of the officers of the Company and providing assistance and
recommendations with respect to compensation plans.
In order to attract and retain well-qualified executives, which the
Compensation Committee believes is crucial to the Company's success, the
Compensation Committee's general approach to compensating executives is to pay
cash salaries which are commensurate with the executives' experience and
expertise and, where relevant, are competitive with the salaries paid to
executives in the Company's main industries and primary geographic locations,
which are currently land based, dockside and riverboat casinos in Nevada,
Louisiana, Mississippi, and other jurisdictions, and a thoroughbred horse
racing track in Arizona. In addition, to align its executives' compensation
with the Company's business strategies, values and management initiatives,
both short and long term, the Compensation Committee may, with the Board's
approval, authorize the payment of discretionary bonuses based upon an
assessment of each executive's contributions to the Company. In general, the
Compensation Committee believes that these discretionary bonuses should be
related to the Company's and the executive's performance, although specific
performance criteria have not been established.
The Compensation Committee also believes that stock ownership by key
executives provides a valuable incentive for such executives and helps align
executives' and stockholders' interests. To facilitate these objectives, the
Company adopted Stock Option Plans in 1993 and 1996, pursuant to which the
Company may grant stock options to executives (as well as other employees and
directors) to purchase up to 625,000 shares and 900,000 shares, respectively,
of Pinnacle Common Stock. The Compensation Committee believes that the key
officers of the Company have provided excellent services and been diligent in
their commitment to the Company. The Compensation Committee believes that
stock ownership by such officers provides an important incentive for their
continued efforts and diligence. On March 29, 1999, Pinnacle Stock Options of
100,000 and 40,000 shares were granted to Messrs. Hubbard and Finnigan,
respectively, at an exercise price of $9.625 per share.
In December, the Compensation Committee, in accordance with each executive
officer's employment agreement, and based upon the excellent services that
such executive officer performed during 1999, approved bonus awards, which
were paid in February 2000, as follows: Paul R. Alanis, $400,000; G. Michael
Finnigan, $500,000; J. Michael Allen, $125,000; and Bruce C. Hinckley,
$75,000.
Mr. Hubbard's annual salary was $500,000 for 1999. The Compensation
Committee based Mr. Hubbard's annual salary on the following factors: (a) the
Company's expansion into the casino gaming business; (b) the annual salaries
of the Company's Named Officers; and (c) the prominence of Mr. Hubbard in the
business community. In December, the Compensation Committee determined to pay
Mr. Hubbard a bonus, which was paid in February 2000, in the amount of
$700,000 based upon the following factors: (a) the Company's success in
entering into transactions to sell certain of the Company's significant
assets; (b) the performance of the Company and its subsidiaries during 1999;
(c) the level and value of the contributions that the Compensation Committee
believes that Mr. Hubbard has made to the Company in 1999; and (d) the fact
that Mr. Hubbard is willing to accept an annual salary substantially lower
than the Compensation Committee believes Mr. Hubbard could command based on
his business experience and expertise.
On December 23, 1999, the Compensation Committee approved the establishment
of a Deferred Compensation Plan benefiting certain highly compensated
employees of the Company and its subsidiaries (including executive officers).
Pursuant to the Plan, the Company does not make contributions to the Plan for
the benefit of such employees.
December 31, 1999 Compensation Committee
Lynn P. Reitnouer (Chairman)
Robert T. Manfuso
James L. Martineau
115
<PAGE>
Performance Graph
Set forth below is a graph comparing the cumulative total stockholder
return for the Company's Pinnacle Common Stock with the cumulative total
returns for the Dow Jones Industry Group CNO--Casinos & Gambling ("Peer Group
Index") and the New York Stock Exchange Market Index ("NYSE Market Index").
Also included in the graph is the cumulative total return for a designated
peer group index ("Custom Index"), which the Company historically included in
the performance graph in its proxy statement but which the Company intends to
replace with the Peer Group Index. The total cumulative return calculations
are for the period commencing December 31, 1994 and ending December 31, 1999,
and include the reinvestment of dividends.
The Custom Index consists of publicly-traded multi-jurisdictional gaming
companies with small or mid-sized stock market capitalizations. As a result of
mergers, consolidations and other similar transactions by many of the
companies in the Custom Index, the Custom Index is currently comprised of only
the following publicly-traded gaming companies: Ameristar Casinos, Inc.;
Argosy Gaming Company; Lady Luck Gaming Corporation; and Players
International, Inc. By contrast, the Peer Group Index includes a larger number
and broader range of companies and consists of approximately thirty publicly-
traded gaming companies. The Company believes that the Peer Group Index is a
more appropriate benchmark against which to measure its stock return
performance than the Custom Index.
COMPARISON OF CUMULATIVE TOTAL RETURN* AMONG
THE COMPANY, NYSE MARKET INDEX,
PEER GROUP INDEX & CUSTOM INDEX
PERFORMANCE GRAPH APPEARS HERE
<TABLE>
<CAPTION>
PINNACLE PEER NYSE
Measurement Period ENTERTAINMENT, GROUP MARKET CUSTOM
(Fiscal Year Covered) INC. 500 INDEX INDEX INDEX
--------------------- --------------- --------- ---------- -------
<S> <C> <C> <C>
Measurement Pt-1994 $100.00 $100.00 $100.00 $100.00
FYE 1995 $ 91.48 $116.39 $129.66 $ 75.56
FYE 1996 $136.36 $124.97 $156.20 $ 48.78
FYE 1997 $200.00 $113.29 $205.49 $ 34.52
FYE 1998 $ 75.57 $ 81.90 $244.52 $ 34.45
FYE 1999 $204.00 $130.34 $267.75 $ 84.47
</TABLE>
The above graph shows historical stock price performance (including
reinvestment of dividends) and is not necessarily indicative of future
performance.
-------
* Assumes $100 invested on January 1, 1994 in Pinnacle Common Stock, Peer
Group Index, NYSE Market Index and the Custom Index. Total return assumes
reinvestment of dividends. Values are as of December 31 of each year.
116
<PAGE>
Certain Relationships and Related Transactions
On June 2, 1998, the Company and R.D. Hubbard Enterprises, Inc. ("Hubbard
Enterprises"), which is wholly owned by Mr. Hubbard, entered into a new
Aircraft Time Sharing Agreement. The former agreement was entered into in
November 1993. The June 2, 1998 Aircraft Time Sharing Agreement is identical
to the former agreement in all aspects, except for the type of aircraft
covered by the agreement. The Aircraft Time Sharing Agreement expired on
December 31, 1999, and automatically renews each month unless written notice
of termination is given by either party at least two weeks before a renewal
date. The Company reimburses Hubbard Enterprises for expenses incurred as a
result of the Company's use of the aircraft, which totaled approximately
$176,000 in 1999, $72,000 in 1998 and $106,000 in 1997.
On August 31, 1998, the Company received a promissory note for up to
$3,500,000 from Paul R. Alanis. As of December 31, 1998, the Company had
loaned Mr. Alanis $3,232,000, who used the funds to purchase 300,000 shares of
Pinnacle Common Stock. The principal amount of the promissory note, along with
accrued interest, was paid in full in June 1999.
Timothy J. Parrott purchased 270,738 shares of Boomtown common stock in
connection with Boomtown's 1988 acquisition of Boomtown Hotel & Casino, Inc.
(which operates Boomtown Reno). Mr. Parrott paid an aggregate purchase price
for the common stock of $222,000, of which $1,000 was paid in cash and
$221,000 was paid by a promissory note secured by pledge to Boomtown of all of
the shares owned by Mr. Parrott. As of October 31, 1998, Mr. Parrott resigned
his position as Chairman of Boomtown, and was retained by the Company as a
consultant to provide services relating to gaming and other business issues.
Mr. Parrott was retained for a three year period, with an annual retainer of
$350,000 with health and disability benefits equivalent to those he received
as Chairman of Boomtown. Mr. Parrott's $221,000 note will be forgiven in three
equal parts on each anniversary of the consulting agreement.
Marlin Torguson, who beneficially owned approximately 21.5% of the
outstanding common shares of Casino Magic prior to the Company's acquisition
of Casino Magic, agreed, in connection with such acquisition, to vote his
Casino Magic shares in favor of the acquisition by the Company. In addition,
Mr. Torguson agreed to continue to serve as an employee of Casino Magic for
three years following the acquisition and, during such three-year period, not
to compete with the Company or Casino Magic in any jurisdiction in which
either the Company or Casino Magic operates. The Company appointed Mr.
Torguson to its board of directors. The Company issued to Mr. Torguson 60,000
shares of the Company's Pinnacle Common Stock as compensation for his three-
year service as an employee, and will pay him $300,000 per year, during a
three-year period, for his non-compete agreement. In addition, the Company
issued Mr. Torguson 30,000 Pinnacle Stock Options to acquire Pinnacle Common
Stock as of the October 15, 1998 acquisition of Casino Magic, priced at the
closing price of Pinnacle Common Stock on that date. The foregoing payments
will be made to Mr. Torguson whether or not the Company or Casino Magic
terminates Mr. Torguson's employment, except for termination for cause.
For certain matters related to the Pinnacle Merger, see "Special Factors,"
"The Pinnacle Merger," "Merger Agreement," "Voting and Contribution Agreement;
Memorandum of Understanding" and "Stockholders Agreement."
Section 16(a) Beneficial Ownership Reporting Compliance
Based solely upon a review of reports furnished to the Company during or
with respect to the year ended December 31, 1999 pursuant to Rule 16a-3(e) of
the Exchange Act, all required reports on Form 3, Form 4 and Form 5 were
timely filed by the Company's directors, officers and 10% stockholders, except
that Mr. Torguson failed to file on a timely basis one Form 4 which reported a
series of acquisitions on a single trading day of shares of Pinnacle Common
Stock and Mr. Ornest failed to file on a timely basis one Form 4 which
reported one disposition of shares of Pinnacle Common Stock of which he had
indirect beneficial ownership.
117
<PAGE>
Security Ownership of Certain Beneficial Owners and Management
The following table sets forth the name, address (address is provided for
persons listed as beneficial owners of 5% or more of the outstanding Pinnacle
Common Stock), number of shares and percent of the outstanding Pinnacle Common
Stock beneficially owned as of July 28, 2000 (except where a different date is
indicated below) by each person known to the Board of Directors of the Company
to be the beneficial owner of 5% or more of the outstanding shares of Pinnacle
Common Stock, each Director, each Named Officer, and all current Directors and
Executive Officers as a group.
<TABLE>
<CAPTION>
Name and Address of Beneficial Shares Beneficially Percent of Shares
Owner Owned Outstanding(a)
------------------------------ ------------------- -----------------
<S> <C> <C>
Legg Mason, Inc............................................... 2,883,104(b) 11.0%
111 South Calvert Street
Baltimore, Maryland 21202
R.D. Hubbard(c)............................................... 2,817,820(d) 10.6%
Pinnacle Entertainment, Inc.
330 North Brand Boulevard, Suite 1100
Glendale, California 91203
Paul R. Alanis(c)............................................. 600,000(e) 2.3%
Timothy J. Parrott............................................ 366,339(f) 1.4%
Michael Ornest................................................ 302,833(g) 1.2%
Marlin Torguson............................................... 103,830(h) *
Lynn P. Reitnouer............................................. 64,000(i) *
Robert T. Manfuso............................................. 42,333(j) *
James L. Martineau............................................ 8,525(k) *
Gary G. Miller................................................ 5,334(l) *
G. Michael Finnigan(c)........................................ 122,082(m) *
J. Michael Allen(c)........................................... 150,000(n) *
Bruce C. Hinckley(c).......................................... 13,333(o) *
Current Directors and Executive Officers as a group
(13 persons)................................................. 4,596,428(p) 16.8%
</TABLE>
--------
* Less than one percent (1%) of the outstanding common shares.
(a) Assumes exercise of stock options beneficially owned by the named
individual or entity into shares of Pinnacle Common Stock. Based on
26,306,323 shares outstanding as of July 28, 2000.
(b) Based upon information provided by the stockholder in Schedule 13G filed
with the Securities and Exchange Commission on February 14, 2000.
According to such Schedule 13G, as of December 31, 1999, 2,515,000 (9.6%)
shares were held by Legg Mason Fund Adviser, Inc, which has power to
dispose thereof. The Schedule 13G further reports that the remaining
368,104 shares were held by Legg Mason Capital Management, Inc., Legg
Mason Trust, fsb and Legg Mason Wood Walker, Inc., which have power to
dispose thereof. Legg Mason Fund Adviser, Inc., Legg Mason Capital
Management, Inc., Legg Mason Trust, fsb and Legg Mason Wood Walker, Inc.
are reported as subsidiaries of Legg Mason, Inc.
(c) Based upon information provided by Harveys Casino Resorts, Colony HCR
Voteco, LLC, Thomas J. Barrack, Jr. and Kelvin L. Davis in a Schedule 13D
filed with the Securities and Exchange Commission on April 27, 2000.
According to such Schedule 13D, as a result of PHCR's execution and
delivery of the Voting Agreement pursuant to which each of the Management
Stockholders agreed to vote his shares in favor of the Pinnacle Merger and
granted to PHCR an irrevocable proxy coupled with an interest to vote all
shares
118
<PAGE>
beneficially owned by such person in favor of the Pinnacle Merger, each of
Harveys Casino Resorts, Colony HCR Voteco, LLC, Thomas J. Barrack, Jr. and
Kelvin L. Davis may be deemed to have the shared power to vote or to direct
the vote of 3,000,285 shares (11.4%) of Pinnacle Common Stock, plus
1,040,342 shares of Pinnacle Common Stock which the Management Stockholders
have the right to acquire upon the exercise of options, which are
exercisable within 60 days of July 28, 2000 (such options and shares
together constitute 14.8% of the outstanding shares of Pinnacle Common
Stock), and therefore may be deemed to beneficially own such shares for
purposes of Section 13(d) of the Exchange Act. According to such Schedule
13D, each of Harveys Casino Resorts, Colony HCR Voteco, LLC, Thomas J.
Barrack, Jr. and Kelvin L. Davis disclaims beneficial ownership of all such
shares, and such parties do not admit that any of them, together with any
of the Management Stockholders, constitute a "person" or "group" for any
purpose other than what they may be deemed to constitute under Section
13(d) of the Exchange Act.
(d) Includes 198,000 shares of Pinnacle Common Stock, which Mr. Hubbard has
the right to acquire upon the exercise of options, which are exercisable
within 60 days of July 28, 2000. These shares also include 249,990 shares
of Pinnacle Common Stock owned by the R.D. and Joan Dale Hubbard
Foundation, a non-profit organization; Mr. Hubbard may be deemed to have
beneficial ownership of such shares.
(e) Includes 300,000 shares of Pinnacle Common Stock held by MBJJP, Ltd., a
family limited partnership for which Mr. Alanis and his wife Allison
Alanis act as general partners. Also includes 300,000 shares of Pinnacle
Common Stock, which Mr. Alanis has the right to acquire upon the exercise
of options, which are exercisable within 60 days of July 28, 2000.
(f) Includes 237,278 shares of Pinnacle Common Stock which Mr. Parrott has the
right to acquire upon exercise of options which are exercisable within 60
days of July 28, 2000, including 235,278 options assumed by the Company in
connection with the Boomtown merger.
(g) Includes 3,667 shares of Pinnacle Common Stock, which Mr. Ornest has the
right to acquire upon the exercise of options, which are exercisable
within 60 days of July 28, 2000.
(h) Includes 13,730 shares of Pinnacle Common Stock, which Mr. Torguson has
the right to acquire upon the exercise of options, which are exercisable
within 60 days of July 28, 2000, including 11,730 shares covered by
options assumed by the Company in connection with the Casino Magic merger.
(i) Includes 14,000 shares of Pinnacle Common Stock, which Mr. Reitnouer has
the right to acquire upon the exercise of options, which are exercisable
within 60 days of July 28, 2000.
(j) Includes 14,000 shares of Pinnacle Common Stock, which Mr. Manfuso has the
right to acquire upon the exercise of options, which are exercisable
within 60 days of July 28, 2000.
(k) Includes 6,191 shares of Pinnacle Common Stock owned by Mr. Martineau's
wife, beneficial ownership of which is disclaimed by Mr. Martineau, and
2,334 shares of Pinnacle Common Stock which Mr. Martineau has the right to
acquire upon the exercise of options, which are exercisable within 60 days
of July 28, 2000.
(l) Includes 2,334 shares of Pinnacle Common Stock, which Mr. Miller has the
right to acquire upon the exercise of options, which are exercisable
within 60 days of July 28, 2000.
(m) Includes 96,667 shares of Pinnacle Common Stock, which Mr. Finnigan has
the right to acquire upon the exercise of options, which are exercisable
within 60 days of July 28, 2000.
(n) Includes 150,000 shares of Pinnacle Common Stock, which Mr. Allen has the
right to acquire upon the exercise of options, which are exercisable
within 60 days of July 28, 2000.
(o) Includes 8,333 shares of Pinnacle Common Stock, which Mr. Hinckley has the
right to acquire upon the exercise of options, which are exercisable
within 60 days of July 28, 2000.
(p) Includes 1,040,342 shares of Pinnacle Common Stock of which the Directors
and Executive Officers may be deemed to have beneficial ownership
following the exercise of options to purchase Pinnacle Common Stock, which
are exercisable within 60 days of July 28, 2000. Excluding such shares,
the Directors and Executive Officers of the Company have beneficial
ownership of 3,556,086 shares of Pinnacle Common Stock, which represents
13.5% of the shares of Pinnacle Common Stock outstanding as of July 28,
2000.
No director or officer of the Company has engaged in any transaction in
Pinnacle Common Stock during the past 60 days.
119
<PAGE>
ADDITIONAL INFORMATION ABOUT THE COMPANY
The Company is a diversified gaming company that owns and operates eight
casinos (four with hotels) in Nevada, Mississippi, Louisiana and Argentina,
two of which are the subject of pending sale transactions. The Company
receives lease income from two card club casinos, both in the Los Angeles
metropolitan area. The company is also constructing the Belterra Casino
Resort, a major hotel/casino complex in Southern Indiana, approximately 35
miles southwest of Cincinnati. See "Parties to the Pinnacle Merger--The
Company."
The following is an overview of the Company's gaming properties as of
December 31, 1999:
<TABLE>
<CAPTION>
Number of
--------------------
Gaming
Square Slot Table Hotel
Property Type of Gaming Footage Machines Games Rooms
-------- ------------------ ------- -------- ----- -----
<S> <C> <C> <C> <C> <C>
Operating Properties:
Boomtown Reno................. Land-based 45,000 1,265 39 318
Boomtown New Orleans.......... Cruising Riverboat 30,000 1,185 38 --
Casino Magic Biloxi........... Dockside 47,700 1,197 47 378
Casino Magic Bossier City..... Dockside Riverboat 30,000 1,058 41 188
Casino Magic Argentina(a)..... Land-based 33,000 515 55 --
------- ----- --- -----
Subtotal.................... 185,700 5,220 220 884
------- ----- --- -----
Properties Held for Sale:
Boomtown Biloxi............... Dockside 33,632 1,184 28 --
Casino Magic Bay St. Louis.... Dockside 39,500 1,123 38 201
------- ----- --- -----
Subtotal.................... 73,132 2,307 66 201
------- ----- --- -----
Grand Total................. 258,832 7,527 286 1,085
======= ===== === =====
Card Clubs Leased:
Hollywood Park-Casino(b)...... Card Club 30,000 -- 145 --
Crystal Park Casino(b)........ Card Club 30,000 -- 60 226
------- ----- --- -----
Card Club Total............... 60,000 -- 205 226
======= ===== === =====
Development Property:
Belterra Casino Resort(c)..... Cruising Riverboat 38,000 1,300 55 309
======= ===== === =====
</TABLE>
--------
(a) There are two separate land-based casinos in Argentina, Casino Magic
Neuqen and Casino Magic San Martin de los Andes, collectively, Casino
Magic Argentina.
(b) The Company does not operate these properties. It leases the Hollywood
Park-Casino and Crystal Park Casino to an unaffiliated operator, for a
fixed monthly rent.
(c) The Company owns 97% of Belterra Casino Resort.
Gaming and Other Operations
Boomtown, Inc. On June 30, 1997, pursuant to the Agreement and Plan of
Merger dated as of April 23, 1996, by and among the Company, HP Acquisition,
Inc. (a wholly-owned subsidiary of the Company), and Boomtown, HP Acquisition,
Inc. was merged with and into Boomtown (the "Boomtown Merger"). As result of
the Boomtown Merger, Boomtown became a wholly-owned subsidiary of the Company
and each share of Boomtown common stock was converted into the right to
receive 0.625 of a share of the Company's common stock. Approximately
5,362,850 shares of the Company's common stock, valued at $9.8125 per share
(excluding shares retired, as described below) were issued in the Boomtown
Merger.
The Boomtown Merger was accounted for under the purchase method of
accounting for a business combination. The purchase price of the Boomtown
Merger was allocated to identifiable assets acquired and
120
<PAGE>
liabilities assumed based on their estimated fair values at the date of
acquisition. Based on financial analyses, which considered the impact of
general economic, financial and market conditions on the assets acquired and
the liabilities assumed, the estimated fair values approximated their carrying
values. The Boomtown Merger generated approximately $15,302,000 of excess
acquisition cost over the recorded value of the net assets acquired, all of
which was allocated to goodwill, which is being amortized over 40 years. The
Company anticipates such goodwill will be reduced by approximately $3,054,000
in connection with the recently completed sale of Boomtown Biloxi (see Note 4
to the Notes to Consolidated Financial Statements). The amortization of the
goodwill is not deductible for income tax purposes.
The Company acquired three of the four Boomtown properties: Boomtown Reno,
Boomtown New Orleans and Boomtown Biloxi.
Boomtown Reno has been operating for over 32 years on 569 acres in the
rolling foothills of the Sierra Nevada mountains, (current operations are
utilizing approximately 61 acres, with 250 acres available for development) in
Verdi, Nevada. Depending on the direction of travel, Boomtown Reno is either
the first or the last hotel casino in Nevada seen when traveling on Interstate
80. About 25,000 cars and trucks pass by every day, mostly heading to or from
California, and every year about 1,400,000 of them, or approximately 15% of
all highway traffic, stop in for gaming, dining or lodging. In 1999, Boomtown
Reno completed renovations at the property that added 196 new rooms, 24 luxury
suites, new convention/meeting space and new and improved restaurants.
Boomtown Reno also features, among other amenities, a truck stop, a
recreational vehicle park, a full service gas station with a mini-mart and a
family fun center.
Boomtown New Orleans opened in August 1994 on a 50-acre site in Harvey,
Louisiana, approximately ten miles from the French Quarter of New Orleans.
Prior to August 8, 1997, Boomtown New Orleans had a 7.5% minority interest
partner. On November 18, 1996, Boomtown entered into an agreement to buy out
the minority partner for $5,670,000, and as of August 8, 1997, the full
payment had been made. Located in the suburban area of New Orleans referred to
as the "Westbank", Boomtown New Orleans boasts a large new riverboat with the
friendliest employees and the best array of gaming attractions in the area.
Adding to the appeal, there were a number of improvements in 1999, such as a
totally remodeled buffet and the addition of a Cajun steak and seafood
restaurant. Boomtown New Orleans is the only gaming property in the Westbank.
Boomtown Biloxi opened in July 1994 and occupies 19 acres on Mississippi's
historic Back Bay of the Mississippi Gulf Coast. Boomtown Biloxi had been
operating with a 15% minority interest partner, and on September 11, 1998, the
Company acquired the minority interest for $400,000. Boomtown Biloxi leases
the majority of the acreage under a 99-year lease. Boomtown Biloxi targets
middle income local residents and offers a value oriented gaming experience,
including one of the best buffets in the Biloxi gaming market. The sale of
this facility closed in August 2000 (see Note 4 to the Notes to Consolidated
Financial Statements).
The fourth Boomtown property, Boomtown Las Vegas, was divested following
the Boomtown Merger on July 1, 1997. Boomtown and its subsidiaries exchanged
substantially all of their interest in the Las Vegas property, including
substantially all of the operating assets and notes receivable of
approximately $27,300,000 from the landowner/lessor of the Las Vegas property
for, among other things, two unsecured notes receivable totaling approximately
$8,465,000, cash, assumption of certain liabilities and release from certain
lease obligations. In addition, concurrently with the divestiture of the Las
Vegas property, the Company purchased and retired 446,491 shares of the
Company's common stock issued to a former principal of Boomtown for a price of
approximately $3,465,000, payable in the form of a Pinnacle Entertainment
promissory note.
Casino Magic Corp. On October 15, 1998, the Company acquired Casino Magic,
pursuant to the February 19, 1998 Agreement of Merger among Casino Magic
Corp., the Company, and HP Acquisition II, Inc. (a wholly-owned subsidiary of
the Company) (the "Casino Magic Merger"). The Company paid cash of
approximately $80,904,000 for Casino Magic's common stock. At the date of the
acquisition, the Company had purchased 792,900 common shares of Casino Magic,
on the open market, at a total cost of approximately $1,615,000. The Company
paid $2.27 per share for the remaining 34,929,224 shares of Casino Magic
common stock outstanding.
121
<PAGE>
The Casino Magic Merger was accounted for under the purchase method of
accounting for a business combination. The purchase price of the Casino Magic
Merger was allocated to identifiable assets acquired and liabilities assumed
based on their estimated fair values at the date of acquisition. Assets
acquired and liabilities assumed were, when found to be necessary, written up
or down to their fair market values based on financial analyses, which
considered the impact of general economic, financial and market conditions.
The Casino Magic Merger generated approximately $43,284,000 of excess
acquisition cost over the recorded value of the net assets acquired, all of
which was allocated to goodwill, to be amortized over 40 years. The Company
anticipates such goodwill will be reduced by approximately $10,277,000 in
connection with the recently completed sale of Casino Magic Bay St. Louis (see
Note 4 to the Notes to Consolidated Financial Statements). The amortization of
the goodwill is not deductible for income tax purposes.
Casino Magic owns and operates i) dockside casinos in Bay St. Louis,
Mississippi, and Biloxi, Mississippi; ii) dockside riverboat gaming in Bossier
City, Louisiana, and iii) land-based casinos at two Argentina locations.
Casino Magic Bay St. Louis, which was sold in August 2000 (see Note 4 to
the Notes to Consolidated Financial Statements), began operations in September
1992, on a permanently moored barge in a 17 acre marina with the adjoining
land-based facilities situated on 591 acres. Bay St. Louis is approximately
46 miles east of New Orleans and 40 miles west of Biloxi. The three story
land-based building houses a restaurant, buffet, snack bar, gift shop and a
live entertainment lounge. The property has a 201 room hotel, an 1,800 seat
arena for concerts and sporting events, and is the only Casino in the Gulf
Coast market with an 18-hole championship golf course on the same property as
the gaming facility.
Casino Magic Biloxi is located in the Mississippi Gulf Coast market, and
began operations in June 1993. The facility includes over 47,000 square feet
of gaming space with 1,197 slot machines and 47 table games, a 378 luxury room
hotel, complete with 16 individually themed master suites and 70 junior
suites, 6,600 square feet of convention and meeting space and a fine dining
restaurant. The property is nestled between two other casinos on the main
strip of Biloxi, commonly referred to as Casino Row. Biloxi, Mississippi is at
the center of the Mississippi Gulf Coast, which emerged as one of the major
regional gaming markets in the United States, exceeding the billion-dollar
gaming revenue milestone in 1999.
Casino Magic Bossier City opened in October 1996 on 23 acres of land, with
casino operations conducted from a dockside riverboat. The property is highly
visible from, and has convenient access to, Interstate 20, a major
thoroughfare connecting Shreveport/Bossier City to Dallas/Fort Worth, just a
three hour drive away. Casino Magic Bossier City boosts a 188-room luxury
hotel, with four master suites, 88 junior suites, a 55,000 square foot
entertainment pavilion, which includes the 350 seat Abracadabra buffet
restaurant, a gift shop, a bar and lounge area, and a 300 seat live
entertainment theater.
In December 1994, Casino Magic, through its wholly-owned subsidiary, Casino
Magic Neuquen S.A., entered into a twelve-year concession agreement with the
Province of Neuquen, Argentina. Casino Magic Argentina operates two casinos in
the Province of Neuquen in the cities of Neuquen and San Martin de los Andes
in west-central Argentina. Neuquen Province is the gateway to the well
established tour destinations and ski resorts of the Andes Mountains. There
are approximately 900,000 residents within a 50 mile radius of the two cities.
In October 1999, the Company purchased the 49% minority interest not owned by
the Company in Casino Magic Argentina.
Hollywood Park-Casino. The Hollywood Park-Casino is located in Inglewood,
California. On September 10, 1999, the Company completed the dispositions of
the Hollywood Park Race Track and Hollywood Park-Casino to Churchill Downs for
$117,000,000 cash and $23,000,000 cash, respectively (see Note 3 to the Notes
to Consolidated Financial Statements). 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, at which time the Company and sub
lessee will negotiate the terms of any sublease extension.
122
<PAGE>
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 California
racing associations may not operate gambling enterprises in California. As a
result, the Hollywood Park-Casino, since September 10, 1999, is leased to, and
operated by, an unrelated third party.
By California state law, a California card club casino may neither bank
card games nor offer certain of the casino games permitted in Nevada and other
traditional gaming jurisdictions, and thus does not participate in the wagers
made or in the outcome of any of the games played.
The Crystal Park Casino. The Crystal Park Casino, located in Compton,
California opened on October 25, 1996. As of December 31, 1997, the Company
owned 100% of Crystal Park Hotel and Casino Development Company, LLC ("Crystal
Park LLC"), the entity that owns the Crystal Park Casino. In December 1997,
the Company paid $1,000,000 (or the initial amount the member contributed) for
3.4% of Crystal Park LLC and in February 1998, paid an additional $2,000,000
(or the initial amount the member contributed) for the remaining outstanding
6.8% of Crystal Park LLC in a transaction with an effective date of December
31, 1997.
As noted above, public corporations that are not qualified California
racing associations may not operate gambling enterprises in California. As a
result, the Crystal Park Casino is leased to, and operated by, the same third
party which operates the Hollywood Park-Casino. The lease is a 48 month,
triple net lease executed on December 19, 1997. Rent due under the lease was
scheduled to increase as of July 1, 1998, but under present market conditions,
will be $100,000 per month for the foreseeable future. Previously, the Crystal
Park Casino was under lease to Compton Entertainment, Inc. ("CEI"). On
November 4, 1997, Crystal Park LLC obtained a judgment in an action for
unlawful detainer against CEI, due to CEI's failure to pay a portion of the
June 1997 rent and to make required additional rent payments. In October 1997,
the California Attorney General revoked CEI's conditional gaming registration,
and the City of Compton revoked CEI's city gaming license. CEI closed the
Crystal Park Casino on October 11, 1997. The Crystal Park Casino reopened on
December 26, 1997.
Other Gaming. Pinnacle Entertainment, through its wholly owned subsidiary
HP Yakama, Inc. ("HP Yakama") loaned approximately $9,618,000 to the Tribal
Gaming Corporation (the "Tribal Corporation") to construct the Legends Casino
in 1998. The Tribal Corporation gave HP Yakama a promissory note for the
$9,618,000, payable in 84 equal installments at a 10% rate of interest. As of
December 31, 1999, the remaining balance on the note was $8,086,000.
Pursuant to a seven year Master Lease between HP Yakama and the
Confederated Tribes and Bands of the Yakama Indian Nation (the "Tribes"), HP
Yakama must pay the Tribes monthly rent of $1,000. HP Yakama and the Tribal
Corporation entered into a corresponding seven year Sublease, under which the
Tribal Corporation owes rent to HP Yakama. Rent under the Sublease was
initially set at 28% of Net Revenues (as defined in the relevant agreements),
and decreases to 22% over the seven year term of the lease. Through the end of
1999, the Company had received approximately $622,000 of rent under the
sublease.
General. All of the Company's properties in Mississippi and Louisiana are
dependent upon attracting customers within their respective geographical
markets. The Company has three casinos in Mississippi, two in Biloxi and one
in nearby Bay St. Louis, and two casinos in Louisiana, one in Bossier City and
one in Harvey, near New Orleans (the Louisiana properties are located 320
miles apart). The Company has a pending sales transaction for the sale of two
of the Mississippi properties (see Note 4 to the Notes to Consolidated
Financial Statements). There can be no assurance that the Company will be able
to continue to attract a sufficient number of customers necessary to make its
operations profitable. In addition, adverse regulatory changes or changes in
the gaming environment in Mississippi and Louisiana could have a materially
adverse effect on the Company's operations.
The Company's riverboat and dockside gaming facilities in Mississippi and
Louisiana, as well as any additional riverboats that might be developed or
acquired, such as the Belterra Casino Resort, are subject to risks
123
<PAGE>
in addition to those associated with land-based casinos, including loss of
service due to casualty, mechanical failure, extended or extraordinary
maintenance, flood, hurricane or other severe weather conditions. For cruising
riverboats there are additional risks associated with the movement of vessels
on waterways, including risks of casualty due to river turbulence and severe
weather conditions.
In September 1998, a hurricane struck the Gulf Coast region and Boomtown
Biloxi, Boomtown New Orleans, Casino Magic Biloxi, and Casino Magic Bay St.
Louis were forced to shut down operations for approximately one week, though
none of the properties sustained significant damage. If any of the Company's
casinos, be it riverboat, dockside or land-based, cease operations for any
period of time, it could adversely affect the Company's results of operations.
Mississippi Anti-Gaming Initiative. In 1998, two referenda were proposed
which, if approved, would have amended the Mississippi Constitution to ban
gaming in Mississippi and would have required all currently legal gaming
entities to cease operations within two years of the ban. A Mississippi State
Circuit Court judge ruled that the first of the proposed referenda was illegal
because, among other reasons, it failed to include required information
regarding its anticipated effect on government revenues. The Mississippi
Supreme Court affirmed the Circuit Court ruling, but only on procedural
grounds. The second referendum proposal included the same language on
government revenues as the first referendum and was struck down by another
Mississippi State Circuit Court judge on the same grounds as the first.
On March 22, 1999, another such referendum was filed with the Mississippi
Secretary of State. The Circuit Court of Hinds County struck down this third
referendum on May 6, 1999 because the initiative failed once again to include
language pertaining to the initiative's negative economic impact. This matter
has been appealed to the Mississippi Supreme Court where disposition is
currently pending. Any such referendum must be approved by the Mississippi
Secretary of State and signatures of approximately 98,000 registered voters
must be gathered and certified in order for such a proposal to be included on
a statewide ballot for consideration by the voters. The next election, for
which the proponents could attempt such a proposal on the ballot, would be
November 2000. It is likely at some point that a revised initiative will be
filed which would adequately address the issues regarding the effect on
government revenues of prohibition of gaming in Mississippi. However, while it
is too early in the process for the Company to make any predictions with
respect to whether such a referendum will appear on a ballot or the likelihood
of such a referendum being approved by the voters, if such a referendum were
passed and gaming were prohibited in Mississippi, it would have a materially
adverse effect on the Company.
Arkansas. The Arkansas Attorney General has, to date, certified at least
three (3) ballot initiatives that would permit casino gambling in the State.
Each initiative requires the collection, by July 7, 2000, of more than
70,000 signatures to qualify it for the November 2000 general election ballot.
The proposed initiatives each vary in their scope and breadth. The Company's
Casino Magic Bossier City casino, in particular, could be negatively impacted
by the existence of casino gambling in Arkansas.
Expansion Plans
The following is a summary of the property enhancements and expansion
projects that the Company undertook with respect to its properties.
Boomtown Reno. The expansion and renovation of Boomtown Reno was completed
in 1999. The renovation included 196 new rooms, 24 luxury suites, new
convention/ meeting space and new improved restaurants.
Boomtown New Orleans. In 1999, improvements included a totally remodeled
buffet and a Cajun steak and seafood restaurant.
Casino Magic Bossier City. Casino Magic Bossier City completed its 188 room
luxury hotel in December 1998, as well as other improvements to the 55,000
square foot Pavilion.
124
<PAGE>
Based on the success of the luxury hotel tower completed in December 1998,
the overall strong performance of the property and the anticipated growth of
the Shreveport/Bossier City market, the Company is currently evaluating a
major expansion of the Casino Magic Bossier City facility. Such an expansion
would include: i) a new 300 room luxury hotel tower, ii) a new riverboat
casino comparable in size and quality to that now being constructed in
connection with the Belterra Casino Resort, and iii) a completely redesigned
pavilion building.
Belterra Casino Resort. See "Parties to the Pinnacle Merger--The Company--
Belterra Casino Resort in Indiana" and Note 6 to the Notes to Consolidated
Financial Statements.
Lake Charles. In November 1999, the Company filed an application for the
fifteenth and final gaming license to be issued by the Louisiana Gaming
Control Board. The Company's application is seeking approval to operate a
cruising riverboat casino, hotel and golf course resort complex in Lake
Charles, Louisiana.
In connection with such submittal, the Company entered into an option
agreement with the Lake Charles Harbor and Terminal District (the "District")
to lease 225-acres of unimproved land from the District upon which such resort
complex would be constructed. The term of the lease would be for a total of up
to 70 years. The lease would require the Company to develop certain on- and
off- site improvements. 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. (See Note 6 to the
Notes to Consolidated Financial Statements.)
There can be no assurance that the Company will be successful in completing
any currently contemplated or future expansion projects or, even if they are
completed, that the projects will be successful. Numerous factors, including
regulatory or financial constraints, could intervene and cause the Company to
alter, delay or abandon expansion plans. Such risks include an inability to
secure required financing and required local gaming approvals and other
permits and approvals, as well as risks typically associated with any
construction project, including possible shortages of materials or skilled
labor, unforeseen engineering, environmental or geological problems, work
stoppages, weather interference and unanticipated costs overruns. In addition,
the Company is subject to state and local laws and regulations, ordinances and
similar provisions relating to zoning and other matters that may restrict the
possible uses of the Company's land and other assets. Any additional
development of the Company's land, including the expansion plans described
above, would require approval of such items as environmental impact reports
and similar certifications. There can be no assurance that other requisite
approvals would be obtained.
Government Regulation
Louisiana. The ownership and operation of a riverboat gaming vessel is
subject to the Louisiana Riverboat Economic Development and Gaming Control Act
(the "Louisiana Act"). As of May 1, 1996, gaming activities are regulated by
the Louisiana Gaming Control Board (the "Board"). The Board is responsible for
issuing the gaming license and enforcing the laws, rules and regulations
relative to riverboat gaming activities. The Board is empowered to issue up to
fifteen licenses to conduct gaming activities on a riverboat of new
construction in accordance with applicable law. However, no more than six
licenses may be granted to riverboats operating from any one parish.
An initial license to conduct gaming operations is valid for a term of five
years. The Louisiana Act provides for successive five year renewals after the
initial five year term.
The laws and regulations of Louisiana seek to (i) prevent unsavory or
unsuitable persons from having any direct or indirect involvement with gaming
at any time or in any capacity; (ii) establish and maintain responsible
accounting practices and procedures; (iii) maintain effective control over the
financial practices of licensees, including establishing procedures for
reliable record keeping and making periodic reports to the Board; (iv) prevent
cheating and fraudulent practices; (v) provide a source of state and local
revenues through fees; and (vi) ensure that gaming licensees, to the extent
practicable, employ and contract with Louisiana residents, women and
minorities.
125
<PAGE>
The Louisiana Act specifies certain restrictions and conditions relating to
the operation of riverboat gaming, including but not limited to the following:
(i) in parishes bordering the Red River, such as the Company's Casino Magic
property in Bossier, gaming may be conducted dockside; however, in all other
authorized locations such as Boomtown New Orleans, gaming is not permitted
while a riverboat is docked, other than for forty-five minutes between
excursions, unless dangerous weather or water conditions exist; (ii) each
round trip riverboat cruise may not be less than three nor more than eight
hours in duration, subject to specified exceptions; (iii) agents of the Board
are permitted on board at any time during gaming operations; (iv) gaming
devices, equipment and supplies may be purchased or leased from permitted
suppliers; (v) gaming may only take place in the designated river or waterway;
(vi) gaming equipment may not be possessed, maintained, or exhibited by any
person on a riverboat except in the specifically designated gaming area, or a
secure area used for inspection, repair, or storage of such equipment; (vii)
wagers may be received only from a person present on a licensed riverboat;
(viii) persons under 21 are not permitted in designated gaming areas; (ix)
except for slot machine play, wagers may be made only with tokens, chips, or
electronic cards purchased from the licensee aboard a riverboat; (x) licensees
may only use docking facilities and routes for which they are licensed and may
only board and discharge passengers at the riverboat's licensed berth; (xi)
licensees must have adequate protection and indemnity insurance; (xii)
licensees must have all necessary federal and state licenses, certificates and
other regulatory approvals prior to operating a riverboat; and (xiii) gaming
may only be conducted in accordance with the terms of the license and the
rules and regulations adopted by the Board.
No person may receive any percentage of the profits from the Company's
operations in Louisiana without first being found suitable. In March 1994,
Boomtown New Orleans, its officers, key personnel, partners and persons
holding a 5% or greater interest in the partnership were found suitable by the
predecessor to the Board. In April 1996, the Board's predecessor confirmed
that Casino Magic Bossier's officers, key personnel, partners and persons
holding a 5% or greater interest in the corporation were suitable and
authorized to acquire an existing licensee. In July 1999, the Board renewed
Boomtown New Orleans' license to conduct gaming operations. In January 2000,
Casino Magic Bossier filed an application to renew its license to conduct
gaming operations. A gaming license is deemed to be a privilege under
Louisiana law and as such may be denied, revoked, suspended, conditioned or
limited at any time by the Board. In issuing a license, the Board must find
that the applicant is a person of good character, honesty and integrity and
the applicant is a person whose prior activities, criminal record, if any,
reputation, habits and associations do not pose a threat to the public
interest of the State of Louisiana or to the effective regulation and control
of gaming, or create or enhance the dangers of unsuitable, unfair or illegal
practices, methods, and activities in the conduct of gaming or the carrying on
of business and financial arrangements in connection therewith. The Board will
not grant any licenses unless it finds that: (i) the applicant is capable of
conducting gaming operations, which means that the applicant can demonstrate
the capability, either through training, education, business experience, or a
combination of the above, to operate a gaming casino; (ii) the proposed
financing of the riverboat and the gaming operations is adequate for the
nature of the proposed operation and from a source suitable and acceptable to
the Board; (iii) the applicant demonstrates a proven ability to operate a
vessel of comparable size, capacity and complexity to a riverboat in its
application for a license; (v) the applicant designates the docking facilities
to be used by the riverboat; (vi) the applicant shows adequate financial
ability to construct and maintain a riverboat; (vii) the applicant has a good
faith plan to recruit, train and upgrade minorities in all employment
classifications; and (viii) the applicant is of good moral character.
The Board may not award a license to any applicant who fails to provide
information and documentation to reveal any fact material to qualifications or
who supplies information which is untrue or misleading as to a material fact
pertaining to the qualification criteria; who has been convicted of or pled
nolo contendere to an offense punishable by imprisonment of more than one
year; who is currently being prosecuted for or regarding whom charges are
pending in any jurisdiction of an offense punishable by more than one year
imprisonment; if any holder of 5% or more in the profits and losses of the
applicant has been convicted of or pled guilty or nolo contendere to an
offense which at the time of conviction is punishable as a felony.
126
<PAGE>
The transfer of a license is prohibited. The sale, assignment, transfer,
pledge, or disposition of securities which represent 5% or more of the total
outstanding shares issued by a holder of a license is subject to prior Board
approval. A security issued by a holder of a license must generally disclose
these restrictions.
Section 2501 of the regulations enacted by the Louisiana State Police
Riverboat Gaming Division pursuant to the Louisiana Act (the "Regulations")
requires prior written approval of the Board of all persons involved in the
sale, purchase, assignment, lease, grant or foreclosure of a security
interest, hypothecation, transfer, conveyance or acquisition of an ownership
interest (other than in a corporation) or economic interest of five percent
(5%) or more in any licensee.
Section 2523 of the Regulations requires notification to and prior approval
from the Board of the (a) application for, receipt, acceptance or modification
of a loan, or the (b) use of any cash, property, credit, loan or line of
credit, or the (c) guarantee or granting of other forms of security for a loan
by a licensee or person acting on a licensee's behalf. Exceptions to prior
written approval include without limitation to any transaction for less than
$2,500,000 in which all of the lending institutions are federally regulated,
the transaction modifies the terms of an existing, previously approved loan
transaction, or if the transaction involves publicly registered debt and
securities sold pursuant to a firm underwriting agreement.
The failure of a licensee to comply with the requirements set forth above
may result in the suspension or revocation of that licensee's gaming license.
Additionally, if the Board finds that the individual owner or holder of a
security of a corporate license or intermediary company or any person with an
economic interest in a licensee is not qualified under the Louisiana Act, the
Board may require, under penalty of suspension or revocation of the license,
that the person not (a) receive dividends or interest on securities of the
corporation, (b) exercise directly or indirectly a right conferred by
securities of the corporation, (c) receive remuneration or economic benefit
from the licensee, or (d) continue in an ownership or economic interest in the
licensee.
A licensee must periodically report the following information to the Board,
which is not confidential and is to be available for public inspection: the
licensee's net gaming proceeds from all authorized games; the amount of net
gaming proceeds tax paid; and all quarterly and annual financial statements
presenting historical data that are submitted to the Board, including annual
financial statements that have been audited by an independent certified public
accountant.
The Louisiana Act restricts gaming space on riverboats to no more than
30,000 square feet. The Board has adopted rules governing the method for
approval of the area of operations and the rules and odds of authorized games
and devices permitted, and prescribing grounds and procedures for the
revocation, limitation or suspension of licenses and permits.
On April 19, 1996, the Louisiana legislature adopted legislation requiring
statewide local elections on a parish-by-parish basis to determine whether to
prohibit or continue to permit licensed riverboat gaming, licensed video poker
gaming, and licensed land-based gaming in Orleans Parish. The applicable local
election took place on November 5, 1996, and the voters in the parishes of
Boomtown New Orleans and Casino Magic Bossier voted to continue licensed
riverboat and video poker gaming. However, it is noteworthy that the current
legislation does not provide for any moratorium on future local elections on
gaming.
Fees to the state of Louisiana for conducting gaming activities on a
riverboat include (i) $50,000 per riverboat for the first year of operation
and $100,000 per year, per riverboat thereafter, plus (ii) 18.5% of net gaming
proceeds.
Mississippi. The ownership and operation of casino facilities in
Mississippi are subject to extensive state and local regulation, but primarily
the licensing and regulatory control of the Mississippi Gaming Commission (the
"Mississippi Commission") and the Mississippi State Tax Commission (the
"Mississippi Gaming Authorities").
127
<PAGE>
The Mississippi Gaming Control Act (the "Mississippi Act"), which legalized
dockside casino gaming in Mississippi, was enacted June 29, 1990. Although not
identical, the Mississippi Act is similar to the Nevada Gaming Control Act.
The Mississippi Commission adopted regulations which are also similar in many
respects to the Nevada gaming regulations.
The laws, regulations and supervisory procedures of Mississippi and the
Mississippi Commission seek to: (i) prevent unsavory or unsuitable persons
from having any direct or indirect involvement with gaming at any time or in
any capacity; (ii) establish and maintain responsible accounting practices and
procedures; (iii) maintain effective control over the financial practices of
licensees, including establishing minimum procedures for internal fiscal
affairs and safeguarding of assets and revenues, providing reliable record
keeping and making periodic reports to the Mississippi Commission; (iv)
prevent cheating and fraudulent practices; (v) provide a source of state and
local revenues through taxation and licensing fees; and (vi) ensure that
gaming licensees, to the extent practicable, employ Mississippi residents. The
regulations are subject to amendment and interpretation by the Mississippi
Commission. Changes in Mississippi laws or regulations may limit or otherwise
materially affect the types of gaming that may be conducted and such changes,
if enacted, could have an adverse effect on the Company and the Company's
Mississippi gaming operations.
The Mississippi Act provides for legalized dockside gaming at the
discretion of the fourteen counties that border the Gulf Coast or the
Mississippi River, but only if the voters in such counties have not voted to
prohibit gaming in that county. During 1998, certain anti-gaming groups
proposed for adoption through the initiative and referendum process certain
amendments to the Mississippi Constitution which would prohibit gaming in the
state. The proposals were declared illegal by Mississippi courts on
constitutional and procedural grounds. If another such proposal were to be
offered and if a sufficient number of signatures were to be gathered to place
a legal initiative on the ballot, it is possible for the voters of Mississippi
to consider such a proposal in November of 2000. As of January 1, 2000,
dockside gaming was permissible in nine of the fourteen eligible counties in
the state and gaming operations had commenced in Adams, Coahoma, Hancock,
Harrison, Tunica, Warren and Washington counties. Under Mississippi law,
gaming vessels must be located on the Mississippi River or on navigable waters
in eligible counties along the Mississippi River or in the waters lying south
of the counties along the Mississippi Gulf Coast. The law permits unlimited
stakes gaming on permanently moored vessels on a 24-hour basis and does not
restrict the percentage of space which may be utilized for gaming. There are
no limitations on the number of gaming licenses which may be issued in
Mississippi.
The Mississippi Act permits substantially all traditional casino games and
gaming devices, and, on August 11, 1997, a Mississippi Circuit Court judge
issued a ruling that the Mississippi Act permits race books on the premises of
licensed casinos. The Mississippi Commission appealed the decision to the
Mississippi Supreme Court, which has not yet rendered a decision.
The Company and any subsidiary of the Company (or partnership in which the
subsidiary is a partner) that operates a casino in Mississippi (a "Mississippi
Gaming Subsidiary"), is subject to the licensing and regulatory control of the
Mississippi Commission. The Company must be registered under the Mississippi
Act as a publicly traded holding company for the Mississippi Gaming
Subsidiaries and is required periodically to submit detailed financial and
operating reports to the Mississippi Commission and furnish any other
information which the Mississippi Commission may require. If the Company is
unable to continue to satisfy the registration requirements of the Mississippi
Act, the Company and its Mississippi Gaming Subsidiaries cannot own or operate
gaming facilities in Mississippi.
Each Mississippi Gaming Subsidiary must maintain a gaming license from the
Mississippi Commission to operate a casino in Mississippi. Such licenses are
issued by the Mississippi Commission subject to certain conditions, including
continued compliance with all applicable state laws and regulations. Gaming
licenses are not transferable, are issued for a two-year period and must be
renewed periodically thereafter. Boomtown Biloxi's license must be renewed in
July of 2000, Casino Magic Bay St. Louis's license must be renewed in April of
2000, and Casino Magic Biloxi's license must be renewed in December of 2000.
No person may become a stockholder of or receive any percentage of profits
from a licensed subsidiary of a registered holding company
128
<PAGE>
without first obtaining licenses and approvals from the Mississippi
Commission. The Company has obtained such approvals in connection with the
licensing of its Mississippi Gaming Subsidiaries, and the registration of the
Company as a publicly-traded holding company.
Certain officers and employees of the Company and the officers, directors
and certain key employees of the Company's Mississippi Gaming Subsidiaries
must be found suitable to be licensed by the Mississippi Commission. The
Company believes that it has obtained, applied for or is in the process of
applying for all necessary findings of suitability with respect to such
persons associated with the Company or its Mississippi Gaming Subsidiaries,
although the Mississippi Commission in its discretion may require additional
persons to file applications for findings of suitability. In addition, any
person having a material relationship or involvement with the Company may be
required to be found suitable, in which case those persons must pay the costs
and fees associated with such investigation. The Mississippi Commission may
deny an application for a finding of suitability for any cause that it deems
reasonable. Changes in certain licensed positions must be reported to the
Mississippi Commission. In addition to its authority to deny an application
for a finding of suitability, the Mississippi Commission has jurisdiction to
disapprove a change in a person's corporate position or title and such changes
must be reported to the Mississippi Commission. The Mississippi Commission has
the power to require any Mississippi Gaming Subsidiary and the Company to
suspend or dismiss officers, directors and other key employees or sever
relationships with other persons who refuse to file appropriate applications
or whom the authorities find unsuitable to act in such capacities.
Employees associated with gaming must obtain work permits that are subject
to immediate suspension under certain circumstances. The Mississippi
Commission shall refuse to issue a work permit to a person convicted of a
felony and it may refuse to issue a work permit to a gaming employee if the
employee has committed certain misdemeanors, or knowingly violated the
Mississippi Act, or for any other reasonable cause.
At any time, the Mississippi Commission has the power to investigate and
require the finding of suitability of any record or beneficial stockholder of
the Company. Mississippi law requires any person who acquires more than 5% of
the common stock of a publicly traded corporation registered with the
Mississippi Commission to report the acquisition to the Mississippi
Commission, and such person may be required to be found suitable. Also, any
person who becomes a beneficial owner of more than 10% of the common stock of
such a company, as reported to the Securities and Exchange Commission, must
apply for a finding of suitability by the Mississippi Commission and must pay
the costs and fees that the Mississippi Commission incurs in conducting the
investigation. The Mississippi Commission has generally exercised its
discretion to require a finding of suitability of any beneficial owner of more
than 5% of a registered publicly-traded holding company's common stock.
However, the Mississippi Commission has adopted a policy that permits certain
institutional investors to own beneficially up to 10% of a registered public
company's common stock without a finding of suitability. If a stockholder who
must be found suitable is a corporation, partnership or trust, it must submit
detailed business and financial information, including a list of beneficial
owners.
Any person who fails or refuses to apply for a finding of suitability or a
license within 30 days after being ordered to do so by the Mississippi
Commission may be found unsuitable. The same restrictions apply to a record
owner, if the record owner, after request, fails to identify the beneficial
owner. Management believes that compliance by the Company with the licensing
procedures and regulatory requirements of the Mississippi Commission will not
affect the marketability of the Company's securities. Any person found
unsuitable and who holds, directly or indirectly, any beneficial ownership of
the securities of the Company beyond such time as the Mississippi Commission
prescribes, may be guilty of a misdemeanor. The Company is subject to
disciplinary action if, after receiving notice that a person is unsuitable to
be a stockholder or to have any other relationship with the Company or its
Mississippi Gaming Subsidiaries, the Company: (i) pays the unsuitable person
any dividend or other distribution upon the voting securities of the Company;
(ii) recognizes the exercise, directly or indirectly, of any voting rights
conferred by securities of the Company held by the unsuitable person; (iii)
pays the unsuitable person any remuneration in any form for services rendered
or otherwise, except in certain limited and specific circumstances; or (iv)
fails to pursue all lawful efforts to require the unsuitable person to divest
129
<PAGE>
himself of the securities, including, if necessary, the immediate purchase of
the securities for cash at a fair market value.
The Company may be required to disclose to the Mississippi Commission upon
request the identities of the holders of any of the Company's debt or other
securities. In addition, under the Mississippi Act the Mississippi Commission
may, in its discretion, (i) require holders of securities of registered
corporations, including debt securities such as the Company's 9.5% Notes and
the 9.25% Notes, to file applications, (ii) investigate such holders, and
(iii) require such holders to be found suitable to own such securities. If the
Mississippi Commission determines that a person is unsuitable to own such
security, then the issuer may be sanctioned, including the loss of its
approvals, if without the prior approval of the Mississippi Commission, it (i)
pays to the unsuitable person any dividend, interest, or any distribution
whatsoever; (ii) recognizes any voting right by such unsuitable person in
connection with such securities; (iii) pays the unsuitable person remuneration
in any form; or (iv) makes any payment to the unsuitable person by way of
principal, redemption, conversion, exchange, liquidation, or similar
transaction. Although the Mississippi Commission generally does not require
the individual holders of obligations such as the Notes to be investigated and
found suitable, the Mississippi Commission retains the discretion to do so for
any reason, including but not limited to a default, or where the holder of the
debt instrument exercises a material influence over the gaming operations of
the entity in question. Any holder of debt securities required to apply for a
finding of suitability must pay all investigative fees and costs of the
Mississippi Commission in connection with such an investigation.
Each Mississippi Gaming Subsidiary must maintain in Mississippi a current
ledger with respect to ownership of its equity securities, and the Company
must maintain in Mississippi a current list of stockholders of the Company
which must reflect the record ownership of each outstanding share of any class
of equity security issued by the Company. The ledger and stockholder lists
must be available for inspection by the Mississippi Commission at any time. If
any securities of the Company are held in trust by an agent or by a nominee,
the record holder may be required to disclose the identity of the beneficial
owner to the Mississippi Commission. A failure to make such disclosure may be
grounds for finding the record holder unsuitable. The Company must also render
maximum assistance in determining the identity of the beneficial owners.
The Mississippi Act requires that the certificates representing securities
of a publicly-traded corporation bear a legend to the general effect that such
securities are subject to the Mississippi Act and the regulations of the
Mississippi Commission. The Company has received from the Mississippi
Commission a waiver from this legend requirement. The Mississippi Commission
has the power to impose additional restrictions on the holders of the
Company's securities at any time.
Substantially all loans, leases, sales of securities and similar financing
transactions by a Mississippi Gaming Subsidiary must be reported to or
approved by the Mississippi Commission. A Mississippi Gaming Subsidiary may
not make a public offering of its securities, but may pledge or mortgage
casino facilities. The Company may not make a public offering of its
securities without the prior approval of the Mississippi Commission if any
part of the proceeds of the offering is to be used to finance the
construction, acquisition or operation of gaming facilities in Mississippi or
to retire or extend obligations incurred for one or more such purposes. Such
approval, if given, does not constitute a recommendation or approval of the
investment merits of the securities subject to the offering.
Under the regulations of the Mississippi Commission, a gaming licensee may
not guarantee a security issued by an affiliate company pursuant to a public
offering, or pledge its assets to secure payment or performance of the
obligations evidenced by the security issued by the affiliated company,
without the prior approval of the Mississippi Commission. A pledge of stock of
a gaming licensee and the foreclosure of such a pledge are ineffective without
the prior approval of the Mississippi Commission. Moreover, restrictions on
the transfer of an equity security issued by a Mississippi licensee and
agreements not to encumber such securities are ineffective without the prior
approval of the Mississippi Commission.
Changes in control of the Company through merger, consolidation,
acquisition of assets, management or consulting agreements or any form of
takeover, cannot occur without the prior approval of the Mississippi
130
<PAGE>
Commission. The Mississippi Commission may also require controlling
stockholders, officers, directors and other persons having a material
relationship or involvement with the entity proposing to acquire control, to
be investigated and licensed as part of the approval process relating to the
transaction.
The Mississippi legislature has declared that some corporate acquisitions
opposed by management, repurchases of voting securities and other corporate
defense tactics that affect corporate gaming licensees in Mississippi and
corporations whose stock is publicly traded that are affiliated with those
licensees, may be injurious to stable and productive corporate gaming. The
Mississippi Commission has established a regulatory scheme to ameliorate the
potentially adverse effects of these business practices upon Mississippi's
gaming industry and to further Mississippi's policy to: (i) assure the
financial stability of corporate gaming operators and their affiliates; (ii)
preserve the beneficial aspects of conducting business in the corporate form;
and (iii) promote a neutral environment for the orderly governance of
corporate affairs. Approvals are, in certain circumstances, required from the
Mississippi Commission before the Company may make exceptional repurchases of
voting securities in excess of the current market price of its common stock
(commonly called "greenmail") or before a corporate acquisition opposed by
management may be consummated. Mississippi's gaming regulations will also
require prior approval by the Mississippi Commission if the Company adopts a
plan of recapitalization proposed by its Board of Directors opposing a tender
offer made directly to the shareholders for the purpose of acquiring control
of the Company.
Neither the Company nor any subsidiary may engage in gaming activities in
Mississippi while also conducting gaming operations outside of Mississippi
without approval of the Mississippi Commission. The Mississippi Commission may
require determinations that, among other things, there are means for the
Mississippi Commission to have access to information concerning the out-of-
state gaming operations of the Company and its affiliates. The Mississippi
Commission has approved the Company's current operations in other
jurisdictions but must approve the Company's future gaming operations in any
new jurisdictions.
If the Mississippi Commission decides that a Mississippi Gaming Subsidiary
violated a gaming law or regulation, the Mississippi Commission could limit,
condition, suspend or revoke the license of the Mississippi Gaming Subsidiary,
subject to compliance with certain statutory and regulatory procedures. In
addition, a Mississippi Gaming Subsidiary, the Company and the persons
involved could be subject to substantial fines for each separate violation.
Because of such a violation, the Mississippi Commission could attempt to
appoint a supervisor to operate the casino facilities. Limitation,
conditioning or suspension of any gaming license or the appointment of a
supervisor could (and revocation of any gaming license would) materially
adversely affect the Company, the Mississippi Gaming Subsidiary's gaming
operations and the Company's results of operations.
License fees and taxes, computed in various ways depending on the type of
gaming involved, are payable to the State of Mississippi and to the counties
and cities in which a Mississippi Gaming Subsidiary's respective operations
will be conducted. Depending upon the particular fee or tax involved, these
fees and taxes are payable either monthly, quarterly or annually and are based
upon (i) a percentage of the gross gaming revenues received by the casino
operation, (ii) the number of slot machines operated by the casino, or (iii)
the number of table games operated by the casino. The license fee payable to
the State of Mississippi is based upon "gaming receipts" (generally defined as
gross receipts less pay outs to customers as winnings) and equals 4% of gaming
receipts of $50,000 or less per month, 6% of gaming receipts over $50,000 and
less than $134,000 per month, and 8% of gaming receipts over $134,000. The
foregoing license fees are allowed as a credit against the licensee's
Mississippi income tax liability for the year paid. The gross revenue fee
imposed by the Mississippi communities in, which the Company's casino
operations are located, equals approximately 4% of the gaming receipts.
In October 1994, the Mississippi Commission adopted two new regulations.
Under the first regulation, as a condition of licensure or license renewal,
casino vessels on the Mississippi Gulf Coast that are not self-propelled must
be moored to withstand a Category 4 hurricane with 155 mile-per-hour winds and
15-foot tidal surge. The Company believes that all of its Mississippi Gaming
Subsidiaries currently meet this requirement. The second regulation requires
as a condition of licensure or license renewal that a gaming establishment's
plan include a
131
<PAGE>
500-car parking facility in close proximity to the casino complex and
infrastructure facilities, the expenditures for which will amount to at least
25% of the casino cost. Such facilities shall include any of the following: a
250-room hotel of at least a two-star rating as defined by the current edition
of the Mobil Travel Guide, a theme park, golf courses, marinas, tennis
complex, entertainment facilities, or any other such facility as approved by
the Mississippi Commission as infrastructure. Parking facilities, roads,
sewage and water systems, or facilities normally provided by cities and/or
counties are excluded. The Mississippi Commission may in its discretion reduce
the number of rooms required, where it is shown to the Commission's
satisfaction that sufficient rooms are available to accommodate the
anticipated visitor load. The Company believes that all of its Mississippi
Gaming Subsidiaries currently meet such requirements. The Mississippi
Commission has recently adopted amendments to the regulation that increase the
infrastructure development requirement from 25% to 100% for new casinos (or
upon acquisition of a closed casino), but grandfather existing licensees.
The sale of food or alcoholic beverages at the Mississippi Gaming
Subsidiaries is subject to licensing, control and regulation by the applicable
state and local authorities. The agencies involved have full power to limit,
condition, suspend or revoke any such license, and any such disciplinary
action could (and revocation would) have a materially adverse effect upon the
operations of the affected casino or casinos. Certain officers and managers of
the Company and the Mississippi Gaming Subsidiaries must be investigated by
the Alcoholic Beverage Control Division of the State Tax Commission (the
"ABC") in connection with the Mississippi Gaming Subsidiaries' liquor permits.
Changes in licensed positions must be approved by the ABC.
Nevada. The ownership and operation of casino gaming facilities in Nevada
are subject to: (i) the Nevada Gaming Control Act and the regulations
promulgated thereunder (collectively, "Nevada Act"); and (ii) various local
regulations. The Company's gaming operations are subject to the licensing and
regulatory control of the Nevada Gaming Commission ("Nevada Commission"), the
Nevada State Gaming Control Board ("Nevada Board") and Washoe County. The
Nevada Commission, the Nevada Board and Washoe County are collectively
referred to as the "Nevada Gaming Authorities."
The laws, regulations and supervisory procedures of the Nevada Gaming
Authorities are based upon declarations of public policy which are concerned
with, among other things: (i) the prevention of unsavory or unsuitable persons
from having a direct or indirect involvement with gaming at any time or in any
capacity; (ii) the establishment and maintenance of responsible accounting
practices and procedures; (iii) the maintenance of effective controls over the
financial practices of licensees, including the establishment of minimum
procedures for internal fiscal affairs and the safeguarding of assets and
revenues, providing reliable record keeping and requiring the filing of
periodic reports with the Nevada Gaming Authorities; (iv) the prevention of
cheating and fraudulent practices; and (v) providing a source of state and
local revenues through taxation and licensing fees. Changes in such laws,
regulations and procedures could have an adverse effect on Boomtown Reno's
gaming operations.
Boomtown Hotel & Casino, Inc. (the "Gaming Subsidiary"), which operates
Boomtown Reno and two other gaming operations with slot machines only, is
required to be licensed by the Nevada Gaming Authorities. The gaming licenses
require the periodic payment of fees and taxes and are not transferable. The
Company is currently registered by the Nevada Commission as a publicly traded
corporation (a "Registered Corporation") and has been found suitable to own
the stock of Boomtown, which is registered as an intermediary company
("Intermediary Company"). Boomtown has been found suitable to own the stock of
the Gaming Subsidiary, which is a corporate licensee (a "Corporate Licensee")
under the terms of the Nevada Act. As a Registered Corporation, the Company is
required periodically to submit detailed financial and operating reports to
the Nevada Commission and furnish any other information which the Nevada
Commission may require. No person may become a stockholder of, or holder of an
interest of, or receive any percentage of profits from an Intermediary Company
or a Corporate Licensee without first obtaining licenses and approvals from
the Nevada Gaming Authorities. The Company, Boomtown and the Gaming Subsidiary
have obtained from the Nevada Gaming Authorities the various registrations,
findings of suitability, approvals, permits and licenses required in order to
engage in gaming activities in Nevada.
132
<PAGE>
The Nevada Gaming Authorities may investigate any individual who has a
material relationship to, or material involvement with, the Company, Boomtown
or the Gaming Subsidiary in order to determine whether such individual is
suitable or should be licensed as a business associate of a gaming licensee.
Officers, directors and certain key employees of the Company, Boomtown and the
Gaming Subsidiary must file applications with the Nevada Gaming Authorities
and may be required to be licensed or found suitable by the Nevada Gaming
Authorities. Officers, directors and key employees of the Company and Boomtown
who are actively and directly involved in gaming activities of the Gaming
Subsidiary may be required to be licensed or found suitable by the Nevada
Gaming Authorities. The Nevada Gaming Authorities may deny an application for
licensing for any cause which they deem reasonable. A finding of suitability
is comparable to licensing, and both require submission of detailed personal
and financial information followed by a thorough investigation. The applicant
for licensing or a finding of suitability must pay all the costs of the
investigation. Changes in licensed positions must be reported to the Nevada
Gaming Authorities and, in addition to their authority to deny an application
for a finding of suitability or licensure, the Nevada Gaming Authorities have
jurisdiction to disapprove a change in a corporate position.
If the Nevada Gaming Authorities were to find an officer, director or key
employee unsuitable for licensing or unsuitable to continue having a
relationship with the Company, Boomtown or the Gaming Subsidiary, the
companies involved would have to sever all relationships with such person. In
addition, the Nevada Commission may require the Company, Boomtown or the
Gaming Subsidiary to terminate the employment of any person who refuses to
file appropriate applications. Determinations of suitability or of questions
pertaining to licensing are not subject to judicial review in Nevada.
The Company and the Gaming Subsidiary are required to submit detailed
financial and operating reports to the Nevada Commission. Substantially all
material loans, leases, sales of securities and similar financing transactions
by the Company, Boomtown and the Gaming Subsidiary must be reported to or
approved by the Nevada Commission.
If it were determined that the Nevada Act was violated by the Gaming
Subsidiary, the gaming licenses it holds could be limited, conditioned,
suspended or revoked, subject to compliance with certain statutory and
regulatory procedures. In addition, the Company, Boomtown, the Gaming
Subsidiary and the persons involved could be subject to substantial fines for
each separate violation of the Nevada Act at the discretion of the Nevada
Commission. Further, a supervisor could be appointed by the Nevada Commission
to operate Boomtown Reno and, under certain circumstances, earnings generated
during the supervisor's appointment (except for reasonable rental value of the
casino) could be forfeited to the State of Nevada. Limitation, conditioning or
suspension of the gaming licenses of the Gaming Subsidiary or the appointment
of a supervisor could (and revocation of any gaming license would) materially
adversely affect the Company's gaming operations.
Any beneficial holder of the Company's voting securities, regardless of the
number of shares owned, may be required to file an application, be
investigated, and be found suitable as a beneficial holder of the Company's
voting securities if the Nevada Commission has reason to believe that such
ownership would otherwise be inconsistent with the declared policies of the
State of Nevada. The applicant must pay all costs of investigation incurred by
the Nevada Gaming Authorities in conducting any such investigation.
The Nevada Act requires any person who acquires beneficial ownership of
more than 5% of a Registered Corporation's voting securities to report the
acquisition to the Nevada Commission. The Nevada Act requires that beneficial
owners of more than 10% of a Registered Corporation's voting securities apply
to the Nevada Commission for a finding of suitability within thirty days after
the Chairman of the Nevada Board mails the written notice requiring such
filing. Under certain circumstances, an "institutional investor," as defined
in the Nevada Act, which acquires more than 10%, but not more than 15%, of a
Registered Corporation's voting securities may apply to the Nevada Commission
for a waiver of such finding of suitability if such institutional investor
holds the voting securities for investment purposes only. An institutional
investor shall not be deemed to hold voting securities for investment purposes
unless the voting securities were acquired and are held in the ordinary course
of business as an institutional investor and not for the purpose of causing,
directly or indirectly,
133
<PAGE>
the election of a majority of the members of the board of directors of the
Registered Corporation, any change in the Registered Corporation's corporate
charter, bylaws, management, policies or operations of the Registered
Corporation, or any of its gaming affiliates, or any other action which the
Nevada Commission finds to be inconsistent with holding the Registered
Corporation's voting securities for investment purposes only. Activities which
are not deemed to be inconsistent with holding voting securities for
investment purposes only include: (i) voting on all matters voted on by
stockholders; (ii) making financial and other inquiries of management of the
type normally made by securities analysts for informational purposes and not
to cause a change in its management, policies or operations; and (iii) such
other activities as the Nevada Commission may determine to be consistent with
such investment intent. If the beneficial holder of voting securities who must
be found suitable is a corporation, partnership or trust, it must submit
detailed business and financial information, including a list of beneficial
owners. The applicant is required to pay all costs of investigation.
Any person who fails or refuses to apply for a finding of suitability or a
license within thirty days after being ordered to do so by the Nevada
Commission or the Chairman of the Nevada Board, may be found unsuitable. The
same restrictions apply to a record owner if the record owner, after request,
fails to identify the beneficial owner. Any stockholder found unsuitable and
who holds, directly or indirectly, any beneficial ownership of the common
stock beyond such period of time as may be prescribed by the Nevada Commission
may be guilty of a criminal offense. The Company is subject to disciplinary
action if, after it receives notice that a person is unsuitable to be a
stockholder or to have any other relationship with the Company, Boomtown or
the Gaming Subsidiary, the Company (i) pays that person any dividend or
interest upon voting securities of the Company, (ii) allows that person to
exercise, directly or indirectly, any voting right conferred through
securities held by that person, (iii) pays remuneration in any form to that
person for services rendered or otherwise, or (iv) fails to pursue all lawful
efforts to require such unsuitable person to relinquish his voting securities
including, if necessary, the immediate purchase of said voting securities for
cash at fair market value.
The Nevada Commission may, in its discretion, require the holder of any
debt security of a Registered Corporation to file applications, be
investigated and be found suitable to own the debt security of a Registered
Corporation. If the Nevada Commission determines that a person is unsuitable
to own such security, then pursuant to the Nevada Act, the Registered
Corporation can be sanctioned, including the loss of its approvals, if without
the prior approval of the Nevada Commission, it (i) pays to the unsuitable
person any dividend, interest, or any distribution whatsoever; (ii) recognizes
any voting right by such unsuitable person in connection with such securities;
(iii) pays the unsuitable person remuneration in any form; or (iv) makes any
payment to the unsuitable person by way of principal, redemption, conversion,
exchange, liquidation, or similar transaction.
The Company is required to maintain a current stock ledger in Nevada which
may be examined by the Nevada Gaming Authorities at any time. If any
securities are held in trust by an agent or by a nominee, the record holder
may be required to disclose the identity of the beneficial owner to the Nevada
Gaming Authorities. A failure to make such disclosure may be grounds for
finding the record holder unsuitable. The Company is also required to render
maximum assistance in determining the identity of the beneficial owner. The
Nevada Commission has the power to require that the Company's stock
certificates bear a legend indicating that the securities are subject to the
Nevada Act. However, to date the Nevada Commission has not imposed such a
requirement on the Company.
The Company is not permitted to make a public offering of its securities
without the prior approval of the Nevada Commission if the securities or the
proceeds therefrom are intended to be used to construct, acquire or finance
gaming facilities in Nevada, or to retire or extend obligations incurred for
such purposes. On March 25, 1999, the Nevada Commission granted the Company
prior approval to make public offerings for a period of two years, subject to
certain conditions (the "Shelf Approval"). The Shelf Approval also applies to
any affiliated company wholly owned by the Company (an "Affiliate"), which is
a publicly traded corporation or would thereby become a publicly traded
corporation pursuant to a public offering. The Shelf Approval also includes
approval for Boomtown and the Gaming Subsidiary to guarantee any security
issued by, and for the Gaming Subsidiary to hypothecate its assets to secure
the payment or performance of any obligations evidenced by a security issued
by the Company or an Affiliate in a public offering under the Shelf
Registration. The Shelf
134
<PAGE>
Approval also includes approval to place restrictions upon the transfer of and
enter into agreements not to encumber the equity securities of Boomtown and
the Gaming Subsidiary (collectively, "Stock Restrictions"). The Shelf
Approval, however, may be rescinded for good cause without prior notice upon
the issuance of an interlocutory stop order by the Chairman of the Nevada
Board. The Shelf Approval does not constitute a finding recommendation or
approval of the Nevada Gaming Authorities as to the accuracy or the adequacy
of the prospectus or the investment merits of the securities offered thereby.
Any representation to the contrary is unlawful.
Changes in control of a Registered Corporation through merger,
consolidation, stock or asset acquisitions, management or consulting
agreements, or any act or conduct by a person whereby he obtains control, may
not occur without the prior approval of the Nevada Commission. Entities
seeking to acquire control of a Registered Corporation must satisfy the Nevada
Board and Nevada Commission in a variety of stringent standards prior to
assuming control of such Registered Corporation. The Nevada Commission may
also require controlling stockholders, officers, directors and other persons
having a material relationship or involvement with the entity proposing to
acquire control to be investigated and licensed as part of the approval
process relating to the transaction.
The Nevada legislature has declared that some corporate acquisitions
opposed by management, repurchases of voting securities and corporate defense
tactics affecting Nevada corporate gaming licensees, and Registered
Corporations that are affiliated with those operations, may be injurious to
stable and productive corporate gaming. The Nevada Commission has established
a regulatory scheme to ameliorate the potentially adverse effects of these
business practices upon Nevada's gaming industry and to further Nevada's
policy to: (i) assure the financial stability of corporate gaming licensees
and their affiliates; (ii) preserve the beneficial aspects of conducting
business in the corporate form; and (iii) promote a neutral environment for
the orderly governance of corporate affairs. Approvals are, in certain
circumstances, required from the Nevada Commission before the Registered
Corporation can make exceptional repurchases of voting securities above the
current market price thereof and before a corporate acquisition opposed by
management can be consummated. The Nevada Act also requires prior approval of
a plan of recapitalization proposed by the Registered Corporation's Board of
Directors in response to a tender offer made directly to the Registered
Corporation's stockholders for the purposes of acquiring control of the
Registered Corporation.
License fees and taxes, computed in various ways depending on the type of
gaming or activity involved, are payable to the State of Nevada and to Washoe
County, in which the Gaming Subsidiary's operations are conducted. Depending
upon the particular fee or tax involved, these fees and taxes are payable
either monthly, quarterly or annually and are based upon either: (i) a
percentage of the gross revenues received; (ii) the number of gaming devices
operated; or (iii) the number of table games operated. A casino entertainment
tax is also paid by casino operations where entertainment is furnished in a
cabaret, nightclub, cocktail lounge or casino showroom in connection with the
serving or selling of food or refreshments, or the selling of any merchandise.
Any person who is licensed, required to be licensed, registered, required
to be registered, or is under common control with such persons (collectively,
"Licensees"), and who proposes to become involved in a gaming venture outside
of Nevada, is required to deposit with the Nevada Board, and thereafter
maintain, a revolving fund in the amount of $10,000 to pay the expenses of
investigation by the Nevada Board of such Licensee's participation in such
foreign gaming. The revolving fund is subject to increase or decrease in the
discretion of the Nevada Commission. Thereafter, Licensees are required to
comply with certain reporting requirements imposed by the Nevada Act.
Licensees are also subject to disciplinary action by the Nevada Commission if
they knowingly violate any laws of the foreign jurisdiction pertaining to the
foreign gaming operation, fail to conduct the foreign gaming operation in
accordance with the standards of honesty and integrity required of Nevada
gaming operations, engage in activities or enter into associations that are
harmful to the State of Nevada or its ability to collect gaming taxes and
fees, or employ, contract with, or associate with a person in the foreign
operation who has been denied a license or finding of suitability in Nevada on
the ground of unsuitability.
135
<PAGE>
California. Operation of California card club casinos such as the Hollywood
Park-Casino and the Crystal Park Casino is governed by the Gambling Control
Act (the "GCA") and is subject to the oversight of the California Attorney
General and the California Gambling Control Commission. Under the GCA, a
California card club casino may only offer certain forms of card games,
including Poker, Pai Gow, and California Blackjack. A card club casino may not
offer many of the card games and other games of chance permitted in Nevada and
other jurisdictions where the Company conducts business.
Although the California Attorney General takes the position that, under the
GCA, only individuals, partnerships or privately-held companies (as opposed to
publicly-traded companies such as Pinnacle Entertainment) are eligible to
operate card club casinos, the enactment of California Senate Bill 100 ("SB-
100") in 1995, and the subsequent enactment of Senate Bill-8 permit a
publicly-owned racing association to own and operate a card club casino if it
also owns and operates a race track on the same premises.
In September 1995, the Attorney General granted the Company a provisional
registration under SB-100 to operate the Hollywood Park-Casino, which
provisional registration was renewed effective January 1, 1999. Pursuant to
the GCA, on September 10, 1999, in connection with the sale of the Hollywood
Park Race Track (see Note 3 to the Notes to Consolidated Financial
Statements), the Company was no longer eligible to operate the Hollywood Park-
Casino and therefore entered into a sub lease arrangement of the Hollywood
Park-Casino with the same third party operator which leases the Crystal Park
Casino. In the event the GCA were to be amended to permit publicly-traded
companies such as Pinnacle Entertainment to operate card clubs, the Company,
and its officers, directors and certain stockholders, would likely have to
file the necessary licensing applications with the Attorney General, if it
wished to operate the Hollywood Park-Casino or the Crystal Park Casino.
Pursuant to the GCA, the operator of a card club casino, and its officers,
directors and certain stockholders are required to be registered by the
Attorney General and licensed by the municipality in which it is located. A
permanent registration will not be granted until the California Department of
Justice completes its review of the applications of The Company and its
corporate officers and directors. The Attorney General has broad discretion to
deny a gaming registration and may impose reasonably necessary conditions upon
the granting of a gaming registration. Grounds for denial include felony
convictions, criminal acts, convictions involving dishonesty, illegal gambling
activities, and false statements on a gaming application. Such grounds also
generally include having a financial interest in a business or organization
that engages in gaming activities that are illegal under California law. In
addition, the Attorney General possesses broad authority to suspend or revoke
a gaming registration on any of the foregoing grounds, as well as for
violation of any federal, state or local gambling law, failure to take
reasonable steps to prevent dishonest acts or illegal activities on the
premises of the card club casino, failure to cooperate with the Attorney
General in its oversight of the card club casino and failure to comply with
any condition of the registration.
The City of Inglewood and the City of Compton have granted the operator of
the Hollywood Park-Casino and the Crystal Park Casino all municipal gaming
licenses necessary for operation of such facilities, and the operator has
received provisional registrations for both locations from the California
Department of Justice.
Indiana. On September 14, 1998, the Indiana Gaming Commission ("Indiana
Commission") voted to award a Certificate of Suitability to Pinnacle Gaming
Development Corporation ("Pinnacle Gaming"), ninety-seven percent (97%) of the
equity of which is owned and controlled by affiliates of the Company. By
action approved by the Indiana Commission, Pinnacle Gaming has been absorbed
by Belterra Resort (Indiana), LLC ("Belterra"). The Company continues to own a
97% interest in Belterra. The Certificate of Suitability, issued by the
Indiana Commission, authorizes Belterra to develop a riverboat gaming resort,
including a hotel and golf course, in Switzerland County, Indiana. Upon
completion of development of the project in accordance with the Certificate of
Suitability and satisfaction of other conditions, the Indiana Commission is
expected to issue a license to Belterra. That license would be the fifth and
final license authorized under Indiana law for riverboat gaming operations
conducted from sites on the Ohio River. Certificates of Suitability have a one
hundred eighty (180) day life and are subject to renewal by Commission action.
The Certificate of Suitability originally awarded
136
<PAGE>
to Pinnacle Gaming and held by Belterra has been renewed on three (3)
occasions and will be subject to one additional renewal before the anticipated
opening date for gaming and hotel operations.
The ownership and operation of riverboat casinos docked at Indiana-based
sites are subject to extensive state regulation under the Indiana Riverboat
Gaming Act ("Indiana Act") and regulations which the Indiana Commission has
adopted under the Indiana Act. The Indiana Act and the regulations are
significant to the Company's prospects for successfully developing and
operating the Switzerland County, Indiana based riverboat casino and
associated developments through Belterra, its Indiana affiliate.
The Indiana Act extends broad and pervasive regulatory powers and authority
to the Indiana Commission. It has adopted a comprehensive set of regulations
covering ownership and reporting for licensed riverboat casinos together with
"rules of the game" governing riverboat casino operations. The Indiana
Commission has also adopted a set of regulations under the Indiana Act which
covers numerous operational matters concerning riverboat casinos licensed by
the Commission.
Among the regulations adopted by the Indiana Commission is one dealing with
riverboat excursions, routes and public safety. The Indiana Act requires
licensed riverboat casinos to be cruising vessels, and the regulations carry
out the legislative intent with appropriate recognition of public safety
needs. The regulations explicitly preclude "dockside gambling". Riverboat
gaming excursions are limited to a duration of up to four hours unless
otherwise expressly approved by the Indiana Commission. Excursion routes and
schedules are subject to the approval of the Indiana Commission. No gaming may
be conducted while the boat is docked except: (1) for thirty-minute embarkment
and disembarkment periods at the beginning and end of a cruise; (2) if the
master of the riverboat reasonably determines that specific weather or water
conditions present a danger to the riverboat, its passengers and crew; (3) if
either the vessel or the docking facility is undergoing mechanical or
structural repair; (4) if water traffic conditions present a danger to the
riverboat, riverboat passengers and crew, or to other vessels on the water, or
(5) if the master has been notified that a condition exists that would cause a
violation of Federal law if the riverboat were to cruise.
For Ohio River excursions, such as those Belterra will conduct from its
Switzerland County development, "full excursions" must be conducted at all
times during the year unless the master determines otherwise, for the above-
stated reasons. A "full excursion" is a cruise on the Ohio River. The Ohio
River has waters in both Indiana and Kentucky. The Company believes there is
ample room to cruise fully in Indiana waters on the Ohio River with no need or
likelihood of entering Kentucky waters. Therefore, the provisions of Kentucky
law (which preclude any kind of casino gaming) will not have any impact on the
Company's prospective Indiana operations.
An Indiana riverboat owner's license has an initial effective period of
five years; thereafter, a license is subject to annual renewal. The Indiana
Commission has broad discretion over the initial issuance of licenses and over
the renewal, revocation, suspension and control of riverboat owner's licenses.
Belterra has received a Certificate of Suitability designed to lead to
issuance of a license upon completion of project development and satisfaction
of various conditions. The Indiana Act requires a reinvestigation after three
years to ensure the owner continues to be in compliance with the Indiana Act.
Officers, directors and principal owners of the actual license holder and
employees who are to work on the riverboat are subject to substantial
disclosure requirements as a part of securing and maintaining necessary
licenses. Significant contracts to which Belterra is party are subject to
disclosure and approval processes imposed by the regulations. A riverboat
owner's licensee may not enter into or perform any contract or transaction in
which it transfers or receives consideration which is not commercially
reasonable or which does not reflect the fair market value of the goods or
services rendered or received. All contracts are subject to disapproval by the
Indiana Commission. Suppliers of gaming equipment and materials must also be
licensed under the Indiana Act.
Licensees are statutorily required to disclose to the Indiana Commission
the identity of all directors, officers and persons holding direct or indirect
beneficial interests of 1% or greater. The Indiana Commission also requires a
broad and comprehensive disclosure of financial and operating information on
licensees and their principal officers, and their parent corporations and
other upstream owners. The Company and Belterra have provided full
137
<PAGE>
information and documentation to the Indiana Commission, and they must
continue to do so until issuance of the license and then throughout the period
of licensure. The Indiana Act prohibits contributions to candidate for a
state, legislative, or local office, or to a candidate's committee or to a
regular party committee by the holder of a riverboat owner's license or a
supplier's license, by an officer of a licensee, by an officer of a person
that holds at least a 1% interest in the licensee or by a person holding at
least a 1% interest in the licensee. The Indiana Commission has promulgated a
rule requiring quarterly reporting by such licensees, officers, and persons.
As a condition to receiving a license to conduct riverboat casino
operations from the Indiana Commission, the Company has obtained permits and
approvals from the United States Army Corp of Engineers to develop the
facilities it will use to conduct operations. Clearances will be required to
be received from the Indiana Department of Natural Resources for portions of
the proposed development. Alcoholic beverage permits for riverboat excursions
and for the hotel and boarding facilities will be required as will various
other permits and governmental consents or clearances.
Adjusted gross receipts from gambling games authorized under the Indiana
Act are subject to a tax at the rate of 20% on adjusted gross receipts.
"Adjusted gross receipts" means the total of all cash and property received
from gaming operations less cash paid out as winnings and uncollectible gaming
receivables (not to exceed 2%). The Indiana Act also prescribes an additional
tax for admissions, based upon $3 per person per excursion. Property taxes may
be imposed on riverboats at rates determined by local taxing authorities.
Income to the Company from Belterra will be subject to the Indiana gross
income tax, the Indiana adjusted gross income tax and the Indiana supplemental
corporate net income tax. Sales on a riverboat and at related resort
facilities are subject to applicable use, excise and retail taxes. The Indiana
Act requires a riverboat owner licensee to directly reimburse the Indiana
Commission for the costs of inspectors and agents required to be present while
authorized gaming is conducted.
Through the establishment of purchasing "goals," the Indiana Act encourages
minority and women's business enterprise participation in the riverboat gaming
industry. Any person issued a riverboat owner's license must establish goals
of at least 10% of the total dollar value of the licensee's contracts for
goods and services with minority business enterprises and 5% of the total
dollar value of the licensee's contracts for goods and services with women's
business enterprises. Compliance with these conditions is incorporated into
the Indiana Affiliate's Certificate of Suitability. The Indiana Commission may
suspend, limit or revoke the owner's license or impose a fine for failure to
comply with the statutory requirements. The Indiana Commission has indicated
it will be vigilant in monitoring attainment of these goals.
Minimum and maximum wagers on games on the riverboat are left to the
discretion of the licensee. Wagering may not be conducted with money or other
negotiable currency. There are no statutory restrictions on extending credit
to patrons; however, the matter of credit may come under scrutiny in future
legislative sessions.
If an institutional investor acquires 5% or more of any class of voting
securities of a holding company of a licensee, the investor is required to
notify the Indiana Commission and to provide additional information, and may
be subject to a finding of suitability. Any other person who acquires 5% or
more of any class of voting securities of a holding company of a licensee is
required to apply to the Indiana Commission for a finding of suitability. A
riverboat licensee or an affiliate may not enter into a debt transaction of
$1,000,000 or more without approval of the Indiana Commission. The Indiana
Commission has taken the position that a "debt transaction" includes increases
in maximum amount available under reducing revolving credit facilities. A
riverboat owner's license is a revocable privilege and is not a property right
under the Indiana Act. A riverboat owner licensee or any other person may not
lease, hypothecate, borrow money against or loan money against or otherwise
scrutinize or monetize a riverboat owner's license.
The study commission on the impact of legalized wagering in Indiana
appointed by the Governor has called for a limit on expansion of legalized
wagering in Indiana.
Proposals introduced before the 2000 General Assembly in Indiana to
authorize dockside gaming by eliminating cruise requirements were not
successful. Parts of those legislative efforts included proposals for
138
<PAGE>
increased taxes on admissions or increased taxes on adjusted gross gaming
receipts. These matters are the subject of continued attention by legislators
and other policy makers.
Argentina. The Provincial Government of Neuquen, Argentina enacted a casino
privatization program to issue twelve-year exclusive concession agreements to
operate existing casinos. The Company's two casinos are the only casinos in
the province of Neuquen, in west central Argentina, and are located in Neuquen
City and San Martin de los Andes. The casinos had previously been operated by
the provincial government. The Ministry of Finance of Argentina has adopted a
modified regulatory system for casinos, based somewhat on the regulatory
system utilized by the State of Nevada, and such regulatory system is being
administered by the Provincial Government of Neuquen. The Company cannot
predict what effect the enactment of other laws, regulations or pronouncements
relating to casino operations may have on the operations of Casino Magic
Argentina.
Competition
The Company faces significant competition in each of the jurisdictions in
which it has established gaming operations, and such competition is expected
to intensify as new gaming operations enter these markets and existing
competitors expand their operations. The Company's properties compete directly
with other gaming properties in Nevada, Mississippi, Louisiana, Indiana,
California and Argentina. To a lesser extent, the Company also competes for
customers with other casino operators in North American markets, including
casinos located on Indian reservations, and other forms of gaming such as
lotteries. Many of the Company's competitors are larger, have substantially
greater name recognition and marketing resources as well as access to lower
cost sources of financing. Moreover, consolidation of companies in the gaming
industry could increase the concentration of large gaming companies in the
markets which the Company operates, and may result in the Company's
competitors having even greater resources, name recognition and licensing
prospects than such competitors currently enjoy.
Mississippi and Louisiana--Gulf Coast Markets. The Company operates two
gaming properties in this market: Boomtown New Orleans and Casino Magic
Biloxi, having sold two gaming properties in this market in August 2000:
Boomtown Biloxi and Casino Magic Bay St. Louis. Competition in this market
expanded during 1999. Further, Mississippi law does not limit the number of
gaming licenses that may be granted. In March 1999, Mirage Resorts opened the
Beau Rivage Resort, an 1,800 room hotel and casino in Biloxi costing in excess
of $675,000,000. Grand Casino Biloxi, a subsidiary of Park Place
Entertainment, expanded its casino, which is next to Casino Magic Biloxi. In
the spring of 2000, the New Palace Casino opened in Biloxi and has 232 hotel
rooms, restaurants and a casino. Grand Casino Gulfport in June 1999 completed
and opened a 600 room hotel expansion, as well as a 3 acre water park, spa and
salon at its Gulfport property (located near Bay. St. Louis). Mandalay Bay has
announced plans to construct a new hotel and casino at Bay St. Louis, but
construction has not yet begun.
Bossier City/Shreveport Market. The Company operates its 188 room luxury
hotel and riverboat Casino Magic Bossier City property in the Bossier
City/Shreveport market, which competes directly with three other gaming
facilities. The largest is Horseshoe Casino, which has a 606 room luxury hotel
and has the largest riverboat, at 62,400 square feet (though all of the
casinos in Louisiana are limited to 30,000 square feet of gaming space). Isle
of Capri Casinos has completed construction of a 305 room hotel, which opened
in mid-1999. Additionally, Hollywood Casino (which is not affiliated with the
Company) has begun construction of a $230,000,000 hotel and riverboat casino
in Shreveport, which is expected to open in the fourth quarter of 2000.
Harrah's is also constructing an approximately 500 room hotel in Shreveport
adjacent to its casino, which is expected to open in the fall of 2000.
New Orleans Market. The Company operates its Boomtown New Orleans property
in Harvey, Louisiana, approximately ten miles from the French Quarter of New
Orleans, on the "Westbank" in Jefferson Parish. In October 1999, Harrah's Jazz
Casino opened a significant land-based casino and entertainment facility in
downtown New Orleans. The Harrah's Jazz Casino has 100,000 square feet and
approximately 4,200 gaming
139
<PAGE>
positions compared with Boomtown New Orleans which has 30,000 square feet and
approximately 1,300 positions.
California and Reno Markets; Proposition 1A. In California, the Company
leases the Hollywood Park-Casino and the Crystal Park Casino (both which are
California card clubs) to a third party operator, and operates Boomtown Reno
in Nevada. Indian tribes have operated casinos in California for approximately
ten years, and currently there are approximately 40 Indian tribes operating
gambling halls, though most are significantly smaller than the typical Las
Vegas casino. In March 2000, California voters passed Proposition 1A, a ballot
initiative that allows Indian tribes to conduct various gaming activities
including horse race wagering, gaming devices (including slot machines),
banked card games (as in traditional Las Vegas card games) and lotteries. As a
result of the passage of Proposition 1A in California, the Company expects the
increased Indian gaming competition will adversely affect the Company's gaming
operations in Reno, Nevada and the California Card Clubs which are run by a
third party operator.
The Hollywood Park-Casino and the Crystal Park Casino also face competition
from other card club casinos in neighboring cities.
General. While the Company believes that it has been able to effectively
compete in these markets to date, increasing competition may adversely affect
gaming operations in the future. The Company believes that increased legalized
gaming in other states, particularly in areas close to our existing gaming
properties, such as in Texas, Alabama or Kentucky could adversely affect its
operations.
Federal Income Tax Matters
The Company accounts for income taxes under Statement of Financial
Accounting Standards No. 109 Accounting for Income Taxes, whereby deferred tax
assets and liabilities are recognized for the future tax consequences
attributable to differences between the financial statement carrying amounts
of existing assets and liabilities and their respective tax bases.
As of December 31, 1999, the Company had federal net operating loss ("NOL")
and capital loss ("CL") carryforwards of approximately $64,700,000, and
$5,600,000, respectively, comprised principally of NOL carryforwards acquired
in the Casino Magic and Boomtown Mergers, and CL carryforwards resulting from
the disposition of Boomtown's Las Vegas property. The NOL carryforwards expire
on various dates through 2018, and the CL carryforwards expire on various
dates through 2002. In addition, the Company has approximately $400,000 of
foreign tax credits related to Casino Magic Argentina operations, which expire
in 2000, and approximately $8,400,000 of alternative minimum tax credits which
do not expire. The alternative minimum tax credits can reduce future federal
income taxes but generally cannot reduce federal income taxes paid below the
amount of alternative minimum tax.
Under several provisions of the Internal Revenue Code (the "Code") and the
regulations promulgated thereunder, the utilization of NOL, CL and tax credit
carryforwards to reduce tax liability is restricted under certain
circumstances. Events which cause such a limitation include, but are not
limited to, certain changes in the ownership of a corporation. Both the
Boomtown Merger and the Casino Magic Merger caused such a change in ownership
with respect to Boomtown and Casino Magic. As a result, the Company's use of
approximately $13,800,000 and $50,900,000 of Boomtown and Casino Magic's NOL
carryforwards, respectively; $1,400,000 of Boomtown's CL carryforwards; and
$3,400,000 and $3,700,000 of Boomtown and Casino Magic's tax credit
carryforwards, respectively, is subject to certain limitations imposed by
Sections 382 and 383 of the Code and by the separate return limitation year
rules of the consolidated return regulations. Section 382 of the Code
generally provides that in each taxable year following an ownership change
with respect to a corporation, the corporation (or consolidated group of which
the corporation is a part) is subject to a limitation on the amount of the
corporation's pre-ownership change NOLs which maybe used equal to the value of
the stock of the corporation (determined immediately prior to the ownership
change and subject to certain adjustments) multiplied by the "long term tax
exempt rate" which is in effect at the time of the ownership change. For
140
<PAGE>
ownership changes occurring during June 1997 (Boomtown) and October 1998
(Casino Magic), the long term tax exempt rates were 5.64% and 5.15%,
respectively. Section 383 of the Code imposes a comparable and related set of
rules for limiting the use of CL and tax credit carryforwards in the event of
an ownership change. In addition, the separate return limitation year rules of
the consolidated return regulations generally provide that Boomtown and Casino
Magic's pre-merger NOLs can be used in computing post-merger taxable income of
the Company only to the extent that Boomtown and Casino Magic, respectively,
contribute to the Company's consolidated income. The separate return
limitation year rules also impose similar limitations with respect to CL and
tax credit carryforwards of Boomtown and Casino Magic. Furthermore, the
utilization of the foreign tax credit is also subject to certain limitations
imposed by Section 904 of the Code which generally provides that foreign tax
credits cannot be used to reduce U.S. tax liability on income sources with the
U.S. These various limitations restrict the amount of NOL, CL and tax credit
carryforwards that may be used by the Company in any taxable year and,
consequently, are expected to defer the Company's use of a substantial portion
of such carryforwards and may ultimately prevent the Company's use of a
portion thereof. Therefore, a valuation allowance has been recorded related to
the Boomtown and Casino Magic carryforwards.
For California tax purposes, as of December 31, 1999, the Company also had
approximately $11,700,000 of Los Angeles Revitalization Zone ("LARZ") tax
credits. The LARZ tax credits can only be used to reduce certain California
tax liability and cannot be used to reduce federal tax liability. A valuation
allowance has been recorded with respect to the LARZ tax credits because the
Company may not generate enough income subject to California tax to utilize
the LARZ tax credits before they expire.
Employees
The following is a summary of Pinnacle Entertainment's employees by
property at December 31, 1999:
<TABLE>
<CAPTION>
Total
Permanent Seasonal Staffing
Property Staff Staff Range
-------- --------- -------- -----------
<S> <C> <C> <C>
Belterra(a)................................... 8 -- 8
Boomtown Reno................................. 1,000 150 1,000-1,150
Boomtown New Orleans.......................... 1,156 -- 1,156
Boomtown Biloxi(b)............................ 988 -- 988
Casino Magic Bay St. Louis(b)................. 1,210 50 1,210-1,260
Casino Magic Biloxi........................... 1,319 -- 1,319
Casino Magic Bossier City..................... 1,450 -- 1,450
Casino Magic Argentina........................ 255 10 265
Turf Paradise(c).............................. 85 340 85-425
Corporate..................................... 35 -- 35
----- --- -----------
Total....................................... 7,506 550 7,506-8,056
===== === ===========
</TABLE>
--------
(a) Belterra expects to have approximately 1,400 employees.
(b) Since consummation of the sale of Boomtown Biloxi and Casino Magic Bay St.
Louis in August 2000, the employees are no longer employed by the Company.
(c) Since consummation of the sale of Turf Paradise in June 2000, the
employees are no longer employed by the Company.
The Company does not employ the staff at the Hollywood Park-Casino or the
Crystal Park Casino.
The Company's staff is non-union. The Company believes that it has good
relationships with its employees.
Other Information
Information concerning backlog, sources and availability of raw materials
is not essential to an understanding of the Company's business.
141
<PAGE>
The Company does not engage in material research activities relating to
development of new products or services or improvement of existing products or
services.
Compliance with federal, state and local provisions which have been enacted
or adopted regulating the discharge of materials into the environment or
otherwise relating to the protection of the environment have not had a
material effect upon capital expenditures, earnings or the competitive
position of the Company.
The Company owns two land-based casinos in Argentina. Casino Magic
Argentina's contribution to the Company's net income is immaterial as compared
with the contributions of the Company's domestic gaming operations.
Real Estate Properties
The following describes the Company's principal real estate properties:
Pinnacle Entertainment, Inc. In connection with the sale of the Hollywood
Park Race Track to Churchill Downs (see Note 3 to the Notes to Consolidated
Financial Statements), the Company relocated its corporate offices to
Glendale, California. The Company leases approximately 10,000 square feet
under a sub lease agreement that expires in May 2005.
Hollywood Park-Casino. As discussed in Note 3 to the Notes to Consolidated
Financial Statements, upon the disposition of the Hollywood Park-Casino to
Churchill Downs, the Company entered into a 10-year leaseback agreement with
Churchill Downs, and immediately sub leased the facility to an unaffiliated
third party tenant to operate the card club casino. The Hollywood Park-Casino
contains approximately 30,000 square feet of card club gaming space and 30,000
square feet of retail and restaurant space.
The Crystal Park Casino. The Crystal Park LLC owns approximately six acres,
including the ground floor of the Crystal Park Casino, which houses the
approximately 40,000 square feet of gaming space. The Crystal Park LLC leases
the hotel, along with approximately 35 acres of unimproved land (to be used
for expansion, if ever needed) from the City of Compton under a 50 year lease.
An unaffiliated third party operates the Crystal Park Casino under a four year
triple net lease.
Boomtown Reno. The Company owns 569 acres in Verdi, Nevada, with current
operations presently utilizing approximately 61 acres. The Company considers
approximately 250 of the excess acreage as available for development. The
Company owns all of the improvements and facilities at the property, including
the casino, hotel, truck stop, recreational vehicle park and service station,
along with the related water rights.
Boomtown New Orleans. The Company owns approximately 50 acres in Harvey,
Louisiana which are utilized by Boomtown New Orleans. The Company owns the
facilities and associated improvements at the property, including the
riverboat casino.
Casino Magic Biloxi. Casino Magic Biloxi is located on approximately 16
acres, of which 4.5 acres are owned and approximately 11.5 acres are leased,
inclusive of approximately 6.4 acres of submerged tidelands leased from the
state of Mississippi. The tidelands are under a ten year lease, with
approximately 4 years remaining, with a five year option to renew. The Company
owns the barge on which the casino is located and all of the land-base
facilities including the hotel.
Casino Magic Bossier City. The Company owns 23 acres on the Red River in
Bossier City, Louisiana. The property contains a dockside riverboat casino,
hotel, parking structure and other land-based facilities, all of which are
owned by the Company. The property secures the Casino Magic 13% Notes. The
Company leases approximately one acre of water bottoms from the State of
Louisiana.
Casino Magic Argentina. The Company operates two casinos in west central
Argentina, in the cities of Neuquen and San Martin de los Andes. The Company
does not own any real property at these sites.
142
<PAGE>
Expansion Properties
Belterra Casino Resort. The Company owns and leases a total of
approximately 315 acres in Switzerland County, Indiana. The Company is
constructing a 15-story, 308-room hotel, a cruising riverboat casino 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 "Parties to the Pinnacle Merger--The Company--Belterra Casino
Resort in Indiana."
Lake Charles. In November 1999, the Company filed an application for the
fifteenth and final gaming license to be issued by the Louisiana Gaming
Control Board. The Company's application is seeking approval to operate a
cruising riverboat casino, hotel and golf course resort complex in Lake
Charles, Louisiana.
In connection with the application, the Company entered into an option
agreement with the Lake Charles Harbor and Terminal District to lease 225-
acres of unimproved land from the District upon which such resort complex
would be constructed. The term of the lease would be for a total of up to 70
years. The lease would require the Company to develop certain on- and off-site
improvements. 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.
Properties Held For Sale
Boomtown Biloxi. Until the sale of Boomtown Biloxi in August 2000, the
Company leased substantially all of the 19 acres that Boomtown Biloxi utilizes
for operations, under a 99 year lease, entered into in 1994. In addition, the
Company leased property for parking under several lease agreements ranging
from 10 to 25 years. The Company leased approximately 5.1 acres of submerged
tidelands, underneath the barge where the casino sits, from the state of
Mississippi under a ten year lease with a five year option to renew. The
Company owned the barge and all of the land-based facilities.
Casino Magic Bay St. Louis. Until the sale of Casino Magic Bay St. Louis in
August 2000, the Company owned approximately 591 acres in Bay St. Louis,
Mississippi, including the 17 acre marina where the gaming barge is moored.
There are approximately 50 acres available for development. The property
includes a golf course, a hotel, a recreational vehicle park, and other land-
based facilities, all of which were owned by the Company.
Inglewood, California. The Company owns approximately 97 acres of
unimproved land adjacent to the Hollywood Park Race Track in Inglewood,
California.
Legal Proceedings
Poulos Lawsuit. A class action lawsuit was filed on April 26, 1994, in the
United States District Court, Middle District of Florida (the "Poulos
Lawsuit"), naming as defendants 41 manufacturers, distributors and casino
operators of video poker and electronic slot machines, including Casino Magic.
The lawsuit alleges that the defendants have engaged in a course of fraudulent
and misleading conduct intended to induce people to play such games based on
false beliefs concerning the operation of the gaming machines and the extent
to which there is an opportunity to win. The suit alleges violations of the
Racketeer Influenced and Corrupt Organization Act, as well as claims of common
law fraud, unjust enrichment and negligent misrepresentation, and seeks
damages in excess of $6 billion. On May 10, 1994, a second class action
lawsuit was filed in the United States District Court, Middle District of
Florida (the "Ahern Lawsuit"), naming as defendants the same defendants who
were named in the Poulos Lawsuit and adding as defendants the owners of
certain casino operations in Puerto Rico and the Bahamas, who were not named
as defendants in the Poulos Lawsuit. The claims in the Ahern Lawsuit are
identical to the claims in the Poulos Lawsuit. Because of the similarity of
parties and claims, the Poulos Lawsuit and Ahern Lawsuit were consolidated
into one case file in the United States District Court, Middle District of
Florida. On December 9, 1994 a motion by the defendants for change of venue
was granted, transferring the case to the United States District Court for the
District of Nevada, in Las Vegas. In an order
143
<PAGE>
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 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, defendents 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
Boomtown Biloxi landbased 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.
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.
Purported Class Action Lawsuits. See "The Pinnacle Merger--Legal
Proceedings."
General. The Company is party to a number of other pending legal
proceedings, though management does not expect that the outcome of such
proceedings, either individually or in the aggregate, will have a material
effect on the Company's financial results.
144
<PAGE>
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 Proxy Statement 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 pending asset sale
transactions (discussed below); the failure to complete (on time or otherwise)
or successfully operate planned expansion and development projects (including
the Belterra Casino Resort); 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).
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 directors 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 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.
145
<PAGE>
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 ongoing 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 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 Securities and Exchange Commission.
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.
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
146
<PAGE>
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
======= =======
<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 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 writedown of the long-lived assets comprising the
Hollywood Park-Casino of $20,446,000 representing the difference between its
net
147
<PAGE>
book value of approximately $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 to the Condensed Notes to Consolidated Financial
Statements). 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).
Condensed results of operations before taxes for the Hollywood Park Race
Track and the Hollywood Park-Casino for the three and six months ended June
30, 1999 and the years ended December 31, 1999, 1998 and 1997 were:
<TABLE>
<CAPTION>
For the For the
three months six months
ended ended Year ended December 31,
June 30, June 30, -------------------------
1999 1999 1999(a) 1998 1997
------------ ---------- ------- -------- --------
(in thousands-- (in thousands)
unaudited)
<S> <C> <C> <C> <C> <C>
Revenues................. $43,737 $63,227 $86,235 $114,751 $121,799
Expenses................. 30,461 51,626 73,019 103,760 107,775
------- ------- ------- -------- --------
Operating income....... 13,276 11,601 13,216 10,991 14,024
Interest expense(b)...... 0 0 0 0 0
------- ------- ------- -------- --------
Income before income
taxes................. $13,276 $11,601 $13,216 $ 10,991 $ 14,024
======= ======= ======= ======== ========
</TABLE>
--------
(a) Operating results through the sales date of September 10, 1999.
(b) No interest expense was specifically identified for these operations.
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 and 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 and 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>
148
<PAGE>
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 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 trying 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 and for the Casino Magic Bay St. Louis and Boomtown Biloxi
casinos and the Turf Paradise horse racing facility for the years ended
December 31, 1999, 1998 and 1997 are as follows:
<TABLE>
<CAPTION>
For the three For the six
months ended months ended
June 30, June 30, Year ended December 31,
--------------- --------------- -------------------------
2000 1999 2000 1999 1999 1998(a) 1997(b)
------- ------- ------- ------- -------- -------- -------
(in thousands--unaudited) (in thousands)
<S> <C> <C> <C> <C> <C> <C> <C>
Revenues(c)............. $39,311 $39,613 $80,806 $80,375 $174,380 $100,014 $46,655
Expenses................ 32,015 33,130 66,087 66,400 145,066 86,051 40,479
------- ------- ------- ------- -------- -------- -------
Operating income...... 7,296 6,483 14,719 13,975 29,314 13,963 6,176
Interest expense
(income), net.......... 37 (13) 82 62 86 339 (153)
------- ------- ------- ------- -------- -------- -------
Income before income
taxes................ $ 7,259 $ 6,496 $14,637 $13,913 $ 29,228 $ 13,624 $ 6,329
======= ======= ======= ======= ======== ======== =======
</TABLE>
--------
(a) Includes the results of Casino Magic Bay St. Louis from October 15, 1998
(see Note 5 to the Notes to Consolidated Financial Statements).
(b) Includes the results of Boomtown Biloxi from June 30, 1997 (see Note 5 to
the Notes to Consolidated Financial Statements).
149
<PAGE>
(c) 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 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.
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 Lousiana Gaming Control Board. The Company's
application is seeking 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.
150
<PAGE>
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.
Year 2000
The Company has not experienced any disruption due to the Year 2000 issue.
The Year 2000 issue exists because computer systems and applications were
historically designed to use two digit fields (rather than four) to designate
a year, which could result in miscalculations or system failures. Costs
incurred prior to December 31, 1999 to mitigate the Year 2000 issue were
approximately $1,028,000. The Company cannot be assured there will not be Year
2000 issues in the future.
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 Consolidated 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 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
151
<PAGE>
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 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
152
<PAGE>
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 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
153
<PAGE>
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).
Year ended December 31, 1999, compared to the year ended December 31, 1998
Total revenues increased by $279,890,000, or 65.6%, for the year ended
December 31, 1999, as compared to the year ended December 31, 1998.
Contribution to total revenue from Casino Magic was approximately $280,723,000
in 1999 compared to $63,621,000 in 1998. This increase is primarily attributed
to the timing of the Casino Magic acquisition. The 1998 results include
operations from the five Casino Magic casinos from the October 15, 1998,
acquisition date to December 31, 1998, whereas their results are included in
all of 1999. Gaming revenues increased by $264,469,000, or 90.2%, with
$260,806,000 of the increase due to Casino Magic. The remaining net increase
is due to increases at each of the Boomtown properties, offset by a decrease
in gaming revenue at the Hollywood Park-Casino (due to the September 10, 1999,
disposition discussed above). Boomtown Reno gaming revenues increased by
$6,765,000, primarily attributed to the remodeling completed in 1999, enhanced
marketing programs and unusually warm weather in the fourth quarter 1999 which
provided increased visitor counts to the casino. Boomtown New Orleans gaming
revenue increased by $9,778,000, primarily attributed to updated marketing and
advertising programs in 1999 as well as a new slot machine mix for the casino
floor. Similar increases are not expected in 2000 particularly in light of the
opening of a larger land-based casino in New Orleans by a competitor in late
October 1999. Boomtown Biloxi gaming revenue increased by $1,137,000,
primarily due to a growth in the Biloxi gaming market brought about by the
opening of a larger casino hotel in the second quarter 1999, as well as
expansions by other competitors, and by the success of the buffet marketing.
Racing revenue decreased by $11,662,000, or 17.4%, including a decrease of
$12,220,000 from the sale of the Hollywood Park Race Track (discussed above).
Turf Paradise revenue increased by $558,000, primarily due to increase sale of
the racing signal to out of state locations. Food and beverage revenue
increased by $9,307,000, or 30.5%, with $9,045,000 of the increase due to
Casino Magic. The remaining net increase is due to increases at Boomtown Reno
and Boomtown Biloxi, offset by decreases at the Hollywood Park Race Track and
Hollywood Park-Casino. Boomtown Reno food and beverage revenues increased by
$1,561,000, primarily due to the improvements completed in 1999 and the higher
visitor counts. Boomtown Biloxi food and beverage revenues increased by
$2,189,000, primarily due to an aggressive marketing program focusing on the
property's buffet. Hotel and recreational vehicle revenues increased by
$8,661,000, or 281.6%, with $6,821,000 of the increase due Casino Magic. The
remaining increase is due primarily to the hotel room addition and room
renovation at Boomtown Reno. Truck stop income increased by $3,145,000, or
21.7%, due primarily to the increased traffic flow at the Boomtown Reno
property, and increased fuel prices. Other income
154
<PAGE>
increased by $5,970,000, or 31.5%, with $4,051,000 of the increase due to
Casino Magic. The remaining increase is primarily due to the lease rent income
earned by the Hollywood Park-Casino (see discussion above).
Total operating expenses increased by $180,189,000, or 47.1%, for the year
ended December 31, 1999, as compared to the year ended December 31, 1998.
Excluding any gain (loss) on the disposition of assets, operating expenses
increased by $224,471,000, or 59.0%, during the year ended December 31, 1999,
as compared to the year ended December 31, 1998. Contribution to total
operating expenses in 1999 from Casino Magic was $229,788,000 compared to
$54,582,000 in 1998. Gaming expenses increased by $147,959,000, or 91.6%,
including $153,897,000 due to Casino Magic, and decreases at Boomtown Reno and
the Hollywood Park-Casino (due to the disposition discussed above), offset by
increases at Boomtown New Orleans. Boomtown Reno gaming expenses decreased by
$1,561,000, primarily due to improved marketing programs in 1999 including the
elimination of the costly fun flight program and by management changes.
Boomtown New Orleans gaming expenses increased by $4,782,000, primarily due to
the corresponding increase in gaming revenue, including the improved marketing
programs. Racing expenses decreased by $6,622,000, or 22.6%, including a
decrease in Hollywood Park Race Track racing expenses of $6,807,000 due to the
sale of the race track discussed above and an increase in racing expenses at
Turf Paradise of $185,000 primarily attributed to the increased racing
revenues. Food and beverage expenses increased by $7,698,000, or 19.8%,
including an increase of $9,457,000 due to Casino Magic and a decrease of
$4,662,000 due to the dispositions of the Hollywood Park Race Track and
Hollywood Park-Casino. Boomtown Reno food and beverage expenses increased by
$1,750,000, consistent with the overall increase in food and beverage revenue.
Boomtown Biloxi food and beverage expenses increased by $1,175,000, also
primarily due to the increase in revenue and volume at the buffet. Hotel and
recreational vehicle expense increased by $4,710,000, or 388.3%, with
$3,499,000 due to the addition of Casino Magic and the remainder due to the
additional hotel operations at Boomtown Reno. Truck stop expenses increased by
$3,017,000, or 22.7%, primarily due to the increased volume at the Boomtown
Reno property and fuel costs. General and administrative expenses increased by
$40,200,000, or 42.5%, with $36,095,000 due to the addition of Casino Magic
and increased casino management. Depreciation and amortization increased by
$19,803,000, or 61.7%, including $20,338,000 due to Casino Magic, offset by a
reduction in depreciation and amortization expenses from the disposition of
the Hollywood Park Race Track in September 1999 (discussed above). Pre-opening
costs for the Belterra Casino Resort increased by $2,199,000, or 267.8%,
consistent with the development of the project. The gain on disposition of
assets of $62,507,000 is primarily related to the disposition of the Hollywood
Park Race Track and the impairment write-down of $20,446,000 relates to the
Hollywood Park-Casino. Other expenses increased by $5,507,000, or 65.5%,
including $6,502,000 due to the Casino Magic acquisition, offset by a
reduction in other expenses from the dispositions of the Hollywood Park Race
Track and Hollywood Park-Casino in September 1999 (discussed above). Net
interest expense increased by $35,026,000, or 155.6%, with $14,502,000 of the
increase due primarily to the debt assumed in the Casino Magic acquisition and
the remaining increase due to the 9.25% Notes issued in February 1999. Income
tax expense increased by $32,484,000, or 384.8%, with approximately
$22,000,000 of the increase attributed to the dispositions of the track and
casino.
Year ended December 31, 1998, compared to the year ended December 31, 1997
On October 15, 1998, and on June 30, 1997, the Company acquired Casino
Magic and Boomtown, respectively, and accounted for each acquisition under the
purchase method of accounting for a business combination. As required under
the rules of the purchase method of accounting for a business combination,
Casino Magic's and Boomtown's results of operations were not consolidated with
those of the Company's, prior to their respective acquisition dates, thus
generating significant variances when comparing 1998's financial results with
those of 1997. Boomtown's results of operations include a full year of
activity in 1998 and just six months of activity in 1997 (July 1, 1997 through
December 31, 1997). Casino Magic's results of operations include the period
October 16, 1998 through December 31, 1998, only, and no 1997 results.
Total revenues increased by $178,839,000, or 72.1%, for the year ended
December 31, 1998, as compared to the year ended December 31, 1997.
Approximately $174,075,000 ($110,454,000 related to Boomtown and
155
<PAGE>
$63,621,000 related to Casino Magic) of the increase was due to the timing of
Boomtown and Casino Magic acquisitions. Gaming revenues increased by
$155,398,000, or 112.9%, with $150,095,000 of the increase due to the timing
of acquisitions. Gaming revenues increased at the Boomtown properties by
$10,687,000 (when comparing the six months ended December 31, 1998 to the six
months ended December 31, 1997) due primarily to increases at Boomtown New
Orleans, generated by a new larger riverboat placed into service in February
1998. Gaming revenues decreased at the Hollywood Park-Casino by approximately
$4,562,000, primarily a result of the ban on smoking in such establishments
and economic problems in various Asian countries (as a significant number of
Hollywood Park-Casino's patrons are Asian). Racing revenues decreased by
$1,973,000, or 2.9%, due to there being five fewer live race days at the
Hollywood Park Race Track in 1998 as compared to 1997. Food and beverage
revenues increased by $10,616,000, or 53.4%, with $9,002,000 of the increase
due to the timing of acquisitions, and the balance of the increase primarily
attributable to increased sales at both Boomtown New Orleans and Boomtown
Biloxi, a result of successful marketing programs. Hotel and recreational
vehicle park revenues increased by $2,139,000, or 228.3%, due to the timing of
acquisitions. Truck stop and service station revenues (all of which are
attributable to Boomtown Reno) increased by $5,866,000, or 67.9%, primarily
due to the timing of the Boomtown acquisition. Other income increased by
$6,793,000, or 55.9%, with $6,456,000 of the increase due to the timing of
acquisitions.
Total operating expenses increased by $156,155,000, or 69.0%, during the
year ended December 31, 1998, as compared to the year ended December 31, 1997.
Approximately $151,578,000 ($96,996,000 related to Boomtown and $54,582,000
related to Casino Magic) of the increase related to the timing of
acquisitions. Gaming expenses increased by $86,816,000, or 116.2%, with
$85,538,000 of the increase due to the timing of acquisitions, with the
balance of the increase primarily a corresponding result of the increased
gaming revenues at the Boomtown properties. Food and beverage expenses
increased by $13,115,000, or 50.9%, with $10,801,000 of the increase due to
the timing of acquisitions. The balance of the increase was primarily due to
increased costs at Boomtown New Orleans and Boomtown Biloxi, where food and
beverage marketing promotions were increased. Hotel and recreational vehicle
expenses increased by $857,000, or 240.7%, primarily due to the timing of
acquisitions. Truck stop and service station expenses (all of which are
attributable to Boomtown Reno) increased by $5,310,000, or 66.6%, due
primarily to the timing of the Boomtown acquisition. General and
administrative expenses increased by $33,156,000, or 53.9%, with $33,361,000
of the increase attributable to the timing of acquisitions, with the balance
of the increase primarily due to additional staffing at corporate, and
expansion related expense increases. Depreciation and amortization increased
by $13,964,000, or 76.9%, with $12,236,000 of the increase due to the timing
of acquisitions, with the balance of the increase primarily due to Boomtown
New Orleans' February 1998 placement of a new riverboat into service. Loss on
write off of assets was $2,221,000 for the year ended December 31, 1998, of
which $1,086,000 related to the closing of the Hollywood Park Golf Center;
$500,000 related to the abandonment of a project in Kansas, with the balance
related to the write off of obsolete assets at Boomtown Reno. Other expenses
increased by $883,000, or 11.7%, including $2,892,000 due to the timing of
acquisitions, offset by a reduction in REIT restructuring expenses (the
Company ceased in 1998 its effort to restructure into a real estate investment
trust). Net interest expense increased by $15,216,000, or 208.4%, due to
interest on the 9.5% Notes, which were issued in August 1997, and interest on
bank borrowings, including borrowing to purchase Casino Magic and to retire
the Casino Magic 11.5% Notes. Income tax expense increased by $2,592,000, or
44.3%, due to increased pre-tax income in 1998.
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).
The Condensed Consolidated Statements of Cash Flows detailing changes in
the cash balances is on page F-4 of this Proxy Statement.
156
<PAGE>
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 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.
157
<PAGE>
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 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.
Quantitative and Qualitative Disclosures About Market Risk
The Company's primary exposure to market risk (or the risk of loss arising
from adverse changes in market rates and prices, such as interest rates and
foreign currency exchange rates) is with respect to potential interest rate
risk associated with the long term floating interest rate on borrowings under
the bank credit facility (see "--Liquidity, Capital Resources and Other
Factors Affecting Future Results" above). As of June 30, 2000, the Company had
no outstanding borrowings under the bank credit facility.
As of 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.
158
<PAGE>
INDEPENDENT PUBLIC ACCOUNTANTS
The consolidated financial position of the Company as of December 31, 1999
and December 31, 1998, and the results of operations and cash flows for each
of the three years ended in the period ended December 31, 1999 have been
audited by Arthur Andersen LLP as stated in their report, which is included in
this Proxy Statement on page F-20. The firm of Arthur Andersen LLP served as
the Company's independent public accountants for the fiscal year ended
December 31, 1999. Representatives of Arthur Andersen LLP are expected to be
present at the Annual Meeting and will be available to respond to appropriate
questions and to make a statement if they so desire.
STOCKHOLDER PROPOSALS FOR THE NEXT ANNUAL MEETING
If the Pinnacle Merger is completed, the Company will not have any public
stockholders and, therefore, there will be no public participation in any
future stockholder meetings. However, if the Pinnacle Merger is not completed,
the Company's public stockholders will continue to be entitled to attend and
participate in meetings of the Company's stockholders.
If the Pinnacle Merger is not completed, under the Company's By-Laws,
stockholders who wish to present proposals for action, or to nominate
directors, at the next annual meeting of stockholders of the Company (that is,
the next annual meeting following the Annual Meeting to which this Proxy
Statement relates) must give written notice thereof to the Secretary of the
Company at the address set forth on the cover page of this Proxy Statement in
accordance with the then current provisions of the Company's By-Laws. The By-
Laws currently require that such notice be given not more than 120 days nor
less than 90 days prior to the first anniversary of this year's Annual
Meeting. If, however, the Company advances the date of the next annual meeting
by more than thirty days or delays such date by more than sixty days, notice
by the stockholder must be given not earlier than 120 days and not later than
90 days in advance of such meeting or, if later, the tenth day following the
first public announcement of the date of such meeting. Stockholder notices
must contain the information required by Section 1 of Article I of the
Company's By-Laws.
In order to be eligible for inclusion in the Company's proxy statement and
proxy card for the next annual meeting pursuant to Rule 14a-8 under the
Exchange Act, stockholder proposals would have to be received by the Secretary
of the Company no later than April [ ], 2001 if the next annual meeting were
held on or near September [ ], 2001. In the event that the Company elects to
hold its next annual meeting at a different time of year than the time of year
of this Annual Meeting, such stockholder proposals would have to be received
by the Company a reasonable time before the Company's solicitation is made. If
the Company does not have notice of a matter to come before the next annual
meeting by the earlier of [ ], 2001 or the date specified in the preceding
paragraph (or, in the event the next annual meeting is held at a different
time of year as described in the preceding paragraph, then by the date
described in the preceding paragraph), the Company's proxy for such meeting
will confer discretionary authority to vote for such matter. Further, in order
for such stockholder proposals to be eligible to be brought before the
stockholders at the next annual meeting, the stockholder submitting such
proposals must also comply with the procedures, including the deadlines,
required by the Company's then current By-Laws, as referenced in the preceding
paragraph. Stockholder nominations of directors are not stockholder proposals
within the meaning of Rule 14a-8 and are not eligible for inclusion in the
Company's proxy statement.
ANNUAL REPORT TO STOCKHOLDERS AND FORM 10-K
The Company will provide without charge a copy of its Annual Report to
Stockholders for 1999 and its annual report on Form 10-K, including the
financial statements and the financial statement schedules, filed with the SEC
for fiscal year 1999 to any beneficial owner of Pinnacle Common Stock as of
the Record Date upon written request to Pinnacle Entertainment, Inc., 330
North Brand Boulevard, Suite 1100, Glendale, California 91203, Attention:
Stockholder Relations. The Company will furnish a beneficial owner with any
exhibit not contained therein upon payment of a reasonable fee.
159
<PAGE>
WHERE TO FIND ADDITIONAL INFORMATION
The SEC allows the Company to "incorporate by reference" information into
this Proxy Statement, which means that the Company can disclose important
information by referring you to another document filed separately with the
SEC.
Any statement contained in a document incorporated by reference herein
shall be deemed to be modified or superseded for all purposes to the extent
that a statement contained in this Proxy Statement modifies or replaces such
statement.
All documents filed by the Company pursuant to Section 13(a), 13(c), 14 or
15(d) of the Exchange Act after the date of this Proxy Statement and prior to
the date of the Annual Meeting shall be deemed to be incorporated by reference
in this Proxy Statement and to be a part of this Proxy Statement from the date
of filing of such documents.
The Company undertakes to provide by first class mail, without charge upon
receipt of any written or oral request, to any person to whom a copy of this
Proxy Statement has been delivered, a copy of any or all of the documents
referred to above which have been incorporated by reference in this Proxy
Statement, other than exhibits to such documents (unless such exhibits are
specifically incorporated by reference therein). Requests for such copies
should be directed to Pinnacle Entertainment, Inc., 330 North Brand Boulevard,
Suite 1100, Glendale, California 91203, Attention: Stockholder Relations.
PROVISIONS FOR UNAFFILIATED SECURITY HOLDERS
The filing persons have made no provision in connection with the Pinnacle
Merger to grant unaffiliated security holders access to the corporate files of
the Company or the other corporate filing persons or to obtain counsel or
appraisal services at the expense of the filing persons.
160
<PAGE>
AVAILABLE INFORMATION
No person is authorized to give any information or to make any
representations, other than as contained in this Proxy Statement, in
connection with the Merger Agreement or the merger, and, if given or made,
such information or representations may not be relied upon as having been
authorized by the Company, PHCR, Pinnacle Acq Corp or Harveys Casino Resorts.
The delivery of this Proxy Statement shall not, under any circumstances,
create any implication that there has been no change in the information set
forth herein or in the affairs of the Company since the date hereof.
Because the Pinnacle Merger may be considered a "going private"
transaction, the Company and certain of the Management Stockholders that may
be considered affiliates of the Company (each of which affiliate Management
Stockholders is also a director and/or executive officer of the Company) have
filed with the SEC a Schedule 13E-3 under the Exchange Act with respect to the
Pinnacle Merger. This Proxy Statement does not contain all of the information
set forth in the Schedule 13E-3 and the exhibits thereto. Copies of the
Schedule 13E-3 and the exhibits thereto are available for inspection and
copying at the principal executive offices of the Company during regular
business hours by any interested stockholder of the Company, or a
representative who has been so designated in writing, and may be inspected and
copied, or obtained by mail, by written request directed to Pinnacle
Entertainment, Inc., 330 North Brand Boulevard, Suite 1100, Glendale,
California 91203, Attention: Stockholder Relations, or from the SEC as
described below.
The Company is currently subject to the information requirements of the
Exchange Act and in accordance therewith files periodic reports, proxy
statements and other information with the SEC relating to its business,
financial and other matters. Copies of such reports, proxy statements and
other information, as well as the Schedule 13E-3 and the exhibits thereto, may
be copied (at prescribed rates) at the public reference facilities maintained
by the SEC at Room 1024, 450 Fifth Street, N.W., Judiciary Plaza, Washington,
D.C. 20549 and at the following Regional Offices of the SEC: 500 West Madison
Street, Suite 1400, Chicago, Illinois 60661; and Seven World Trade Center,
Suite 1300, New York, New York 10048. For further information concerning the
SEC's public reference rooms, you may call the SEC at 1-800-SEC-0330. Some of
this information may also be accessed on the World Wide Web through the SEC's
Internet address at "http://www.sec.gov." The Pinnacle Common Stock is listed
on the New York Stock Exchange (ticker symbol: PNK), and materials may also be
inspected at the office of the New York Stock Exchange located at 20 Broad
Street, Seventh Floor, New York, New York 10005.
161
<PAGE>
PINNACLE ENTERTAINMENT, INC.
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<S> <C>
Unaudited
Consolidated Balance Sheets as of June 30, 2000 and December 31, 1999.... F-2
Consolidated Statements of Operations for the three and six months ended
June 30, 2000 and 1999.................................................. F-3
Condensed Consolidated Statements of Cash Flows for the six months ended
June 30, 2000 and 1999.................................................. F-4
Condensed Notes to Consolidated Financial Statements..................... F-5
Calculation of Earnings per Share........................................ F-23
Audited
Report of Independent Public Accountants
Report of Arthur Andersen LLP........................................... F-24
Consolidated Balance Sheets as of December 31, 1999 and 1998............. F-25
Consolidated Statements of Operations for the years ended December 31,
1999, 1998 and 1997..................................................... F-26
Consolidated Statements of Changes in Stockholders' Equity for the years
ended December 31, 1999, 1998 and 1997.................................. F-27
Consolidated Statements of Cash Flows for the years ended December 31,
1999, 1998 and 1997..................................................... F-28
Notes to Consolidated Financial Statements............................... F-29
Calculation of Earnings per Share........................................ F-55
</TABLE>
F-1
<PAGE>
PINNACLE ENTERTAINMENT, INC.
CONSOLIDATED BALANCE SHEETS
(in thousands, except share data)
<TABLE>
<CAPTION>
June 30, December 31,
2000 1999
----------- ------------
(unaudited)
ASSETS
------
<S> <C> <C>
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
========== ==========
<CAPTION>
LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------ ----------- ------------
<S> <C> <C>
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 consolidated financial statements.
F-2
<PAGE>
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 consolidated financial statements.
F-3
<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.
F-4
<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 financial
information 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.
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
F-5
<PAGE>
PINNACLE ENTERTAINMENT, INC.
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
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
F-6
<PAGE>
PINNACLE ENTERTAINMENT, INC.
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
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.
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 would 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
F-7
<PAGE>
PINNACLE ENTERTAINMENT, INC.
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
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 casino assets
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 Beltrerra 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.
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>
F-8
<PAGE>
PINNACLE ENTERTAINMENT, INC.
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
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 writedown 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.
F-9
<PAGE>
PINNACLE ENTERTAINMENT, INC.
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
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 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
F-10
<PAGE>
PINNACLE ENTERTAINMENT, INC.
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
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 completd 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.
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
F-11
<PAGE>
PINNACLE ENTERTAINMENT, INC.
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
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 has 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.
F-12
<PAGE>
PINNACLE ENTERTAINMENT, INC.
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
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
F-13
<PAGE>
PINNACLE ENTERTAINMENT, INC.
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
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 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 guaranty 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.
F-14
<PAGE>
PINNACLE ENTERTAINMENT, INC.
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
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.
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 redeemed 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.
F-15
<PAGE>
PINNACLE ENTERTAINMENT, INC.
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Casino America Litigation. On or about September 6, 1996, Casino America,
Inc. commenced litigation in the Chancery Court of Harrison County,
Mississippi, Second Judicial District, against Casino Magic, and James Edward
Ernst, its then Chief Executive Officer, seeking injunctive relief and
unspecified compensatory damages in an amount to be proven at trial as well as
punitive damages. The plaintiff claims, among other things, that the
defendants (i) breached the terms of an agreement they had with the plaintiff;
(ii) tortiously interfered with certain of the plaintiff's business relations;
and (iii) breached covenants of good faith and fair dealing they allegedly
owed to the plaintiff. On or about October 8, 1996, the defendants interposed
an answer, denying the allegations contained in the Complaint. 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
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
F-16
<PAGE>
PINNACLE ENTERTAINMENT, INC.
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
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.
F-17
<PAGE>
PINNACLE ENTERTAINMENT, INC.
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
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>
F-18
<PAGE>
PINNACLE ENTERTAINMENT, INC.
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
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>
F-19
<PAGE>
PINNACLE ENTERTAINMENT, INC.
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
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>
F-20
<PAGE>
PINNACLE ENTERTAINMENT, INC.
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
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 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
F-21
<PAGE>
PINNACLE ENTERTAINMENT, INC.
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
beginning in January 1998 and October 1998, respectively, when the Company
acquired the outstanding minority interests therein and they became wholly
owned subsidiaries.
(b) The following wholly owned subsidiaries 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).
F-22
<PAGE>
PINNACLE ENTERTAINMENT, INC.
CALCULATION OF EARNINGS PER SHARE
<TABLE>
<CAPTION>
For the three months ended
June 30,
-----------------------------
Basic Diluted(a)
-------------- --------------
2000 1999 2000 1999
------- ------ ------- ------
(in thousands, except per
share data)
<S> <C> <C> <C> <C>
Average number of common shares outstanding..... 26,303 25,871 26,303 25,871
Average common shares due to assumed conversion
of stock options............................... 0 0 1,042 258
------- ------ ------- ------
Total shares.................................. 26,303 25,871 27,345 26,129
======= ====== ======= ======
Net income allocated to shareholders............ $26,232 $9,711 $26,232 $9,711
======= ====== ======= ======
Net income per share............................ $ 1.00 $ 0.38 $ 0.96 $ 0.37
======= ====== ======= ======
</TABLE>
<TABLE>
<CAPTION>
For the six months ended June
30,
-------------------------------
Basic Diluted(a)
--------------- ---------------
2000 1999 2000 1999
------- ------- ------- -------
(in thousands, except per share
data)
<S> <C> <C> <C> <C>
Average number of common shares outstanding.. 26,281 25,836 26,281 25,836
Average common shares due to assumed
conversion of stock options................. 0 0 1,045 (277)
------- ------- ------- -------
Total shares............................... 26,281 25,836 27,326 25,559
======= ======= ======= =======
Net income allocated to shareholders......... $48,144 $13,844 $48,144 $13,844
======= ======= ======= =======
Net income per share......................... $ 1.83 $ 0.54 $ 1.76 $ 0.54
======= ======= ======= =======
</TABLE>
--------
(a) When the computed diluted values are anti-dilutive, the basic per share
values are presented on the face of the consolidated statements of
operations.
F-23
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Board of Directors and Stockholders of
Pinnacle Entertainment, Inc.:
We have audited the accompanying consolidated balance sheets of Pinnacle
Entertainment, Inc., (a Delaware corporation, formerly Hollywood Park, Inc.)
and subsidiaries (the "Company") as of December 31, 1999 and 1998, and the
related consolidated statements of operations, shareholders' equity and cash
flows for each of the three years in the period ended December 31, 1999. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards in the United States. Those standards require that we plan and
perform the audits to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on
a test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used
and significant estimates made by management, as well as evaluating the
overall financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Pinnacle Entertainment,
Inc. and subsidiaries as of December 31, 1999 and 1998, and the results of
their operations and their cash flows for each of the three years in the
period ended December 31, 1999 in conformity with accounting principles
generally accepted in the United States.
Arthur Andersen LLP
Los Angeles, California
February 8, 2000 (except with respect
to the matters discussed in Note 20,
as to which the date is March 21, 2000)
F-24
<PAGE>
PINNACLE ENTERTAINMENT, INC.
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
December 31, December 31,
1999 1998
------------ ------------
(in thousands, except
share data)
ASSETS
------
<S> <C> <C>
Current Assets:
Cash and cash equivalents.......................... $ 123,362 $ 44,234
Short term investments............................. 123,428 3,179
Receivables, net................................... 17,132 16,783
Prepaid expenses and other assets.................. 13,118 15,207
Deferred income taxes.............................. 0 18,425
Assets held for sale............................... 154,649 0
Current portion of notes receivable................ 5,785 2,320
---------- --------
Total current assets.............................. 437,474 100,148
Notes receivable..................................... 8,912 17,852
Net property, plant and equipment.................... 437,715 602,912
Goodwill, net of accumulated amortization of $7,927
and $6,947 at December 31, 1999 and 1998,
respectively........................................ 87,481 97,098
Gaming licenses, net of accumulated amortization of
$5,219 and $3,616 at December 31, 1999 and 1998,
respectively........................................ 41,485 44,037
Debt issuance costs, net of accumulated amortization
of $8,278 and $4,095 at December 31, 1999 and 1998,
respectively........................................ 22,813 12,105
Other assets......................................... 9,528 17,187
---------- --------
$1,045,408 $891,339
========== ========
<CAPTION>
LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
<S> <C> <C>
Current Liabilities:
Accounts payable................................... $ 21,096 $ 20,970
Accrued interest................................... 26,080 16,741
Other accrued liabilities.......................... 45,569 61,498
Accrued compensation............................... 16,073 17,819
Liabilities to be assumed in asset sales........... 9,866 0
Deferred income taxes.............................. 19,542 0
Current portion of notes payable................... 6,782 11,564
---------- --------
Total current liabilities......................... 145,008 128,592
Notes payable, less current maturities............... 618,698 527,619
Deferred income taxes................................ 826 400
Minority interests................................... 0 3,752
Stockholders' Equity:
Capital stock--
Preferred--$1.00 par value, authorized 250,000
shares; none issued and outstanding in 1999 and
1998.............................................. 0 0
Common--$0.10 par value, authorized 40,000,000
shares; 26,234,699 and 25,800,069 shares issued
and outstanding in 1999 and 1998.................. 2,624 2,580
Capital in excess of par value....................... 224,654 218,375
Retained earnings.................................... 53,598 10,021
---------- --------
Total stockholders' equity........................ 280,876 230,976
---------- --------
$1,045,408 $891,339
========== ========
</TABLE>
See accompanying notes to the consolidated financial statements.
F-25
<PAGE>
PINNACLE ENTERTAINMENT, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
For the years ended
December 31,
---------------------------
1999 1998 1997
-------- -------- --------
(in thousands, except per
share data)
<S> <C> <C> <C>
Revenues:
Gaming......................................... $557,526 $293,057 $137,659
Racing......................................... 55,209 66,871 68,844
Food and beverage.............................. 39,817 30,510 19,894
Hotel and recreational vehicle park............ 11,737 3,076 937
Truck stop and service station................. 17,644 14,499 8,633
Other.......................................... 24,924 18,954 12,161
-------- -------- --------
706,857 426,967 248,128
-------- -------- --------
Expenses:
Gaming......................................... 309,508 161,549 74,733
Racing......................................... 22,694 29,316 30,304
Food and beverage.............................. 46,558 38,860 25,745
Hotel and recreational vehicle park............ 5,923 1,213 356
Truck stop and service station................. 16,296 13,279 7,969
General and administrative..................... 134,870 94,670 61,514
Depreciation and amortization.................. 51,924 32,121 18,157
Pre-opening costs, Belterra Casino Resort...... 3,020 821 0
(Gain) loss on disposition of assets, net...... (62,507) 2,221 0
Impairment write-down of Hollywood Park-
Casino........................................ 20,446 0 0
Other.......................................... 13,921 8,414 7,531
-------- -------- --------
562,653 382,464 226,309
-------- -------- --------
Operating income................................. 144,204 44,503 21,819
Interest expense, net.......................... 57,544 22,518 7,302
-------- -------- --------
Income before minority interests and income
taxes........................................... 86,660 21,985 14,517
Minority interests............................. 1,687 374 (3)
Income tax expense............................. 40,926 8,442 5,850
-------- -------- --------
Net income....................................... $ 44,047 $ 13,169 $ 8,670
======== ======== ========
Dividend requirements on convertible preferred
stock........................................... $ 0 $ 0 $ 1,520
-------- -------- --------
Net income attributable to common stockholders... $ 44,047 $ 13,169 $ 7,150
======== ======== ========
Net income per common share:
Net income--basic.............................. $ 1.70 $ 0.50 $ 0.33
Net income--diluted............................ $ 1.67 $ 0.50 $ 0.32
Number of shares--basic.......................... 25,966 26,115 22,010
Number of shares--diluted........................ 26,329 26,115 22,340
</TABLE>
See accompanying notes to the consolidated financial statements.
F-26
<PAGE>
PINNACLE ENTERTAINMENT, INC.
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
For the years ended December 31, 1999, 1998 and 1997
<TABLE>
<CAPTION>
Capital
in Retained
Excess Earnings Total
Preferred Common of Par (Accumulated Stockholders'
Stock Stock Value Deficit) Equity
--------- ------ -------- ------------ -------------
(in thousands)
<S> <C> <C> <C> <C> <C>
Balance as of December
31, 1996............... $ 28 $1,833 $167,074 $(10,775) $158,160
Net income............ 0 0 0 8,670 8,670
Issuance of common
stock to acquire
Boomtown, Inc........ 0 582 56,425 0 57,007
Repurchase and
retirement of common
stock................ 0 (45) (3,420) 0 (3,465)
Common stock options
exercised............ 0 20 1,975 0 1,995
Other................. (28) 232 296 (1,513) (1,013)
---- ------ -------- -------- --------
Balance as of December
31, 1997............... 0 2,622 222,350 (3,618) 221,354
Net income............ 0 0 0 13,169 13,169
Repurchase and
retirement of common
stock................ 0 (50) (5,490) 0 (5,540)
Common stock options
exercised............ 0 8 627 0 635
Tax benefit associated
with exercised common
stock options........ 0 0 888 0 888
Investment in stock--
unrealized holding
gain................. 0 0 0 470 470
---- ------ -------- -------- --------
Balance as of December
31, 1998............... 0 2,580 218,375 10,021 230,976
Net income............ 0 0 0 44,047 44,047
Executive stock option
compensation......... 0 0 828 0 828
Common stock options
exercised............ 0 44 4,335 0 4,379
Tax benefit associated
with exercised common
stock options........ 0 0 1,116 0 1,116
Investment in stock--
realized holding
gain................. 0 0 0 (470) (470)
---- ------ -------- -------- --------
Balance as of December
31, 1999............... $ 0 $2,624 $224,654 $ 53,598 $280,876
==== ====== ======== ======== ========
</TABLE>
See accompanying notes to the consolidated financial statements.
F-27
<PAGE>
PINNACLE ENTERTAINMENT, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
For the years ended December
31,
-------------------------------
1999 1998 1997
--------- --------- ---------
(in thousands)
<S> <C> <C> <C>
Cash flows from operating activities:
Net income................................... $ 44,047 $ 13,169 $ 8,670
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation and amortization.............. 51,924 32,121 18,157
(Gain) loss on disposition of assets....... (62,507) 2,221 0
Impairment write-down of Hollywood Park-
Casino.................................... 20,446 0 0
Other changes that (used) provided cash,
net of the effects of the purchase and
disposition of businesses:
Receivables, net......................... (2,242) (2,937) (312)
Prepaid expenses and other assets........ (4,780) 2,927 (452)
Accounts payable......................... (10,948) (3,074) (2,468)
Accrued liabilities...................... (16,254) 2,009 (9,119)
Accrued interest payable................. 9,344 516 5,175
Deferred income taxes.................... 38,393 (5,546) (4,822)
All other, net........................... 7,900 (3,294) (464)
--------- --------- ---------
Net cash provided by operating
activities............................ 75,323 38,112 14,365
--------- --------- ---------
Cash flows from investing activities:
Additions to property, plant and equipment... (59,680) (56,747) (32,505)
Receipts from disposition of property, plant
and equipment............................... 140,083 980 187
Principal collected on notes receivable...... 5,283 2,489 52
Notes receivable issued...................... 0 (12,850) 0
(Purchase of) proceeds from short term
investments, net............................ (120,249) (2,709) 4,776
Payment to buy-out minority interest in
subsidiaries................................ (16,500) (1,946) (1,000)
Net cash paid for the acquisition of Casino
Magic....................................... 0 (65,749) 0
Cash acquired in the acquisition of Boomtown,
net of cash transaction and other costs..... 0 0 12,264
--------- --------- ---------
Net cash used in investing activities.. (51,063) (136,532) (16,226)
--------- --------- ---------
Cash flows from financing activities:
Proceeds from secured Bank Credit Facility... 17,000 270,000 112,000
Payment of secured Bank Credit Facility...... (287,000) 0 (112,000)
Payment of notes payable..................... (15,566) (7,625) (4,942)
Assumption of notes payable.................. 1,364 0 0
Proceeds from issuance of 9.5% Notes......... 0 0 125,000
Proceeds from issuance of 9.25% Notes........ 350,000 0 0
Payment of the 11.5% Casino Magic Notes...... 0 (135,000) 0
Payment of 11.5% Boomtown Notes.............. 0 (1,253) (110,924)
Increase in debt issuance costs.............. (15,309) (2,719) 0
Common stock options exercised............... 4,379 635 1,995
Common stock repurchase and retirement....... 0 (5,540) 0
Dividends paid to preferred stockholders..... 0 0 (1,520)
--------- --------- ---------
Net cash provided by financing
activities............................ 54,868 118,498 9,609
--------- --------- ---------
Increase in cash and cash equivalents........ 79,128 20,078 7,748
Cash and cash equivalents at the beginning of
the period.................................. 44,234 24,156 16,408
--------- --------- ---------
Cash and cash equivalents at the end of the
period...................................... $ 123,362 $ 44,234 $ 24,156
========= ========= =========
</TABLE>
See accompanying notes to the consolidated financial statements.
F-28
<PAGE>
PINNACLE ENTERTAINMENT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 1--Summary of Significant Accounting Policies
General. 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 owns and operates eight casinos (four with
hotels) in Nevada, Mississippi, Louisiana and Argentina, two of which are
subject to a pending sales transaction (see Note 4). Pinnacle Entertainment
receives lease income from two card clubs, both in the Los Angeles
metropolitan area; and owns and operates a horse racing facility in Arizona,
which is also subject to a pending sale transaction (see Note 4).
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), Turf
Paradise, Inc. and Belterra Resort and Casino, LLC.
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 (see Note 5). 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.
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. Amortization expense was $2,343,000, $1,141,000 and $598,000
for the years ended December 31, 1999, 1998 and 1997, respectively.
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. Amortization expense was
$2,859,000, $1,888,000 and $943,000 for the years ended December 31, 1999,
1998 and 1997, 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 consists of fees collected from
patrons on a per seat or per hand basis. Revenues in the accompanying
statements of operations exclude the retail value of food and beverage, hotel
rooms and other items provided to patrons on a complimentary basis. The
estimated cost of providing these promotional allowances (which is included in
gaming expenses) during the years ended December 31, 1999, 1998, and 1997 was
$41,341,000, $21,270,000 (which includes Casino Magic's promotional allowances
from October 15, 1998) and $8,285,000 (which includes Boomtown's promotional
allowances from June 30, 1997), 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.
F-29
<PAGE>
PINNACLE ENTERTAINMENT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
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 $1,359,000,
$2,142,000 and $425,000 in fiscal 1999, 1998 and 1997, respectively.
Depreciation and amortization are provided on the straight-line method over
their estimated useful lives as follows:
<TABLE>
<CAPTION>
Years
--------
<S> <C>
Land improvements............................................... 3 to 25
Buildings....................................................... 5 to 40
Vessels and Barges.............................................. 25 to 31
Equipment....................................................... 3 to 10
</TABLE>
Maintenance and repairs are charged to expense, and betterments are
capitalized. The cost of property sold or otherwise disposed of and its
associated accumulated depreciation are eliminated from both the property and
accumulated depreciation accounts with any gain or loss recorded in the
expense accounts.
Property, plant and equipment is carried on the Company's balance sheets at
depreciated cost. Whenever there are recognized events or changes in
circumstances that affect the carrying amount of the property, plant and
equipment, management reviews the assets for possible impairment.
Cash and Cash Equivalents. Cash and cash equivalents consisted of cash,
certificates of deposit and short term investments with original maturities of
90 days or less, as well as restricted cash of $300,000 at December 31, 1998.
There was no restricted cash at December 31, 1999.
Short Term Investments. Short term investments are classified as held to
maturity and are carried at cost, which approximates market value.
Income Taxes. The Company accounts for income taxes under Statement of
Financial Accounting Standards 109, Accounting for Income Taxes ("SFAS No.
109"), whereby deferred tax assets and liabilities are recognized for the
future tax consequences attributable to differences between the financial
statement carrying amounts of existing assets and liabilities and their
respective tax bases. Deferred tax assets and liabilities are measured using
enacted tax rates expected to apply to taxable income in the years in which
those temporary differences are expected to be recovered or settled. Under
SFAS No. 109, the effect on deferred tax assets and liabilities of a change in
tax rates is recognized in income in the period that included the enactment
date.
Stock-Based Compensation. The Company accounts for its stock-based
compensation under Accounting Principles Board Opinion No. 25, Accounting for
Stock Issued to Employees, and follows the disclosure provisions of Financial
Accounting Standards Board's Statement of Accounting Standards No. 123
Accounting for Stock-Based Compensation.
Segment Information. Statement of Financial Accounting Standards No. 131
Disclosures about Segments of an Enterprise and Related Information ("SFAS No.
131") was effective for years after December 31, 1997, and has been adopted by
the Company for all periods presented in these consolidated financial
statements. SFAS No. 131 establishes guidelines for public companies in
determining operating segments based on those used for internal reporting to
management. Based on these guidelines, Pinnacle Entertainment reports
information under a single gaming segment.
Long-lived Assets. The Company periodically reviews the propriety of the
carrying amount of long-lived assets and the related intangible assets as well
as the related amortization period to determine whether current events or
circumstances warrant adjustments to the carrying value and/or the estimates
of useful lives. This evaluation consists of comparing asset carrying values
to the Company's projection of the undiscounted cash
F-30
<PAGE>
PINNACLE ENTERTAINMENT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
flows over the remaining lives of the assets, in accordance with Statement of
Financial Accounting Standards No. 121 Accounting for the Impairment of Long-
lived Assets and for Long-lived Assets to Be Disposed Of ("SFAS No. 121").
Based on its review, the Company believes that as of December 31, 1999, there
were no significant impairments of its long-lived assets or related intangible
assets. In September 1999, an impairment write-down of the Hollywood Park-
Casino was recorded (see Note 3).
Start-Up Costs. The Company's policy has been to expense start-up costs as
incurred. In April 1998, Statement of Position 98-5 Reporting on the Costs of
Start-Up Activities was issued and was effective for years after December 31,
1998. Statement of Position 98-5 required that start-up activities and
organization costs be expensed as incurred. The adoption of Statement of
Position 98-5 did not have an impact on the financial statements of the
Company.
Derivative Instruments and Hedging Activities. In September 1998, the
Financial Accounting Standards Board issued Statement of Financial Accounting
Standards No. 133 Accounting for Derivative Instruments and Hedging Activities
("SFAS No. 133"). The Company has not made such investments in the past and
does not expect to make such investments in the foreseeable future, and thus
SFAS No. 133 has no impact on the financial reporting of the Company.
Comprehensive Income. Statement of Financial Accounting Standards No. 130,
Reporting Comprehensive Income ("SFAS 130") requires that the Company disclose
comprehensive income and its components. The objective of SFAS 130 is to
report a measure of all changes in equity of an enterprise that result from
transactions and other economic events of the period other than transactions
with owners. Comprehensive income is the sum of the following: net income and
other comprehensive income, which is defined as all other nonowner changes in
equity. Other comprehensive income is immaterial for all periods.
Earnings per Share. Basic earnings per share are based on net income less
preferred stock dividend requirements divided by the weighted average common
shares outstanding during the period. Diluted earnings per share assume
exercise of in-the-money stock options outstanding at the beginning of the
year or date of the issuance, unless they are antidilutive.
Reclassifications. Certain reclassifications have been made to the 1998 and
1997 amounts to be consistent with the 1999 financial statement presentation.
Note 2--Supplemental Disclosure of Cash Flow Information
<TABLE>
<CAPTION>
For the years ended
December 31,
----------------------
1999 1998 1997
------- ------- ------
(in thousands)
<S> <C> <C> <C>
Cash paid during the year for:
Interest........................................... $58,943 $22,024 $1,321
Income taxes....................................... 6,223 8,195 827
</TABLE>
Note 3--Assets Sold
On September 10, 1999, the Company completed the dispositions of the
Hollywood Park Rack Track and Hollywood Park-Casino to Churchill Downs
California Company ("Churchill Downs"), a wholly owned subsidiary of Churchill
Downs Incorporated, 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
F-31
<PAGE>
PINNACLE ENTERTAINMENT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
$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, at which time the
Company and sublessee will negotiate the terms of any sublease extension.
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 writedown 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. The pre-tax gain on the sale of the race track is
included in "(Gain) loss on disposition of assets, net" in the accompanying
Consolidated Statements of Operations. 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.
Condensed results of operations for the Hollywood Park Race Track and the
Hollywood Park-Casino for the years ended December 31, 1999, 1998 and 1997
were:
<TABLE>
<CAPTION>
1999(a) 1998 1997
------- -------- --------
(in thousands)
<S> <C> <C> <C>
Revenues.......................................... $86,235 $114,751 $121,799
Expenses.......................................... 73,019 103,760 107,775
------- -------- --------
Operating income.................................. 13,216 10,991 14,024
Interest expense(b)............................... 0 0 0
------- -------- --------
Income before income taxes........................ $13,216 $ 10,991 $ 14,024
======= ======== ========
</TABLE>
--------
(a) Operating results through the sale date of September 10, 1999.
(b) No interest expense was specifically identified for these operations.
Note 4--Assets Held For Sale
Assets held for sale at December 31, 1999 consisted of the following, and
excluded the related goodwill and deferred income taxes associated with such
assets:
<TABLE>
<CAPTION>
Net Property
Plant &
Equipment Other Total
------------ ------- --------
(in thousands)
<S> <C> <C> <C>
Two casinos in Mississippi................... $115,731 $ 5,876 $121,607
Turf Paradise Race Track in Arizona.......... 10,873 4,359 15,232
Other (primarily undeveloped land in
California)................................. 17,810 0 17,810
-------- ------- --------
$144,414 $10,235 $154,649
======== ======= ========
</TABLE>
F-32
<PAGE>
PINNACLE ENTERTAINMENT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Sales transactions for these assets were pending or the properties were
actively being marketed as of December 31, 1999. There are no assurances these
transactions will close or the anticipated cash proceeds and after tax gains
as described below will be achieved. Until the sales transactions are
completed, the Company continues to operate the race track and casinos held
for sale. In addition, certain liabilities will be 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 December 31, 1999 includes
approximately $13,331,000 related to the pending race track and 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 will 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. The
transactions are subject to certain closing conditions, including approval by
the Mississippi Gaming Commission, the purchaser completing the necessary
financing and termination of the Hart-Scott-Rodino waiting period. The Company
estimates the transactions will close in the second quarter of 2000 and
generate an after tax gain of approximately $32,300,000.
Race Track in Arizona. On December 30, 1999, the Company announced the
signing of a letter of intent under which the Company will sell its Turf
Paradise horse racing facility located in Phoenix, Arizona to a private
investor. In February 2000, the Company announced the signing of a definitive
agreement for the sale of Turf Paradise for $53,000,000 in cash. The agreement
includes the horse racing operations and all 275 acres at the Phoenix, Arizona
property. Pinnacle Entertainment anticipates closing the transaction in the
second quarter of 2000. The after tax gain from such sale is expected to be
approximately $23,000,000.
Other. On July 15, 1999, the Company announced it had entered into an
agreement to sell 42 acres of the 139 acres retained in the Churchill Downs
transaction for approximately $24,000,000 in cash. In March 2000, the Company
completed the sale (see Note 20). The Company anticipates an after tax gain of
approximately $13,800,000 from this sale. On November 4, 1999, the Company
announced it had entered into an agreement for the sale of the remaining 97
acres for approximately $63,000,000 in cash. On February 7, 2000, the Company
elected to terminate such agreement and has begun discussions with other
buyers. The Company expects to close the sale of this property for cash by the
end of 2000, which will result in a gain.
The Company owns other land parcels in Missouri, which it is actively
trying to sell.
Condensed results of operations for the Casino Magic Bay St. Louis and
Boomtown Biloxi casinos and the Turf Paradise horse racing facility for the
years ended December 31, 1999, 1998 and 1997 are as follows:
<TABLE>
<CAPTION>
Year ended December 31,
-------------------------
1999 1998(a) 1997(b)
-------- -------- -------
(in thousands)
<S> <C> <C> <C>
Revenues.......................................... $174,380 $100,014 $46,655
Expenses.......................................... 145,066 86,051 40,479
-------- -------- -------
Operating income.................................. 29,314 13,963 6,176
Interest expense (income), net.................... 86 339 (153)
-------- -------- -------
Income before income taxes........................ $ 29,228 $ 13,624 $ 6,329
======== ======== =======
</TABLE>
--------
(a) Includes the results of Casino Magic Bay St. Louis from October 15, 1998
(see Note 5).
(b) Includes the results of Boomtown Biloxi from June 30, 1997 (see Note 5).
F-33
<PAGE>
PINNACLE ENTERTAINMENT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
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 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 possibly extend such concession contract for an
additional ten years. The $12,300,000 purchase price in excess of the minority
interest of approximately $4,200,000 is being amortized over the extended life
of the concession contract beginning October 1999.
Casino Magic Acquisition. On October 15, 1998, the Company acquired Casino
Magic, Corp. (the "Casino Magic Merger"). The Company paid cash of
approximately $80,904,000 for Casino Magic's common stock. At the date of the
acquisition, the Company had purchased 792,900 common shares of Casino Magic
on the open market, at a total cost of approximately $1,615,000. The Company
paid $2.27 per share for the remaining 34,929,224 shares of Casino Magic
common stock outstanding.
The Casino Magic Merger was accounted for under the purchase method of
accounting for a business combination. The purchase price of the Casino Magic
Merger was allocated to identifiable assets acquired and liabilities assumed
based on their estimated fair values at the date of acquisition. Assets
acquired and liabilities assumed were, when necessary, written up or down to
their fair market values based on financial analyses, which considered the
impact of general economic, financial and market conditions. The Casino Magic
Merger generated approximately $43,284,000 of excess acquisition cost over the
recorded value of the net assets acquired, all of which was allocated to
goodwill, and is being amortized over 40 years. The Company anticipates such
goodwill will be reduced by approximately $10,277,000 in connection with the
pending sale of Casino Magic Bay St. Louis in 2000 (see Note 4). The
amortization of this goodwill is not deductible for income tax purposes. At
December 31, 1999 and 1998, accumulated amortization was $1,350,000 and
$262,000, respectively.
Boomtown, Inc. On June 30, 1997, pursuant to the Agreement and Plan of
Merger dated as of April 23, 1996, the Company acquired Boomtown (the
"Boomtown Merger"). As result of the Boomtown Merger, Boomtown became a wholly
owned subsidiary of the Company and each share of Boomtown common stock was
converted into the right to receive 0.625 of a share of the Company's common
stock.
The Boomtown Merger was accounted for under the purchase method of
accounting for a business combination. The purchase price of the Boomtown
Merger was allocated to identifiable assets acquired and liabilities assumed
based on their estimated fair values at the date of acquisition. Based on
financial analyses, which considered the impact of general economic, financial
and market conditions on the assets acquired and the liabilities assumed, the
estimated fair values approximated their carrying values. The Boomtown Merger
generated approximately $15,302,000 of excess acquisition cost over the
recorded value of the net assets acquired, all of which was allocated to
goodwill, to be amortized over 40 years. The Company anticipates such goodwill
will be reduced by approximately $3,054,000 in connection with the pending
sale of Boomtown Biloxi in 2000 (see Note 4). The amortization of the goodwill
is not deductible for income tax purposes. At December 31, 1999 and 1998,
accumulated amortization was $773,000 and $375,000, respectively.
F-34
<PAGE>
PINNACLE ENTERTAINMENT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Pro Forma Results of Operations. The following unaudited pro forma results
of operations were prepared under the assumption that the acquisitions of
Boomtown and Casino Magic had occurred as of January 1, 1997. The historical
results of operations of Boomtown prior to the Company's June 30, 1997
acquisition (excluding the approximately $1,900,000 net loss associated with
Boomtown's Las Vegas property, which was sold on June 30, 1997), and Casino
Magic prior to the Company's October 15, 1998 acquisition were combined with
the Company's results for 1998 and 1997. Pro forma adjustments were made for
the following: (a) the early retirement of $102,200,000 principal amount of
the Boomtown 11.5% Notes; (b) the issuance of the 9.5% Notes; (c) redemption
of the Casino Magic 11.5% Notes; (d) the borrowing of approximately
$222,615,000 to redeem the Casino Magic 11.5% Notes ($141,515,000) and to
purchase Casino Magic's common stock ($81,100,000); (e) amortization of the
costs associated with amending the Bank Credit Facility to provide the funds
necessary to purchase Casino Magic's common stock and redeem the Casino Magic
11.5% Notes; (f) elimination of compensation expense associated with three
Casino Magic executives who resigned and will not be replaced; (g) elimination
of expenses associated with Casino Magic's board of directors; (h) the
amortization of the excess purchase price over net assets acquired for both
the Casino Magic Merger and the Boomtown Merger; (i) the amortization of the
premium associated with the purchase accounting write-up of the Casino Magic
13% Notes; and (j) the tax expense associated with the net pro forma
adjustments.
PINNACLE ENTERTAINMENT, INC.
UNAUDITED PRO FORMA COMBINED CONSOLIDATED RESULTS OF OPERATIONS
<TABLE>
<CAPTION>
For the years
ended December
31,
-----------------
1998 1997
-------- --------
(in thousands,
except per share
data)
<S> <C> <C>
Revenues:
Gaming................................................ $516,622 $467,328
Racing................................................ 66,871 68,844
Other................................................. 82,846 74,659
-------- --------
$666,339 $610,831
======== ========
Operating income(a)..................................... $ 74,752 $ 55,569
======== ========
Income before extraordinary item........................ $ 7,678 $ 4,323
Extraordinary item, redemption of the Casino Magic 11.5%
Notes.................................................. $ 0 $ 11,039
-------- --------
Net income (loss)....................................... $ 7,678 $ (6,716)
Dividend requirement on preferred stock................. $ 0 $ 1,520
-------- --------
Net income (loss) to common shareholders................ $ 7,678 $ (8,236)
======== ========
Per common share:
Net income (loss)--basic.............................. $ 0.29 $ (0.37)
Net income (loss)--diluted............................ $ 0.29 $ (0.37)
</TABLE>
--------
(a) In 1998, the operating income is inclusive of costs of $6,243,000, related
to the Casino Magic merger.
The unaudited pro forma combined results of operations are for comparative
purposes only and are not necessarily indicative of the operating results or
financial position that would have occurred if the Boomtown Merger and the
Casino Magic Merger had occurred as of January 1, 1997.
F-35
<PAGE>
PINNACLE ENTERTAINMENT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Note 6--Expansion and Development
Belterra Casino Resort. In September 1998, the Indiana Gaming Commission
approved the Company to receive the last available license to conduct
riverboat gaming operations on the Ohio River in Indiana for the Belterra
Casino Resort. Pinnacle Entertainment owns 97% of the Belterra Casino Resort
(currently under construction), with the remaining 3% held by a non-voting
local partner.
In July 1999, the Company broke ground on the Belterra Casino Resort and is
continuing on schedule for an opening in August 2000. 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 ($30,635,000 of which
has been spent as of December 31, 1999) in total costs (including land,
capitalized interest, 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 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.
In October 1999, the Company acquired the Ogle Haus Inn, a 54-room hotel
operation in the city of Vevay, for $2,500,000. The Company is utilizing the
facility principally for the Belterra Casino Resort pre-opening operations,
including housing various key management staff, converting rooms into offices
and training hotel and food and beverage employees. Operational costs of the
Ogle Haus Inn, as well as all other pre-opening costs of Belterra Casino
Resort, are being expensed as incurred. After completion of Belterra Casino
Resort, the Ogle Haus will be operated as a hotel and restaurant facility and
will provide overflow capacity for Belterra Casino Resort.
Lake Charles. In November 1999, the Company filed an application for the
fifteenth and final gaming license to be issued by the Louisiana Gaming
Control Board. The Company was one of five applicants for such license. 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.
In connection with such submittal, Pinnacle Entertainment has entered into
an option agreement with the Lake Charles Harbor and Terminal District to
lease 225-acres of unimproved land from the District upon which such resort
complex would be constructed. The initial lease option is for a six-month
period ending January 2000, with three six-month renewal options, 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
As of 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 cost which approximates market value.
At December 31, 1998, short term available for sale investments consisted
of investments in equity securities of approximately $3,179,000.
F-36
<PAGE>
PINNACLE ENTERTAINMENT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Interest income for the years ended December 31, 1999, 1998 and 1997 was
$7,927,000, $1,842,000 and $1,294,000, respectively.
Note 8--Property, Plant and Equipment
Property, plant and equipment held at December 31, 1999, and 1998 consisted
of the following:
<TABLE>
<CAPTION>
December 31,
-----------------
1999(a) 1998
-------- --------
(in thousands)
<S> <C> <C>
Land and land improvements................................ $ 71,052 $141,536
Buildings................................................. 253,126 393,200
Equipment................................................. 134,701 174,270
Vessel and barges......................................... 65,580 76,605
Construction in progress.................................. 32,813 46,297
-------- --------
557,272 831,908
Less accumulated depreciation............................. 119,557 228,996
-------- --------
$437,715 $602,912
======== ========
</TABLE>
--------
(a) Excludes $213,992,000 of assets and $69,578,000 of accumulated
depreciation related to assets classified as held for sale (see Note 4).
Note 9--Secured and Unsecured Notes Payable
Notes payable at December 31, 1999, and 1998 consisted of the following:
<TABLE>
<CAPTION>
December 31,
-----------------
1999 1998
-------- --------
(in thousands)
<S> <C> <C>
Secured notes payable, Bank Credit Facility............... $ 0 $270,000
Unsecured 9.25% Notes..................................... 350,000 0
Unsecured 9.5% Notes...................................... 125,000 125,000
Casino Magic 13% Notes(a)................................. 119,814 121,685
Hollywood Park-Casino debt obligation..................... 22,566 0
Other secured notes payable............................... 5,785 16,569
Other unsecured notes payable............................. 2,315 5,288
Capital lease obligations................................. 0 641
-------- --------
625,480 539,183
Less current maturities................................... 6,782 11,564
-------- --------
$618,698 $527,619
======== ========
</TABLE>
--------
(a) Includes a write up to fair market value (net of amortization), as of the
October 15, 1998 acquisition of Casino Magic, of $6,939,000 and
$8,810,000, as of December 31, 1999 and 1998, 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 "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 Credit Facility also provides for letters of credit up to $30,000,000 and
swing line loans of up to $10,000,000.
F-37
<PAGE>
PINNACLE ENTERTAINMENT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
At December 31, 1998, the Company had outstanding borrowings under the
Credit Facility of $270,000,000. Through February of 1999, the Company
borrowed an additional $17,000,000, before repaying all $287,000,000 with a
portion of the proceeds from the issuance of the 9.25% Notes (see below). The
Credit Facility has remained unused since the February 1999 repayment, and
there was no outstanding balance at December 31, 1999.
Interest rates on borrowings under the Credit Facility are determined by
adding a margin, which is based upon the Company's debt to cash flow ratio (as
defined in the Credit Facility), to either the LIBOR rate or Prime Rate (at
the Company's option). The Company also pays a quarterly commitment fee on the
unused balance of the Credit Facility. The Credit Facility allows for interest
rate swap agreements or other interest rate protection agreements, 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
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 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 guaranty 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 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.
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
F-38
<PAGE>
PINNACLE ENTERTAINMENT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
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. The Casino Magic 13% Notes are redeemable, at the option of the
Company, in whole or in part, on or after August 15, 2000, at a premium to
face amount, plus accrued interest, as follows: (a) August 15, 2000, at
106.5%; (b) August 15, 2001, at 104.332%; and (c) August 15, 2002 through
maturity at 102.166%.
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.
At December 31, 1999 $2,115,000 of contingent interest was accrued. This
entire amount was paid with the February 15, 2000 scheduled interest payment.
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.
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).
Annual Maturities. As of December 31, 1999, annual maturities of secured
and unsecured notes payable are as follows:
<TABLE>
<CAPTION>
(in thousands)
--------------
<S> <C>
Year ending December 31:
2000.................................................... $ 6,782
2001.................................................... 5,338
2002.................................................... 5,655
2003.................................................... 116,667
2004.................................................... 2,329
Thereafter.............................................. 488,709
--------
$625,480
========
</TABLE>
F-39
<PAGE>
PINNACLE ENTERTAINMENT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Note 10--Income Taxes
The Company accounts for income taxes under Statement of Financial
Accounting Standards No. 109 Accounting for Income Taxes, whereby deferred tax
assets and liabilities are recognized for the future tax consequences
attributable to differences between the financial statement carrying amounts
of existing assets and liabilities and their respective tax bases.
The composition of the Company's income tax expense (benefit) for the years
ended December 31, 1999, 1998 and 1997 was as follows:
<TABLE>
<CAPTION>
Current Deferred Total
-------- -------- -------
(in thousands)
<S> <C> <C> <C>
Year ended December 31, 1999:
U.S. Federal..................................... $ 10,986 $21,963 $32,949
State............................................ 2,392 3,137 5,529
Foreign.......................................... 2,448 0 2,448
-------- ------- -------
$15,826 $25,100 $40,926
======== ======= =======
Year ended December 31, 1998:
U.S. Federal..................................... $ 5,793 $ 97 $ 5,890
State............................................ 2,511 41 2,552
-------- ------- -------
$ 8,304 $ 138 $ 8,442
======== ======= =======
Year ended December 31, 1997:
U.S. Federal..................................... $ (1,616) $ 6,972 $ 5,356
State............................................ (698) 1,192 494
-------- ------- -------
$(2,314) $ 8,164 $ 5,850
======== ======= =======
</TABLE>
The following table reconciles the Company's income tax expense (based on
its effective tax rate) to the federal statutory tax rate of 35%:
<TABLE>
<CAPTION>
For the years ended
December 31,
------------------------
1999 1998 1997
------- ------- ------
(in thousands)
<S> <C> <C> <C>
Income before income tax expense, at the statutory
rate............................................. $29,741 $ 7,348 $4,935
State income taxes, net of federal tax benefits... 5,529 2,552 494
Non-deductible impairment write-down on Hollywood
Park-Casino (see Note 3)......................... 7,157 0 0
Other non-deductible expenses..................... (1,501) (1,458) 421
------- ------- ------
Income tax expense................................ $40,926 $ 8,442 $5,850
======= ======= ======
</TABLE>
F-40
<PAGE>
PINNACLE ENTERTAINMENT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
At December 31, 1999, and 1998, the tax effects of temporary differences
that gave rise to significant portions of the deferred tax assets and deferred
tax liabilities were:
<TABLE>
<CAPTION>
1999 1998
-------- --------
(in thousands)
<S> <C> <C>
Current deferred tax assets (liabilities):
Workers' compensation insurance reserve................ $ 1,059 $ 1,029
General liability insurance reserve.................... 1,463 1,430
Write off of investment in Kansas Race Track and excess
loss recapture........................................ 0 7,139
Vacation and sick pay accrual.......................... 1,584 1,709
Sale of Hollywood Race Track & Casino.................. (22,000) 0
Other.................................................. (1,648) 7,118
-------- --------
Net current deferred tax assets (liabilities)........ $(19,542) $ 18,425
======== ========
Non-current deferred tax assets (liabilities):
Net operating loss carryforwards....................... $ 24,615 $ 29,279
Excess tax basis over book value of acquired assets.... 11,736 11,736
Alternative minimum tax credits........................ 8,395 7,207
Los Angeles revitalization zone tax credits............ 11,717 11,717
Less valuation allowance............................... (23,490) (23,490)
Depreciation and amortization.......................... (30,160) (41,125)
Other.................................................. (3,639) 4,276
-------- --------
Net non-current deferred tax liabilities............. $ (826) $ (400)
======== ========
</TABLE>
Current income taxes payable of $8,773,000 and $9,935,000 at December 31,
1999 and 1998 respectively are included in other accrued liabilities in the
accompanying consolidated balance sheets.
Prior to 1999 the Company earned a substantial amount of California tax
credits related to the ownership of and operation of the Hollywood Park Race
Track and Hollywood Park-Casino as well as the Crystal Park Card Club Casino,
which were located in the Los Angeles Revitalization Tax Zone (LARZ). At
December 31, 1999 the amount subject to carry forward of these unused
California tax credits (net of valuation allowance) was approximately
$3,520,000, which can be used to reduce certain future California tax
liabilities. The LARZ credits will expire between 2007 to 2012.
As of December 31, 1999, the Company had federal net operating loss ("NOL")
and capital loss ("CL") carryforwards of approximately $64,700,000, and
$5,600,000, respectively, comprised principally of NOL carryforwards acquired
in the Casino Magic and Boomtown Mergers, and CL carryforwards resulting from
the disposition of Boomtown's Las Vegas property. The NOL carryforwards expire
on various dates through 2018, and the CL carryforwards expire on various
dates through 2002. In addition, the Company has approximately $400,000 of
foreign tax credits related to Casino Magic Argentina operations, which expire
in 2000, and approximately $8,400,000 of alternative minimum tax credits,
which do not expire. The alternative minimum tax credits can reduce future
federal income taxes but generally cannot reduce federal income taxes paid
below the amount of the alternative minimum tax.
Under several provisions of the Internal Revenue Code (the "Code") and the
regulations promulgated there under, the utilization of NOL, CL and tax credit
carryforwards to reduce tax liability is restricted under certain
circumstances. Events, which cause such a limitation, include, but are not
limited to, certain changes in the ownership of a corporation. Both the
Boomtown Merger and the Casino Magic Merger caused such a change in ownership
with respect to Boomtown and Casino Magic. As a result, the Company's use of
approximately
F-41
<PAGE>
PINNACLE ENTERTAINMENT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
$13,800,000 and $50,900,000 of Boomtown and Casino Magic's NOL carryforwards,
respectively, and $3,400,000 and $3,700,000 of Boomtown and Casino Magic's tax
credit carryforwards, respectively, is subject to certain limitations imposed
by Sections 382 and 383 of the Code. These various limitations restrict the
amount of NOL, CL and tax credit carryforwards that may be used by the Company
in any taxable year and, consequently, are expected to defer the Company's use
of a substantial portion of such carryforwards and may ultimately prevent the
Company's use of a portion thereof. Therefore, a valuation allowance has been
recorded related to the Boomtown and Casino Magic carryforwards.
Note 11--Stockholders' Equity
In September 1998, the Company granted 817,500 stock options (625,000 at an
exercise price of $10.1875 and 192,500 at an exercise price of $18.00) outside
of the Company's 1993 and 1996 Stock Option Plans (see Note 15) to four
executives hired on January 1, 1999. Of these grants, 613,125 (420,625 at an
exercise price of $10.1875 and 192,500 at an exercise price of $18.00) were
made subject to shareholder approval, which approval was granted at the
shareholder meeting held May 25, 1999 (the "Measurement Date") at which time
the stock price was $14.13. Accounting Principles Board Opinion No. 25
requires that compensation be determined as of the Measurement Date based on
the excess of the quoted market price over the exercise price of the stock and
charged over the service period of the executives in their employment
agreements or option vesting period, whichever is shorter. Compensation
related to these options for the year ended December 31, 1999, was $828,000.
In August 1998, the Company announced its intention to repurchase and
retire up to 20% or approximately 5,256,000 shares of its then issued and
outstanding common stock on the open market or in negotiated transactions. As
of December 31, 1999 and 1998, the Company had repurchased and retired 500,000
shares at a total cost of approximately $5,540,000 (with the last purchase
being made on September 28, 1998). At December 31, 1999, under the most
restrictive debt agreement, the Company could spend a maximum of $15,000,000
to buy back its common stock.
On June 30, 1997, the Company acquired Boomtown and each share of Boomtown
common stock was converted into the right to receive 0.625 of a share of the
Company's common stock. Approximately 5,362,850 net shares of the Company's
common stock were issued in connection with such transaction. In connection
with the Boomtown Merger, the Company purchased and retired 446,491 shares of
its common stock held by a former Boomtown shareholder.
Note 12--Lease Obligations
The Company leases certain equipment for use in gaming operations and
general office equipment. Minimum lease payments required under operating
leases that have initial terms in excess of one year as of December 31, 1999
are as follows:
<TABLE>
<CAPTION>
Period
------ (in thousands)
<S> <C>
2000...................................................... $6,876
2001...................................................... 5,954
2002...................................................... 5,584
2003...................................................... 5,181
2004...................................................... 4,453
Thereafter................................................ 3,743
</TABLE>
Total rent expense for these long-term lease obligations for the years
ended December 31, 1999, 1998 and 1997 was $6,481,000, $5,194,000 and
$2,453,000, respectively.
F-42
<PAGE>
PINNACLE ENTERTAINMENT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Note 13--Employee Benefit Plans
The Company offers a 401(k) Investment Plan (the "401(k) Plan") which is
subject to the provisions of the Employee Retirement Income Security Act of
1994. The 401(k) Plan is available to all employees of the Company (except
those covered by collective bargaining agreements) who have completed a
minimum of 500 hours of service. Employees may contribute up to 18% (up to 15%
through June 30, 1999) of pretax income (subject to the legal limitation of
$10,000 for 1999). The Company offers discretionary matching, and for the
years ended December 31, 1999, 1998 and 1997 matching contributions to the
401(k) Plan totaled $1,437,000, $987,000 and $717,000, respectively.
The Company merged the 401(k) plans of Boomtown and Casino Magic into the
Company's 401(k) Plan on July 1, 1998 and January 1, 1999, respectively.
Prior to the sale of the Hollywood Park Race Track in September of 1999,
the Company contributed to several collectively-bargained multi-employer
pension and retirement plans, which were administered by unions, and to a
pension plan covering non-union employees, administered by an association of
race track owners. Amounts charged to pension cost and contributed to these
plans for the years ended December 31, 1999, 1998 and 1997 totaled $948,000,
$1,690,000 and $1,842,000, respectively. Contributions to the collectively-
bargained plans were determined in accordance with the provisions of
negotiated labor contracts and generally based upon the number of employee
hours or days worked. Contributions to the non-union plans were based on the
covered employees' compensation. It is management's belief that no withdrawal
liability existed for these plans at the time of the sale of the race track.
On January 1, 2000, the Company instituted a nonqualified Executive
Deferred Compensation Plan (the "Deferred Plan") to permit certain key
employees to defer receipt of current compensation in order to provide
retirement benefits on behalf of such employees. The Company will not make
matching contributions to the Deferred Plan. As a nonqualified plan (as
defined by the Internal Revenue Service Code), all deferred compensation
remains within the general assets of the Company and would be subject to
claims of general creditors in the unlikely case of insolvency. The Company
has the right to amend, modify or terminate the Deferred Plan.
Note 14--Related Party Transactions
In June 1998, the Company and R.D. Hubbard Enterprises, Inc. ("Hubbard
Enterprises"), which is wholly owned by Mr. Hubbard, (the Company's Chairman
and Chief Executive Officer) entered into a new Aircraft Time Sharing
Agreement. The former agreement was entered into in November 1993. The June
1998 Aircraft Time Sharing Agreement is identical to the former agreement in
all respects, except for the type of aircraft covered by the agreement. The
Aircraft Time Sharing Agreement expired on December 31, 1999, and now
automatically renews each month unless written notice of termination is given
by either party at least two weeks before a renewal date. The Company
reimburses Hubbard Enterprises for expenses incurred as a result of the
Company's use of the aircraft, which totaled approximately $176,000 in 1999,
$72,000 in 1998 and $106,000 in 1997.
In August 1998, the Company received a promissory note for up to $3,500,000
from Paul Alanis (effective January 1, 1999, Mr. Alanis became the Company's
President and Chief Operating Officer and in October 1999 became a director).
At December 31, 1998, the Company had loaned Mr. Alanis $3,232,000. Interest
on the promissory note was at the prime interest rate. The principal amount of
the promissory note, along with accrued interest, was paid in full in June
1999.
Timothy J. Parrott (a director and member of the Executive Committee of the
Company's Board of Directors) purchased 270,738 shares of Boomtown common
stock in connection with Boomtown's 1988
F-43
<PAGE>
PINNACLE ENTERTAINMENT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
acquisition of Boomtown Hotel & Casino, Inc. (which operates Boomtown Reno).
Mr. Parrott paid an aggregate purchase price for the common stock of $222,000,
of which $1,000 was paid in cash and $221,000 was paid by a promissory note
secured by a pledge to Boomtown of all of the shares owned by Mr. Parrott. As
of October 31, 1998, Mr. Parrott resigned his position as Chairman of
Boomtown, and the Company retained him as a consultant to provide services
relating to gaming and other business issues. Mr. Parrott was retained for a
three year period, with an annual retainer of $350,000 with health and
disability benefits equivalent to those he received as Chairman of Boomtown.
Mr. Parrott's $221,000 note will be forgiven in three equal parts on each
anniversary of the consulting agreement.
Marlin Torguson, who beneficially owned approximately 21.5% of the then
outstanding common shares of Casino Magic, agreed, in connection with the
Casino Magic acquisition, to vote his Casino Magic shares in favor of the
acquisition by the Company. In addition, Mr. Torguson agreed to continue to
serve as an employee of Casino Magic for three years following the
acquisition, and during such three year period, not to compete with the
Company or Casino Magic in any jurisdiction in which either the Company or
Casino Magic operates. The Company appointed Mr. Torguson to its board of
directors. The Company issued to Mr. Torguson 60,000 shares of the Company's
common stock as compensation for his three-year service as an employee, and
will pay him $300,000 for each year, during a three-year period, for his non-
compete agreement. In addition, the Company issued Mr. Torguson 30,000 options
to acquire the Company's common stock as of the October 15, 1998, acquisition
of Casino Magic, priced at the closing price of the Company's common stock on
that date. The foregoing payments have been and will be made to Mr. Torguson
whether or not the Company or Casino Magic terminates Mr. Torguson's
employment, except for termination for cause.
Note 15--Stock Option Plans
The Company has two stock option plans that provide for the granting of
stock options to officers and key employees. The objectives of these plans
include attracting and retaining the best personnel, providing for additional
performance incentives, and promoting the success of the Company.
In 1996, the shareholders of the Company adopted the 1996 Stock Option Plan
(the "1996 Plan"), which provides for the issuance of up to 900,000 shares.
Except for the provisions governing the number of shares issuable under the
1996 Plan and except for provisions which reflect changes in tax and
securities laws, the provisions of the 1996 Plan are substantially similar to
the provisions of the prior plan adopted in 1993. The 1996 Plan is
administered and terms of option grants are established by the Board of
Directors' Compensation Committee. Under the terms of the 1996 Plan, options
alone or coupled with stock appreciation rights may be granted to selected key
employees, directors, consultants and advisors of the Company. Options become
exercisable ratably over a vesting period as determined by the Compensation
Committee and expire over terms not exceeding ten years from the date of
grant, one month after termination of employment, or six months after the
death or permanent disability of the optionee. The purchase price for all
shares granted under the 1996 Plan shall be determined by the Compensation
Committee, but in the case of incentive stock options, the price will not be
less than the fair market value of the common stock at the date of grant. On
April 26, 1996, the Company amended the non-qualified stock option agreements
issued through this date, to lower the per share price of the outstanding
options to $10.00.
As of December 31, 1999, the 1996 Stock Option Plan is the only plan with
stock option awards available for grant; all of the 625,000 shares eligible
for issuance under the 1993 Stock Option Plan have been granted. Of the
900,000 shares eligible for issuance under the 1996 Stock Option Plan, 554,449
have been granted. In addition, 721,077 shares (with a weighted average
exercise price of $9.98 per share) of Pinnacle Entertainment common stock are
issuable upon exercise of options granted under pre-merger stock option plans
of Boomtown. Of such Boomtown stock options, 711,742 (with a weighted average
exercise price of $9.99) are currently vested.
F-44
<PAGE>
PINNACLE ENTERTAINMENT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
In addition, 256,136 shares (with a weighted average exercise price of $24.57
per share) of Pinnacle Entertainment common stock are issuable upon exercise
of options granted under pre-merger stock options plans of Casino Magic. Of
such Casino Magic stock options, 169,590 (with a weighted average exercise
price of $23.65 per share) are currently vested.
On September 10, 1998, the Company granted 817,500 options (625,000 at an
exercise price of $10.1875, and 192,500 at an exercise price of $18.00)
outside of the 1993 and 1996 Plans to the new executive management team hired
as of January 1, 1999. As of December 31, 1999, none of these options were
exercised.
The following table summarizes information related to shares under option
and shares available for grant under the Company's 1993 and 1996 Plans:
<TABLE>
<CAPTION>
Number
of Weighted Average
Shares Exercise Price
-------- ----------------
<S> <C> <C>
Options outstanding at December 31, 1996.......... 622,500 $10.00
Granted......................................... 261,000 $14.75
Exercised, expired or forfeited................. (26,001) $10.00
-------- ------
Options outstanding at December 31, 1997.......... 857,499 $11.50
Granted......................................... 219,188 $12.66
Exercised, expired or forfeited................. (249,866) $10.00
-------- ------
Options outstanding at December 31, 1998.......... 826,821 $12.02
Granted......................................... 278,500 $11.73
Exercised, expired or forfeited................. (253,478) $11.72
-------- ------
Options outstanding at December 31, 1999.......... 851,843 $12.01
======== ======
Options exercisable at:
December 31, 1999............................... 474,426 $11.86
December 31, 1998............................... 584,846 $10.00
December 31, 1997............................... 696,813 $10.00
======== ======
</TABLE>
The following table summarizes information about stock options under the
1993 and 1996 Plans outstanding as of December 31, 1999:
<TABLE>
<CAPTION>
Outstanding Exercisable
-------------------- --------------------
Weighted Weighted
Number of Average Number of Average
Range of Shares Exercise Shares Exercise
Exercise Price at 12/31/99 Price at 12/31/99 Price
-------------- ----------- -------- ----------- --------
<S> <C> <C> <C> <C>
$ 8.63 to $10.00................... 457,633 $ 9.80 271,633 $ 9.94
$10.19 to $14.81................... 363,210 $14.34 197,460 $14.34
$16.50 to $18.19................... 31,000 $17.33 5,333 $17.31
------- ------ ------- ------
$ 8.63 to $18.19................... 851,843 $12.01 474,426 $11.86
======= ====== ======= ======
</TABLE>
The weighted average remaining contractual life of the outstanding options
under the Company's 1993 and 1996 Plans as of December 31, 1999 is
approximately 8.3 years.
F-45
<PAGE>
PINNACLE ENTERTAINMENT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Accounting for Stock-Based Compensation
The Company estimated the fair market value of stock options using an
option-pricing model taking into account, as of the date of grant, the
exercise price and expected life of the option, the then current price of the
underlying stock and its expected volatility, expected dividend on the stock,
and the risk-free interest rate for the expected term of the options.
In computing the stock-based compensation, the following assumptions were
made:
<TABLE>
<CAPTION>
Risk-Free Expected Expected
Interest Rate Expected Life Volatility Dividends
------------- ------------- ---------- ---------
<S> <C> <C> <C> <C>
Options granted in the
following periods:
Third quarter 1997..... 5.0% 3 years 47.8% None
Third quarter 1998..... 4.5% 10 years 40.1% None
Fourth quarter 1998.... 4.5% 3 to 10 years 40.1% None
Fourth quarter 1999.... 4.6% 10 years 47.3% None
</TABLE>
The following table summarizes information about stock options under the
1993 and 1996 Plans outstanding as of December 31, 1999:
<TABLE>
<CAPTION>
For the years ended
December 31,
----------------------
1999 1998 1997
------- ------- ------
(in thousands, except
per share data)
<S> <C> <C> <C>
Net income before stock-based compensation expense.. $44,047 $13,169 $8,670
Stock-based compensation expense.................... 1,510 1,905 629
------- ------- ------
Pro forma net income................................ $42,537 $11,264 $8,041
======= ======= ======
Dividend requirements on convertible preferred
stock.............................................. $ 0 $ 0 $1,520
Pro forma net income attributed to common
stockholders....................................... $42,537 $11,264 $6,521
======= ======= ======
Net income per common share:
Net income--basic................................. $ 1.64 $ 0.43 $ 0.30
Net income--diluted............................... $ 1.62 $ 0.43 $ 0.29
Number of shares--basic............................. 25,966 26,115 22,010
Number of shares--diluted........................... 26,329 26,115 22,340
</TABLE>
Note 16--Commitments and Contingencies
Belterra Casino Resort. The Company plans to spend approximately
$200,000,000 ($30,635,000 of which has been spent as of December 31, 1999) in
total costs (including land, capitalized interest, 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
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. As of December 31, 1999, the Company has contractual
commitments of $113,301,000 for construction contracts executed as of such
date.
Employment and Severance Agreements. The Company has employment agreements
with five employees (including three officers) which grant these employees the
right to receive their annual salary for up to the balance of the contract
period, plus extension of certain benefits and the immediate vesting of
certain stock options, if the employee terminates the contract for good reason
(as defined and which definition includes a
F-46
<PAGE>
PINNACLE ENTERTAINMENT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
change in control), or if the Company terminates the employee without cause
(as defined). At December 31, 1999, the maximum contingent liability for
salary and incentive compensation under these agreements was approximately
$3,850,000.
In addition, the Company has severance agreements with three employees
which grant the employees the right to receive up to two and one-half times
their annual salary and two and one-half times their incentive compensation,
as well as the extension of certain benefits, if there is a change in control
(as defined). At December 31, 1999, the maximum contingent liability for
salary and incentive compensation under these agreements was approximately
$1,574,000. Eleven employees have the right to receive severance payments if
their employment is terminated. At December 31, 1999, the maximum contingent
liability for these severance payments was approximately $195,000. There are
also three former employees entitled to future compensation under severance
agreements. At December 31, 1999, the contingent liability for such
compensation was approximately $251,000.
The Company also has (i) a consulting agreement until October 31, 2001,
with a former employee (now a director) for which the contingent liability at
December 31, 1999 was $788,000, and (ii) a non-compete agreement with a
director for which the contingent liability at December 31, 1999 was $550,000.
Legal
Poulos Lawsuit. A class action lawsuit was filed on April 26, 1994, in the
United States District Court, Middle District of Florida (the "Poulos
Lawsuit"), naming as defendants 41 manufacturers, distributors and casino
operators of video poker and electronic slot machines, including Casino Magic.
The lawsuit alleges that the defendants have engaged in a course of fraudulent
and misleading conduct intended to induce people to play such games based on
false beliefs concerning the operation of the gaming machines and the extent
to which there is an opportunity to win. The suit alleges violations of the
Racketeer Influenced and Corrupt Organization Act, as well as claims of common
law fraud, unjust enrichment and negligent misrepresentation, and seeks
damages in excess of $6 billion. On May 10, 1994, a second class action
lawsuit was filed in the United States District Court, Middle District of
Florida (the "Ahern Lawsuit"), naming as defendants the same defendants who
were named in the Poulos Lawsuit and adding as defendants the owners of
certain casino operations in Puerto Rico and the Bahamas, who were not named
as defendants in the Poulos Lawsuit. The claims in the Ahern Lawsuit are
identical to the claims in the Poulos Lawsuit. Because of the similarity of
parties and claims, the Poulos Lawsuit and Ahern Lawsuit were consolidated
into one case file in the United States District Court, Middle District of
Florida. On December 9, 1994 a motion by the defendants for change of venue
was granted, transferring the case to the United States District Court for the
District of Nevada, in Las Vegas. In an order dated April 17, 1996, the court
granted motions to dismiss filed by Casino Magic and other defendants and
dismissed the Complaint without prejudice. The plaintiffs then filed an
amended Complaint on May 31, 1996 seeking damages against Casino Magic and
other defendants in excess of $1 billion and punitive damages for violations
of the Racketeer Influenced and Corrupt Organizations Act and for state common
law claims for fraud, unjust enrichment and negligent misrepresentation.
Casino Magic and other defendants have moved to dismiss the amended Complaint.
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 interfered with certain of the plaintiff's business relations;
and (iii) breached covenants of good faith and fair dealing they
F-47
<PAGE>
PINNACLE ENTERTAINMENT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
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
First Judicial District Court for 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 thirty-eight (38) 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
Boomtown Biloxi landbased 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. No substantive developments in the matter occurred prior to July 30,
1999 when the court denied the defendants' motions to arbitrate, and to stay,
the matter. Trial of the matter will commence on March 28, 2000. The Company
believes that the claims are without merit and intends to contest the matter
vigorously.
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.
F-48
<PAGE>
PINNACLE ENTERTAINMENT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Note 17--Unaudited Quarterly Information; Supplementary Financial Information
The following is a summary of unaudited quarterly financial data for the
years ended December 31, 1999 and 1998:
<TABLE>
<CAPTION>
1999
------------------------------------
Sept.
Dec. 31, 30, June 30, Mar. 31,
-------- -------- -------- --------
(in thousands, except per share
data)
<S> <C> <C> <C> <C>
Revenues............................. $150,675 $184,655 $199,529 $171,998
(Gain) loss on dispositions of
assets, net......................... $ 78 $(42,139) $ 0 $ 0
Pre opening costs.................... $ 827 $ 684 $ 802 $ 707
Operating income..................... $ 18,937 $ 70,246 $ 33,183 $ 21,838
Net income........................... $ 3,971 $ 26,232 $ 9,711 $ 4,133
Net income per common share:
Net income--basic.................. $ 0.15 $ 1.01 $ 0.38 $ 0.16
Net income--diluted................ $ 0.15 $ 0.98 $ 0.37 $ 0.16
<CAPTION>
1998
------------------------------------
Sept.
Dec. 31, 30, June 30, Mar. 31,
-------- -------- -------- --------
(in thousands, except per share
data)
<S> <C> <C> <C> <C>
Revenues............................. $158,218 $ 87,467 $103,125 $ 78,157
(Gain) loss on dispositions of
assets, net......................... $ 635 $ 1,586 $ 0 $ 0
Pre opening costs.................... $ 361 $ 367 $ 93 $ 0
Operating income..................... $ 18,906 $ 6,337 $ 17,602 $ 1,658
Net income (loss).................... $ 4,302 $ 1,972 $ 8,129 $ (1,234)
Net income (loss) per common share:
Net income (loss)--basic........... $ 0.17 $ 0.08 $ 0.31 $ (0.05)
Net income (loss)--diluted......... $ 0.17 $ 0.08 $ 0.31 $ (0.05)
</TABLE>
--------
(a) No dividends were paid in 1999 or 1998.
(b) Net income per share calculations for each quarter are based on the
weighted average number of shares outstanding during the respective
periods; accordingly, the sum of the quarters may not equal the full year
income per share.
(c) The Company acquired Casino Magic on October 15, 1998, and accounted for
the acquisition under the purchase method of accounting for a business
combination, and therefore, Casino Magic's results of operations are not
included prior to its acquisition date.
(d) Hollywood Park Race Track and Casino were sold on September 10, 1999, and
accordingly, results of operations after that date are excluded.
Note 18--Fair Value of Financial Instruments
Due to the short term maturity of financial instruments classified as
current assets and liabilities, the fair value approximates the carrying
value. It is not practical to estimate the fair value of long term receivables
and long term debt instruments, other than the 9.25% Notes, 9.5% Notes and the
Casino Magic 13% Notes, because there are no quoted market prices for
transactions of a similar nature.
Based on quoted market values at December 31, 1999, the carrying values of
the 9.25% Notes and the 9.5% Notes approximate fair value and the carrying
value of $119,800,000 for the Casino Magic 13% Notes is below the fair value
by approximately $3,500,000.
F-49
<PAGE>
PINNACLE ENTERTAINMENT, INC.
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Note 19--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
As of and for the year ended December 31, 1999
<TABLE>
<CAPTION>
(a) (b)
Consolidating Pinnacle
Pinnacle Wholly Owned Wholly Owned and Entertainment,
Entertainment, Guarantor Non-Guarantor Eliminating Inc.
Inc. Subsidiaries Subsidiaries Entries Consolidated
-------------- ------------ ------------- ------------- --------------
(in thousands)
<S> <C> <C> <C> <C> <C>
As of and for the year
ended December 31, 1999
Balance Sheet
Current assets.......... $220,216 $188,330 $ 28,928 $ 0 $ 437,474
Property, plant and
equipment, net......... 36,671 311,165 89,879 0 437,715
Other non-current
assets................. 28,369 40,788 44,599 56,463 170,219
Investment in
subsidiaries........... 340,840 86,215 0 (427,055) 0
Inter-company........... 239,469 173,002 31,493 (443,964) 0
-------- -------- -------- --------- ----------
$865,565 $799,500 $194,899 $(814,556) $1,045,408
======== ======== ======== ========= ==========
Current liabilities..... $ 75,933 $ 52,159 $ 16,916 $ 0 $ 145,008
Notes payable, long
term................... 502,421 3,393 112,884 0 618,698
Other non-current
liabilities............ (7,165) 83 20,114 (12,206) 826
Inter-company........... 13,500 406,437 24,031 (443,968) 0
Equity.................. 280,876 337,428 20,954 (358,382) 280,876
-------- -------- -------- --------- ----------
$865,565 $799,500 $194,899 $(814,556) $1,045,408
======== ======== ======== ========= ==========
Statement of Operations
Revenues:
Gaming................. $ 33,638 $368,993 $154,895 $ 0 $ 557,526
Racing................. 39,714 15,495 0 0 55,209
Food and beverage...... 8,073 27,823 3,921 0 39,817
Equity in
subsidiaries.......... 78,679 42,974 0 (121,653) 0
Other.................. 6,661 44,324 3,320 0 54,305
-------- -------- -------- --------- ----------
166,765 499,609 162,136 (121,653) 706,857
-------- -------- -------- --------- ----------
Expenses:
Gaming................. 18,241 200,594 90,673 0 309,508
Racing................. 15,843 6,851 0 0 22,694
Food and beverage...... 11,060 31,237 4,261 0 46,558
Administrative and
other................. 34,124 114,633 25,273 0 174,030
(Gain) loss on
disposition of
assets................ (42,828) 767 0 0 (42,061)
Depreciation and
amortization.......... 5,295 35,480 9,664 1,485 51,924
-------- -------- -------- --------- ----------
41,735 389,562 129,871 1,485 562,653
-------- -------- -------- --------- ----------
Operating income
(loss)................. $125,030 $110,047 $ 32,265 $(123,138) $ 144,204
Interest expense, net... 41,030 (1,460) 17,974 0 57,544
-------- -------- -------- --------- ----------
Income (loss) before
minority interests and
taxes.................. 84,000 111,507 14,291 (123,138) 86,660
Minority interests...... 0 1,687 0 0 1,687
Income tax expense...... 38,469 10 2,447 0 40,926
-------- -------- -------- --------- ----------
Net income (loss)....... $ 45,531 $109,810 $ 11,844 $(123,138) $ 44,047
======== ======== ======== ========= ==========
Statement of Cash Flows
Net cash provided by
(used in) operating
activities............. $ 592 $ 56,861 $ 19,632 $ (1,762) $ 75,323
Net cash provided by
(used in) investing
activities............. 897 (49,100) (2,860) 0 (51,063)
Net cash provided by
(used in) financing
activities............. 66,941 (3,149) (8,924) 0 54,868
</TABLE>
F-50
<PAGE>
PINNACLE ENTERTAINMENT, INC.
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Pinnacle Entertainment, Inc.
Consolidating Condensed Financial Information
As of and for the year ended December 31, 1998
<TABLE>
<CAPTION>
(a) (b) (c)
Pinnacle Hollywood Park
Entertainment, Operating Co. Wholly Non Wholly Consolidating Pinnacle
Inc. Guarantor (Co-Obligor 9.5% Wholly Owned Owned Owned and Entertainment,
(Parent Notes/Guarantor Guarantor Non-Guarantor Non-Guarantor Eliminating Inc.
Obligor) 9.25% Notes) Subsidiaries Subsidiaries Subsidiaries Entries Consolidated
-------------- ---------------- ------------ ------------- ------------- ------------- --------------
(in thousands)
<S> <C> <C> <C> <C> <C> <C> <C>
As of and for the
year ended
December 31, 1998
Balance Sheet
Current assets..... $ 14,820 $ 2,574 $ 69,790 $ 17,726 $15,046 $ (19,808) $ 100,148
Property, plant and
equipment, net.... 85,870 1,953 421,380 92,218 1,491 0 602,912
Other non-current
assets............ 41,365 4,196 31,275 53,452 7,591 50,400 188,279
Investment in
subsidiaries...... 279,442 17,839 174,141 0 0 (471,422) 0
Inter-company...... 252,556 144,569 303,855 0 5,012 (705,992) 0
--------- -------- ---------- -------- ------- ----------- ---------
$ 674,053 $171,131 $1,000,441 $163,396 $29,140 $(1,146,822) $ 891,339
========= ======== ========== ======== ======= =========== =========
Current
liabilities....... $ 11,048 $ 12,547 $ 79,178 $ 29,266 $ 5,604 $ (9,051) $ 128,592
Notes payable, long
term.............. 279,018 125,228 10,042 118,349 0 (5,018) 527,619
Other non-current
liabilities....... 5,889 0 9,747 2,727 7,532 (25,495) 400
Inter-company...... 147,122 23,323 564,207 0 21,549 (756,201) 0
Minority interest.. 0 0 4,366 0 0 (614) 3,752
Equity............. 230,976 10,033 332,901 13,054 (5,545) (350,443) 230,976
--------- -------- ---------- -------- ------- ----------- ---------
$ 674,053 $171,131 $1,000,441 $163,396 $29,140 $(1,146,822) $ 891,339
========= ======== ========== ======== ======= =========== =========
Statement of
Operations
Revenues:
Gaming............ $ 46,255 $ 0 $ 221,029 $ 21,985 $ 3,788 $ 0 $ 293,057
Racing............ 0 39,618 27,253 0 0 0 66,871
Food and
beverage......... 4,881 0 25,008 381 240 0 30,510
Equity in
subsidiaries..... 20,812 0 3,390 0 0 (24,202) 0
Inter-company..... 0 0 22,856 0 0 (22,856) 0
Other............. 3,797 1,983 30,487 214 48 0 36,529
--------- -------- ---------- -------- ------- ----------- ---------
75,745 41,601 330,023 22,580 4,076 (47,058) 426,967
--------- -------- ---------- -------- ------- ----------- ---------
Expenses:
Gaming............ 27,167 0 118,813 14,602 967 0 161,549
Racing............ 0 17,198 12,118 0 0 0 29,316
Food and
beverage......... 9,613 0 28,490 566 191 0 38,860
Administrative and
other............ 19,035 14,254 80,451 3,394 1,263 0 118,397
Loss on write off
of assets........ 1,586 0 635 0 0 0 2,221
Depreciation and
amortization..... 4,346 3,985 21,451 1,429 306 604 32,121
--------- -------- ---------- -------- ------- ----------- ---------
61,747 35,437 261,958 19,991 2,727 604 382,464
--------- -------- ---------- -------- ------- ----------- ---------
Operating income
(loss)............ 13,998 6,164 68,065 2,589 1,349 (47,662) 44,503
Interest expense... 6,871 12,565 (226) 3,308 0 0 22,518
Inter-company
interest.......... 0 0 22,856 0 0 (22,856) 0
--------- -------- ---------- -------- ------- ----------- ---------
Income (loss)
before minority
interests and
taxes............. 7,127 (6,401) 45,435 (719) 1,349 (24,806) 21,985
Minority
interests......... 0 0 0 0 0 374 374
Income tax expense
(benefit)......... (6,213) 0 14,164 0 491 0 8,442
--------- -------- ---------- -------- ------- ----------- ---------
Net income (loss).. $ 13,340 $ (6,401) $ 31,271 $ (719) $ 858 $ (25,180) $ 13,169
========= ======== ========== ======== ======= =========== =========
Statement of Cash
Flows
Net cash provided
by (used in)
operating
activities........ $(153,372) $ 1,965 $ 203,874 $ 7,042 $ 1,055 $ (22,452) $ 38,112
Net cash provided
by (used in)
investing
activities........ (89,208) (2,132) (57,942) (5,844) (72) 18,666 (136,532)
Net cash provided
by (used in)
financing
activities........ 261,682 (27) (140,773) 0 0 (2,384) 118,498
</TABLE>
F-51
<PAGE>
PINNACLE ENTERTAINMENT, INC.
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Pinnacle Entertainment, Inc.
Consolidating Condensed Financial Information
As of and for the year ended December 31, 1997
<TABLE>
<CAPTION>
(a) (b) (c)
Pinnacle Hollywood Park
Entertainment, Operating Co. Wholly Non Wholly Consolidating Pinnacle
Inc. Guarantor (Co-Obligor 9.5% Wholly Owned Owned Owned and Entertainment,
(Parent Notes/Guarantor Guarantor Non-Guarantor Non-Guarantor Eliminating Inc.
Obligor) 9.25% Notes) Subsidiaries Subsidiaries Subsidiaries Entries Consolidated
-------------- ---------------- ------------ ------------- ------------- ------------- --------------
(in thousands)
<S> <C> <C> <C> <C> <C> <C> <C>
As of and for the
year ended December
31, 1997
Balance Sheet
Current assets..... $ 19,844 $ 8,568 $ 25,074 $ 6,720 $0 $ 0 $ 60,206
Property, plant and
equipment, net.... 68,515 23,753 140,105 68,293 0 0 300,666
Other non-current
assets............ 22,306 0 29,320 7,611 0 (1,080) 58,157
Investment in
subsidiaries...... 126,121 15,132 116,020 0 0 (257,273) 0
Inter-company...... 125,210 148,380 122,035 0 0 (395,625) 0
-------- --------- --------- ------- --- --------- --------
$361,996 $ 195,833 $ 432,554 $82,624 $0 $(653,978) $419,029
======== ========= ========= ======= === ========= ========
Current
liabilities....... $ 16,890 $ 14,232 $ 19,583 $ 6,612 $0 $ 0 $ 57,317
Notes payable, long
term.............. 2,406 125,256 1,936 2,504 0 0 132,102
Other non-current
liabilities....... 4,753 5,202 83 0 0 (3,728) 6,310
Inter-company...... 146,145 21,589 178,448 49,443 0 (395,625) 0
Minority interest.. 0 0 0 0 0 1,946 1,946
Equity............. 191,802 29,554 232,504 24,065 0 (256,571) 221,354
-------- --------- --------- ------- --- --------- --------
$361,996 $ 195,833 $ 432,554 $82,624 $0 $(653,978) $419,029
======== ========= ========= ======= === ========= ========
Statement of
Operations
Revenues:
Gaming............ $ 50,820 $ 0 $ 58,622 $28,217 $0 $ 0 $137,659
Racing............ 0 39,930 28,914 0 0 0 68,844
Food and
beverage......... 4,659 0 13,483 1,752 0 0 19,894
Equity in
subsidiaries..... 13,963 3,735 (43) 0 0 (17,655) 0
Inter-company..... 0 0 4,823 0 0 (4,823) 0
Other............. 4,601 1,808 13,789 1,533 0 0 21,731
-------- --------- --------- ------- --- --------- --------
74,043 45,473 119,588 31,502 0 (22,478) 248,128
-------- --------- --------- ------- --- --------- --------
Expenses:
Gaming............ 28,353 0 32,370 14,010 0 0 74,733
Racing............ 0 17,822 12,482 0 0 0 30,304
Food and
beverage......... 9,658 0 13,784 2,303 0 0 25,745
Administrative and
other............ 18,282 14,536 33,277 8,792 0 0 74,887
REIT
restructuring.... 2,483 0 0 0 0 0 2,483
Depreciation and
amortization..... 4,632 3,804 6,229 3,459 0 33 18,157
-------- --------- --------- ------- --- --------- --------
63,408 36,162 98,142 28,564 0 33 226,309
-------- --------- --------- ------- --- --------- --------
Operating income
(loss)............ 10,635 9,311 21,446 2,938 0 (22,511) 21,819
Interest expense... 1,789 5,368 (37) 182 0 0 7,302
Inter-company
interest.......... 0 0 2,244 2,579 0 (4,823) 0
-------- --------- --------- ------- --- --------- --------
Income (loss)
before minority
interests and
taxes............. 8,846 3,943 19,239 177 0 (17,688) 14,517
Minority
interests......... 0 0 0 0 0 (3) (3)
Income tax
expense........... 4,124 0 1,726 0 0 0 5,850
-------- --------- --------- ------- --- --------- --------
Net income (loss).. $ 4,722 $ 3,943 $ 17,513 $ 177 $0 $ (17,685) $ 8,670
======== ========= ========= ======= === ========= ========
Statement of Cash
Flows
Net cash provided
by (used in)
operating
activities........ $ 19,559 $(122,039) $ 129,260 $ 5,250 $0 $ (17,665) $ 14,365
Net cash provided
by (used in)
investing
activities........ 14,747 (3,139) (23,516) (4,328) 0 10 (16,226)
Net cash provided
by (used in)
financing
activities........ 475 124,975 (114,345) (2,373) 0 877 9,609
</TABLE>
F-52
<PAGE>
PINNACLE ENTERTAINMENT, INC.
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
--------
(a) All of the subsidiaries mentioned in this footnote (a) became wholly owned
subsidiaries of the Company at different points in time, in some cases,
during the periods presented. All of such subsidiaries were guarantors on
both the 9.5% Notes and the 9.25% Notes. The following subsidiaries were
treated as guarantors for all periods presented: Turf Paradise, Inc.,
Hollywood Park Food Services, Inc. (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.
(b) The following wholly owned subsidiaries were not guarantors on either the
9.5% Notes or the 9.25% Notes and became subsidiaries of the Company on
October 15, 1998, when the Casino Magic Merger was consummated: Jefferson
Casino Corporation, Casino Magic of Louisiana, Corp., and Casino Magic
Management Services, Corp. 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 non-wholly owned subsidiaries were not guarantors on either
the 9.5% notes or the 9.25% Notes and became subsidiaries of the Company
on October 15, 1998, when the Casino Magic Merger was consummated: Casino
Magic Neuquen S.A. and its subsidiary, Casino Magic Support Services S.A.
Note 20--Subsequent Events
On March 8, 2000, the Company announced it had received a proposal pursuant
to which Harveys Casino Resorts ("Harveys") would acquire all of the
outstanding shares of common stock of Pinnacle Entertainment for cash at $25
per fully diluted share (the "Acquisition Proposal"). The Acquisition Proposal
is subject to, among other things, the execution of a definitive agreement
containing the customary terms and conditions, including regulatory approval,
the agreement of Pinnacle Entertainment's senior management to retain an
equity interest in the combined company and the approval of a majority of
Pinnacle Entertainment's shareholders. The Company's Board of Directors,
excluding management members, agreed to evaluate the Acquisition Proposal and
to negotiate on an exclusive basis through the end of March 2000. Harveys
Casino Resorts is majority owned by Colony Capital, Inc., a private investment
firm.
On March 14, 2000, Harbor Finance Partners filed a class action lawsuit in
the Chancery Court of the State of Delaware against the Company, and each of
its directors, claiming that the defendants have breached their fiduciary duty
to the stockholders of the Company by agreeing to negotiate exclusively with
Harveys Resorts Casinos, a majority owned company of Colony Capital, Inc. (see
Acquisition Proposal discussion above). On March 21, 2000, a similar class
action lawsuit was filed by Leta Hilliard in the Superior Court of the State
of California. The lawsuits claim that the Company and its directors have
failed to undertake an appropriate evaluation of the Company's worth and
engage in an auction of the Company with third parties, and that the
F-53
<PAGE>
PINNACLE ENTERTAINMENT, INC.
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
price for the stock is inadequate. The Company intends to vigorously defend
these actions and believes no basis exists for the plaintiffs' claims.
On March 17, 2000, the Company completed the sale of approximately 42 acres
of the 139 acres retained in the Churchill Downs transaction for $24,200,000 in
cash (see Note 4). The Company anticipates an after tax gain of approximately
$13,800,000 from this sale.
F-54
<PAGE>
PINNACLE ENTERTAINMENT, INC.
CALCULATION OF EARNINGS PER SHARE
<TABLE>
<CAPTION>
For the three months ended December 31,
-----------------------------------------
Basic Diluted
-------------------- --------------------
1999 1998 1997 1999 1998 1997
------ ------ ------ ------ ------ ------
(in thousands, except per share data--
unaudited)
<S> <C> <C> <C> <C> <C> <C>
Average number of common shares
outstanding......................... 26,145 25,800 26,209 26,145 25,800 26,705
Average common shares due to assumed
conversion of convertible preferred
shares(b)........................... 0 0 0 0 0 0
Average common shares due to assumed
conversion of stock options......... 0 0 0 854 0 0
------ ------ ------ ------ ------ ------
Total shares......................... 26,145 25,800 26,209 26,999 25,800 26,705
====== ====== ====== ====== ====== ======
Net income........................... $3,971 $4,302 $1,551 $3,971 $4,302 $1,551
Less dividend requirements on
convertible preferred shares........ 0 0 0 0 0 0
------ ------ ------ ------ ------ ------
Net income available to common
shareholders........................ $3,971 $4,302 $1,551 $3,971 $4,302 $1,551
====== ====== ====== ====== ====== ======
Net income per share................. $ 0.15 $ 0.17 $ 0.06 $ 0.15 $ 0.17 $ 0.06
====== ====== ====== ====== ====== ======
</TABLE>
<TABLE>
<CAPTION>
For the years ended December 31,
---------------------------------------------
Basic Diluted(a)
---------------------- ----------------------
1999 1998 1997 1999 1998 1997
------- ------- ------ ------- ------- ------
(in thousands, except per share data)
<S> <C> <C> <C> <C> <C> <C>
Average number of common shares
outstanding..................... 25,966 26,115 22,010 25,966 26,115 22,340
Average common shares due to
assumed conversion of
convertible preferred
shares(b)....................... 0 0 0 0 0 0
Average common shares due to
assumed conversion of stock
options......................... 0 0 0 363 0 0
------- ------- ------ ------- ------- ------
Total shares..................... 25,966 26,115 22,010 26,329 26,115 22,340
======= ======= ====== ======= ======= ======
Net income....................... $44,047 $13,169 $8,670 $44,047 $13,169 $8,670
Less dividend requirements on
convertible preferred shares.... 0 0 1,520 0 0 1,520
------- ------- ------ ------- ------- ------
Net income (loss) available to
(allocated to) common
shareholders.................... $44,047 $13,169 $7,150 $44,047 $13,169 $7,150
======= ======= ====== ======= ======= ======
Net income per share............. $ 1.70 $ 0.50 $ 0.33 $ 1.67 $ 0.50 $ 0.32
======= ======= ====== ======= ======= ======
</TABLE>
--------
(a) When the computed diluted values are anti-dilutive, the basic per share
values are presented on the face of the consolidated statements of
operations.
(b) As of August 28, 1997, the Company's 2,749,000 outstanding depositary
shares were converted into 2,291,492 shares of the Company's common stock.
F-55
<PAGE>
ANNEX A
AGREEMENT AND PLAN OF MERGER
Dated as of April 17, 2000
among
PH CASINO RESORTS, INC.
PINNACLE ENTERTAINMENT, INC.
and
PINNACLE ACQUISITION CORPORATION
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
----
<C> <S> <C>
ARTICLE I--DEFINITIONS.................................................. 1
ARTICLE II--THE PINNACLE MERGER......................................... 8
Section 2.1 The Pinnacle Merger.................................... 8
Section 2.2 Closing................................................ 8
Section 2.3 Effective Time......................................... 9
Section 2.4 Effects of the Pinnacle Merger......................... 9
Section 2.5 Corporate Governance Documents......................... 9
Section 2.6 Directors.............................................. 9
Section 2.7 Officers............................................... 9
Section 2.8 Further Actions........................................ 9
ARTICLE III--CONVERSION OF SHARES....................................... 9
Section 3.1 Effect on Capital Stock of Pinnacle and Pinnacle Acq
Corp.................................................. 9
Section 3.2 Exchange of Certificates............................... 10
ARTICLE IV--REPRESENTATIONS AND WARRANTIES OF PINNACLE.................. 11
Section 4.1 Organization, Standing and Corporate Power............. 12
Section 4.2 Subsidiaries........................................... 12
Section 4.3 Capital Structure...................................... 12
Section 4.4 Authority; Noncontravention............................ 13
Section 4.5 Opinion of Financial Advisor........................... 13
Section 4.6 SEC Documents; Financial Statements.................... 14
Section 4.7 Absence of Certain Changes or Events................... 14
Section 4.8 Litigation............................................. 15
Section 4.9 Absence of Changes in Benefit Plans.................... 15
Section 4.10 Employee Benefits; ERISA............................... 15
Section 4.11 Taxes.................................................. 17
Section 4.12 Environmental Matters.................................. 17
Section 4.13 Permits; Compliance with Laws.......................... 18
Section 4.14 State Takeover Statutes................................ 19
Section 4.15 Brokers................................................ 20
Section 4.16 Trademarks, etc........................................ 20
Section 4.17 Title to Properties.................................... 20
Section 4.18 Insurance.............................................. 21
Section 4.19 Contracts; Debt Instruments............................ 22
Section 4.20 Board Consent and Recommendation....................... 22
Section 4.21 Accounting Controls.................................... 23
Section 4.22 Affiliate Transactions................................. 23
Section 4.23 Vote Required.......................................... 23
Section 4.24 Material Subsidiaries.................................. 23
ARTICLE V--REPRESENTATIONS AND WARRANTIES OF HOLDING AND
PINNACLE ACQ CORP...................................................... 23
Section 5.1 Organization, Standing and Corporate Power............. 23
Section 5.2 Authority; Noncontravention............................ 23
Section 5.3 Interim Operations of Pinnacle Acq Corp................ 24
Section 5.4 Licensing Matters...................................... 24
Section 5.5 Litigation............................................. 25
Section 5.6 Financing.............................................. 25
Section 5.7 No Other Agreements.................................... 25
Section 5.8 Harveys Merger......................................... 25
</TABLE>
i
<PAGE>
<TABLE>
<CAPTION>
Page
----
<C> <S> <C>
ARTICLE VI--COVENANTS RELATING TO CONDUCT OF BUSINESS................... 25
Section 6.1 Conduct of Business................................... 25
Section 6.2 Advice of Changes..................................... 28
Section 6.3 No Solicitation....................................... 28
ARTICLE VII--ADDITIONAL AGREEMENTS...................................... 30
Section 7.1 Stockholders Meeting.................................. 30
Section 7.2 Proxy Statement and Other Filings; Auditor's Letter... 30
Section 7.3 Access to Information; Confidentiality................ 31
Section 7.4 Reasonable Efforts; Notification...................... 32
Section 7.5 Stock Option Plans; Change of Control Plan............ 33
Section 7.6 Indemnification and Insurance......................... 33
Section 7.7 Fees.................................................. 34
Section 7.8 Public Announcement................................... 34
Section 7.9 Title Insurance, Surveys.............................. 34
Section 7.10 Transfer Taxes........................................ 35
Section 7.11 Financing............................................. 36
Section 7.12 Tax Treatment......................................... 36
Section 7.13 Tender Offer and Consent Solicitations................ 36
Section 7.14 Termination of Voting Agreement....................... 36
Section 7.15 Compliance Committees................................. 36
Section 7.16 Atlantic Land Warrant................................. 36
Section 7.17 Filing of Corporate Gaming License Applications....... 37
ARTICLE VIII--CONDITIONS PRECEDENT...................................... 37
Section 8.1 Conditions to Each Party's Obligation to Effect the
Pinnacle Merger...................................... 37
Section 8.2 Conditions to Obligations of Pinnacle Acq Corp........ 37
Section 8.3 Conditions to Obligations of Pinnacle................. 39
ARTICLE IX--TERMINATION, AMENDMENT AND WAIVER........................... 39
Section 9.1 Termination........................................... 39
Section 9.2 Effect of Termination................................. 40
Section 9.3 Amendment............................................. 41
Section 9.4 Extension; Waiver..................................... 41
Section 9.5 Procedure for Termination, Amendment, Extension or
Waiver............................................... 41
ARTICLE X--GENERAL PROVISIONS........................................... 41
Section 10.1 Nonsurvival of Representations........................ 41
Section 10.2 Representations and Warranties........................ 41
Section 10.3 Notices............................................... 41
Section 10.4 Interpretation........................................ 42
Section 10.5 Counterparts.......................................... 43
Section 10.6 Entire Agreement; No Third-Party Beneficiaries........ 43
Section 10.7 Governing Law......................................... 43
Section 10.8 Gaming Laws........................................... 43
Section 10.9 Assignment............................................ 43
Section 10.10 Enforcement........................................... 43
Section 10.11 Inglewood Sale; CPRs.................................. 43
</TABLE>
ii
<PAGE>
SCHEDULES
EXHIBITS
<TABLE>
<C> <S>
Exhibit A Material Terms of the Financing
</TABLE>
iii
<PAGE>
AGREEMENT AND PLAN OF MERGER dated as of 12:01 A.M. on April 17, 2000 (this
"Agreement"), among PH CASINO RESORTS, INC., a Delaware corporation ("PHCR"),
PINNACLE ENTERTAINMENT, INC., a Delaware corporation ("Pinnacle"), and
PINNACLE ACQUISITION CORPORATION, a Delaware corporation ("Pinnacle Acq
Corp").
W I T N E S S E T H
WHEREAS, Pinnacle Acq Corp is a direct wholly owned subsidiary of PHCR and
an indirect wholly owned subsidiary of Harveys Casino Resorts, a Nevada
corporation ("Harveys"), and Harveys is majority owned by Colony Investors
III, L.P., a Delaware limited partnership ("Colony III");
WHEREAS, the respective Boards of Directors of Pinnacle and Pinnacle Acq
Corp have determined that the merger of Pinnacle Acq Corp with and into
Pinnacle (the "Pinnacle Merger"), upon the terms and subject to the conditions
set forth in this Agreement, is advisable and in the best interests of their
respective corporations and stockholders, and have approved this Agreement;
WHEREAS, PHCR has formed a wholly owned subsidiary, Harveys Acquisition
Corporation, a Nevada corporation ("Harveys Acq Corp"), which will,
simultaneously with the Pinnacle Merger, merge with and into Harveys (the
"Harveys Merger") so that, following the Pinnacle Merger and the Harveys
Merger, the Pinnacle Surviving Corporation (as defined below) and the Harveys
Surviving Corporation (as defined below) will each be wholly owned
subsidiaries of PHCR;
WHEREAS, for Federal income tax purposes, the parties intend that the
Pinnacle Merger, the Harveys Merger and the contribution pursuant to the
Voting Agreement (as defined below) qualify as exchanges under section 351 of
the Internal Revenue Code of 1986, as amended (the "Code");
WHEREAS, as a condition for PHCR and Pinnacle Acq Corp to enter into this
Agreement, those stockholders of Pinnacle listed on the signature pages to the
Voting Agreement, as defined below (the "Group"), have entered into the Voting
and Contribution Agreement as of the date hereof with Pinnacle, Pinnacle Acq
Corp and PHCR, which provides, among other things, that, subject to the terms
and conditions thereof, (a) each member of the Group will vote its shares of
Pinnacle Common Stock (as defined below) in favor of the Pinnacle Merger and
the approval and adoption of this Agreement and (b) each member of the Group
will contribute certain securities of Pinnacle to PHCR in exchange for
securities of PHCR;
WHEREAS, the Board of Directors of Pinnacle has approved the terms of this
Agreement and the transactions contemplated hereby;
WHEREAS, the parties hereto desire to make certain representations,
warranties, covenants and agreements in connection with the Pinnacle Merger
and also to prescribe various conditions to the Pinnacle Merger.
NOW, THEREFORE, in consideration of the mutual representations, warranties,
covenants and agreements contained in this Agreement and for other good and
valuable consideration, the receipt and sufficiency of which are hereby
acknowledged, the parties hereto, intending to be legally bound, agree as
follows:
ARTICLE I
DEFINITIONS
Capitalized and certain other terms used in this Agreement and not
otherwise defined have the meanings set forth below. Unless the context
otherwise requires, such terms shall include the singular and plural and the
conjunctive and disjunctive forms of the terms defined.
A-1
<PAGE>
"Affiliate" of any Person means another Person that directly or indirectly,
through one or more intermediaries, controls, is controlled by, or is under
common control with, such first Person.
"Agreement" has the meaning set forth in the recitals hereof.
"Asset Dispositions" has the meaning set forth in Section 6.1(c).
"Asset Disposition Agreements" has the meaning set forth in Section 6.1(c).
"Atlantic Land Warrant" means that certain warrant to purchase shares of
Pinnacle Common Stock held by Atlantic Land Corporation and originally issued
by Casino Magic Corporation.
"Audit" means any audit, assessment of Taxes, other examination by any Tax
Authority, proceeding or appeal of such proceeding relating to Taxes.
"Bank Credit Facility" means the Amended and Restated Reducing Revolving
Loan Agreement, dated as of October 14, 1998, and amended as of June 2, 1999
and September 30, 1999, among Hollywood Park, Inc. and the banks named
therein, Societe Generale and Bank of Scotland (as Managing Agents), First
National Bank of Commerce (as Co-Agent), and Bank of America National Trust
and Savings Association (as Administrative Agent).
"Base Balance Sheet" has the meaning set forth in Section 4.6.
"Budget" has the meaning set forth in Section 6.1(a)(v).
"Business Day" means any day excluding: Saturday, Sunday and any day which
is in the City of New York a legal holiday or a day upon which banking
institutions in the City of New York are required or authorized by law or
other governmental action to close.
"Certificate of Merger" has the meaning set forth in Section 2.1.
"Closing" has the meaning set forth in Section 2.2.
"Closing Date" has the meaning set forth in Section 2.2.
"Code" has the meaning set forth in the recitals hereto.
"Colony" has the meaning set forth in Section 5.4.
"Colony LP" has the meaning set forth in Section 5.4.
"Colony III" has the meaning set forth in the recitals hereof.
"Commitments" has the meaning set forth in Section 7.9(a).
"Competitive Proposal" means, other than the transactions contemplated by
this Agreement, (a) any proposal or offer from any Person relating to any
direct or indirect acquisition or purchase of assets of Pinnacle or any of its
Material Subsidiaries comprising 50% or more of Pinnacle's consolidated assets
or over 50% of any class of equity securities of Pinnacle or any of its
Material Subsidiaries or (b) any tender offer or exchange offer that, if
consummated, would result in any Person beneficially owning 50% or more of any
class of equity securities of Pinnacle or any of its Material Subsidiaries or
(c) any merger, consolidation, business combination, liquidation, dissolution
or similar transaction involving Pinnacle with a third party; provided, that
the Board of Directors of Pinnacle determines in its good faith judgment that
(i) the value of the consideration (based on the opinion, with only customary
qualifications, of an independent financial advisor of good national
reputation in such matters) of such proposal exceeds the value of each of the
Pinnacle Merger Consideration and any
A-2
<PAGE>
alternative proposal presented by Pinnacle Acq Corp or any of its Affiliates
and (ii) such proposal is more favorable to Pinnacle's stockholders than the
Pinnacle Merger and any alternative proposal presented by Pinnacle Acq Corp or
any of its Affiliates. Notwithstanding the foregoing, the consummation of (i)
the Principal Asset Dispositions (other than the sale of the Inglewood
Property), substantially on the terms and subject to the conditions contained
in the applicable Asset Disposition Agreement in effect as of the date hereof
(or as amended or modified in accordance with this Agreement), and (ii) the
sale of the Inglewood Property and the Other Asset Dispositions on terms
approved by Pinnacle's Board of Directors, in good faith, shall not be deemed
to constitute a Competitive Proposal.
"Confidential Information" has the meaning set forth in Section 7.3.
"Contract" means any mortgage, indenture, note, debenture, agreement,
lease, license, permit, franchise or other instrument or obligation, whether
written or oral.
"Covered Person" has the meaning set forth in Section 6.3(a).
"Current SEC Documents" has the meaning set forth in Section 4.6.
"DGCL" means the Delaware General Corporation Law, as amended from time to
time.
"Effective Time" has the meaning set forth in Section 2.3.
"Environmental Claim" has the meaning set forth in Section 4.12(c).
"Environmental Laws" has the meaning set forth in Section 4.12(a).
"ERISA" means the Employee Retirement Income Security Act of 1974, as
amended.
"ERISA Affiliate" has the meaning set forth in Section 4.10(a).
"ERISA Plans" has the meaning set forth in Section 4.10(a).
"Exchange Act" means the Securities Exchange Act of 1934, as amended, and
the rules and regulations promulgated thereunder.
"Exchange Funds" has the meaning set forth in Section 3.2(a).
"Existing Leases" has the meaning set forth in Section 4.17(b).
"Fairness Opinion" has the meaning set forth in Section 4.5.
"Financing" means debt financing on terms not less favorable to the
borrower than those set forth in Exhibit A hereto which, together with any
indebtedness of Pinnacle assumed in the Merger, is in an amount sufficient to
enable the payment, in full of (i) the Pinnacle Merger Consideration, (ii) all
payments in connection with the cancellation of the Pinnacle Stock Options,
(iii) all other related payments in connection with the Pinnacle Merger and
the Harveys Merger (including any related consent payments to holders of and
any related repurchase of outstanding indebtedness of Pinnacle and Harveys set
forth on Exhibit A), and (iv) the related fees and expenses, estimates of
which are set forth on Exhibit A.
"Gaming Approvals" has the meaning set forth in Section 8.2(d).
"Gaming Authority" means any governmental authority or agency with
regulatory control or jurisdiction over the conduct of lawful gaming or
gambling, including, without limitation, the Arizona Racing Commission, the
California Attorney General, the California Gambling Control Commission, the
Colorado Division of Gaming, the Colorado Limited Gaming Control Commission,
the Indiana Gaming Commission, the City of Inglewood, the Iowa Racing and
Gaming Commission, the Louisiana Gaming Control Board, the Mississippi Gaming
Commission, the Mississippi State Tax Commission, the Provincial Government of
Neuquen, the Nevada State Gaming Control Board, the National Indian Gaming
Commission, the Nevada Gaming Commission, the Washington State Gaming
Commission, the Washoe County Board of Commissioners, Nevada Gaming Commission
and the Yakima Tribal Gaming Commission.
A-3
<PAGE>
"Gaming Laws" means any Federal, state, local or foreign statute,
ordinance, rule, regulation, permit, consent, approval, registration, finding
of suitability, license, judgment, order, decree, injunction or other
authorization governing or relating to the current or, in the case of Pinnacle
and its Subsidiaries, contemplated manufacturing, distribution, casino
gambling and gaming activities and operations of Pinnacle and Harveys,
including, without limitation, the California Gambling Control Act and the
rules and regulations promulgated thereunder, the Colorado Limited Gaming Act
and the rules and regulations promulgated thereunder, the Indian Gaming
Regulatory Act and the rules and regulations promulgated thereunder, the
Indiana Riverboat Gambling Act (as set forth at Indiana Code 4-33) and the
rules and regulations promulgated thereunder, chapters 99D and F of the Code
of Iowa and the rules and regulations promulgated thereunder, the Louisiana
Riverboat Economic Development and Gaming Control Act and the rules and
regulations promulgated thereunder, the Mississippi Gaming Control Act and the
rules and regulations promulgated thereunder, and the Nevada Gaming Control
Act and the rules and regulations promulgated thereunder and all applicable
local rules and ordinances.
"Governmental Entity" means any Federal, state or local government or any
court, administrative or regulatory agency or commission or other governmental
authority or agency, domestic or foreign, including any Gaming Authority.
"Group" has the meaning set forth in the recitals hereof.
"Harveys" has the meaning set forth in the recitals hereof.
"Harveys Acq Corp" has the meaning set forth in the recitals hereof.
"Harveys Merger" has the meaning set forth in the recitals hereof.
"Harveys Surviving Corporation" means the surviving corporation of the
Harveys Merger.
"HSR Act" means the Hart-Scott-Rodino Antitrust Improvements Act of 1976,
as amended.
"indebtedness" means, with respect to any Person, without duplication, (a)
all obligations of such Person for borrowed money, or with respect to deposits
or advances of any kind, (b) all obligations of such Person evidenced by
bonds, debentures, notes or similar instruments, (c) all obligations of such
Person upon which interest charges are customarily paid (other than trade
payables incurred in the Ordinary Course of Business), (d) all obligations of
such Person under conditional sale or other title retention agreements
relating to property purchased by such Person, (e) all obligations of such
Person issued or assumed as the deferred purchase price of property or
services or for trade or barter arrangements (excluding obligations of such
Person to creditors for raw materials, inventory, services and supplies
incurred in the ordinary course of such Person's business), (f) all lease
obligations of such Person capitalized on the books and records of such
Person, (g) all obligations of others secured by any Lien on property or
assets owned or acquired by such Person, whether or not the obligations
secured thereby have been assumed, (h) all obligations of such Person under
interest rate, or currency or commodity hedging, swap or similar derivative
transactions (valued at the termination value thereof), (i) all letters of
credit issued for the account of such Person (excluding letters of credit
issued for the benefit of suppliers or lessors to support accounts payable to
suppliers incurred in the Ordinary Course of Business) and (j) all guarantees
and arrangements having the economic effect of a guarantee by such Person of
any other Person.
"In the Money Option" has the meaning set forth in Section 10.11.
"Indemnified Parties" has the meaning set forth in Section 7.6(a).
"Indiana Project" has the meaning set forth in Section 4.6.
"Inglewood Property" means the 97 acres of vacant land in Inglewood which
was the subject of the agreement announced on November 4, 1999 (and
subsequently terminated), with the Hovnanian Companies of California, the
legal description of which is contained in Schedule 1.0 hereto.
A-4
<PAGE>
"Intellectual Property Rights" has the meaning set forth in Section 4.16.
"knowledge" of any Person means the actual knowledge of the executive
officers of such Person after due inquiry.
"Law" means any law, statute, ordinance, regulation or rule or any
judgment, decree, order, regulation or rule of any court or governmental
authority or body.
"Leased Properties" has the meaning set forth in Section 4.17(a).
"Licensed Persons" has the meaning set forth in Section 5.4.
"Lien" means any mortgage, pledge, assessment, security interest, lease,
sublease, lien, adverse claim, levy, charge, option, right of others or
restriction (whether on voting, sale, transfer, disposition or otherwise) or
other encumbrance of any kind, whether imposed by agreement, understanding,
law or equity, or any conditional sale contract, title retention contract or
other contract to give or to refrain from giving any of the foregoing;
provided that other than with respect to Section 4.17 hereof, workers',
mechanics', suppliers', carriers', materialmen's, landlords' statutory,
warehousemen's liens, liens for taxes, assessments or government charges that
are not yet delinquent or that are being contested in good faith and for which
adequate reserves have been provided in accordance with generally accepted
accounting principles (to the extent required thereunder), or other similar
liens arising in the Ordinary Course of Business, shall not constitute a
"Lien."
"material adverse change" or "material adverse effect" with respect to any
Person means any change or effect that is individually or in the aggregate
materially adverse to the business, prospects, properties, assets or financial
condition or results of operations of such Person and its Subsidiaries, taken
as a whole; provided, however, that in no event shall the following, either
individually or in the aggregate, in and of itself be deemed to constitute a
"material adverse change" or a "material adverse effect" (i) the effects of
changes that are applicable to the national financial, banking, currency or
capital markets in general, individually or in the aggregate, solely in and of
itself be deemed to constitute a "material adverse change" or a "material
adverse effect;" (ii) the failure by Pinnacle to meet independent, third party
analysts' projections of earnings, revenue or other financial performance
measures solely in and of itself be deemed to constitute a "material adverse
change" or a "material adverse effect;" provided, however, that the underlying
facts, circumstances, operating results or prospects which cause Pinnacle to
fail to meet such projections may be considered in determining whether a
"material adverse change" or a "material adverse effect" has occurred or (iii)
the effects of any event or circumstances (including the actual occurrence of
any proposed action) listed on Schedule 1.1 hereto.
"Materials of Environmental Concern" has the meaning set forth in Section
4.12(a).
"Material Subsidiary" shall mean each of: Boomtown Hotel & Casino, Inc., a
Nevada corporation; Louisiana--I Gaming, a Louisiana Partnership in Commendam;
Biloxi Casino Corp., a Mississippi corporation; Casino Magic of Louisiana,
Corp., a Louisiana corporation; and Belterra Resort (Indiana), LLC, an Indiana
limited liability company.
"Notice of Competitive Proposal" has the meaning set forth in Section
6.3(b).
"NYSE" means the New York Stock Exchange, Inc., or any successor entity.
"Ordinary Course of Business" means (unless otherwise indicated) (i) with
respect to representations and warranties contained in Article IV or V hereof,
transactions in the ordinary course of business, and (ii) with respect to
covenants and agreements contained in Article VI or VII hereof, transactions
in the ordinary course of business consistent with past practice.
"Other Asset Dispositions" has the meaning set forth in Section 6.1(c).
A-5
<PAGE>
"Other Filings" has the meaning set forth in Section 7.2(b).
"Owned Properties" has the meaning set forth in Section 4.17(a).
"Paying Agent" has the meaning set forth in Section 3.2(a).
"PBGC" has the meaning set forth in Section 4.10(c).
"Permits" has the meaning set forth in Section 4.13(a).
"Permitted Liens" means (i) Liens described on Schedule 4.17(b), other than
the Liens arising under the Bank Credit Facility, (ii) Liens for current taxes
not yet due and payable or being contested in good faith by appropriate
proceedings and for which adequate reserves have been provided in accordance
with generally accepted accounting principles (to the extent required
thereunder), or (iii) such Liens, encumbrances, restrictions, leases, option
to purchase, options to lease, conditions, covenants, assessments, defects,
claims or exceptions which could not reasonably be expected to, either
individually or in the aggregate, materially impair the current use,
occupancy, value, financeability, or marketability of title to the parcels of
Real Property on a project-by-project basis or as would not reasonably be
expected to have a material adverse effect on Pinnacle or any of its Material
Subsidiaries.
"Person" means any natural person, corporation, general partnership,
limited partnership, limited liability company, limited liability partnership,
proprietorship, trust, union, association, court, tribunal, agency,
government, department, commission, self-regulatory organization, arbitrator,
board, bureau, instrumentality or other entity, enterprise, authority or
business organization.
"Pinnacle" has the meaning set forth in the recitals hereof.
"Pinnacle Acq Corp" has the meaning set forth in the recitals hereof.
"Pinnacle Certificates" has the meaning set forth in Section 3.2(b).
"Pinnacle Common Stock" means the Common Stock of Pinnacle, par value $.10
per share.
"Pinnacle Dissenting Shares" has the meaning set forth in Section 3.2(f).
"Pinnacle Merger" has the meaning set forth in the recitals hereof.
"Pinnacle Merger Consideration" means $24.00 in cash, subject to adjustment
as described in Section 10.11.
"Pinnacle Preferred Stock" means the Preferred Stock of Pinnacle, par value
$1.00 per share.
"Pinnacle Stockholders Meeting" has the meaning set forth in Section 7.1.
"Pinnacle Stock Option" has the meaning set forth in Section 7.5(a).
"Pinnacle Stock Option Plans" has the meaning set forth in Section 7.5(a).
"Pinnacle Surviving Corporation" has the meaning set forth in Section 2.1.
"Pinnacle Surviving Corporation Common Stock" means the Common Stock of the
Pinnacle Surviving Corporation, par value $.01.
"Plans" has the meaning set forth in Section 4.10(a).
A-6
<PAGE>
"Principal Asset Dispositions" has the meaning set forth in Section 6.1(c).
"Proxy Statement" has the meaning set forth in Section 7.2(a).
"Real Properties" has the meaning set forth in Section 4.17(a).
"Requisite Vote" has the meaning set forth in Section 4.24.
"Schedule 13E-3" has the meaning set forth in Section 7.2(a).
"SEC" means the Securities and Exchange Commission.
"SEC Documents" has the meaning set forth in Section 4.6.
"Securities Act" means the Securities Act of 1933, as amended, and the
rules and regulations promulgated thereunder.
"Significant Takeover Proposal" means (other than the transactions
contemplated by this Agreement) (a) any proposal or offer from any Person
relating to any direct or indirect acquisition or purchase of assets
(including capital stock of any Subsidiaries) of Pinnacle or any of its
Subsidiaries comprising 20% or more of Pinnacle's consolidated assets or of
over 20% of any class of equity securities of Pinnacle or any of its Material
Subsidiaries or (b) any tender offer or exchange offer that if consummated
would result in any Person beneficially owning 20% or more of any class of
equity securities of Pinnacle or any of its Material Subsidiaries or which
would require approval under any Gaming Law, or (c) any merger, consolidation,
business combination, recapitalization, liquidation, dissolution or similar
transaction involving Pinnacle (or any of its Material Subsidiaries) and a
third party. Notwithstanding the foregoing, consummation of (i) the Principal
Asset Dispositions substantially on the terms and subject to the conditions
contained in the applicable Asset Disposition Agreement in effect as of the
date hereof (or as amended or modified in accordance with this Agreement) (ii)
the sale of the Inglewood Property and the Other Asset Dispositions on terms
approved by Pinnacle's Board of Directors, in good faith, shall not be deemed
to constitute a Significant Takeover Proposal and (iii) any transaction which
would otherwise constitute a Significant Takeover Proposal but which is
consented to by PHCR in writing prior to the initiation of any substantive
negotiations or discussions with respect thereto, shall not be deemed to
constitute a Significant Takeover Proposal.
"SPD" has the meaning set forth in Section 4.10(b)(iv).
"Special Committee" has the meaning set forth in Section 4.5.
"Subsidiary" means, with respect to any Person, (a) any corporation with
respect to which such Person, directly or indirectly through one or more
Subsidiaries, (i) owns more than 50% of the outstanding shares of capital
stock having generally the right to vote in the election of directors or (ii)
has the power, under ordinary circumstances, to elect, or to direct the
election of, a majority of the board of directors of such corporation, (b) any
partnership with respect to which (i) such Person or a Subsidiary of such
Person is a general partner, (ii) such Person and its Subsidiaries together
own more than 50% of the interests therein, or (iii) such Person and its
Subsidiaries have the right to appoint or elect or direct the appointment or
election of a majority of the directors or other Person or body responsible
for the governance or management thereof, (c) any limited liability company
with respect to which (i) such Person or a Subsidiary of such Person is the
manager or managing member, (ii) such Person and its Subsidiaries together own
more than 50% of the interests therein, or (iii) such Person and its
Subsidiaries have the right to appoint or elect or direct the appointment or
election of a majority of the directors or other Person or body responsible
for the governance or management thereof, or (d) any other entity in which
such Person has, and/or one or more of its Subsidiaries have, directly or
indirectly, (i) at least a 50% ownership interest or (ii) the power to appoint
or elect or direct the appointment or election of a majority of
A-7
<PAGE>
the directors or other Person or body responsible for the governance or
management thereof. For purposes of this Agreement, the term "Subsidiary"
shall not include Sunflower Racing, Inc.
"Surveys" has the meaning set forth in Section 7.9(b).
"Takeover Proposal" means (other than the transactions contemplated by this
Agreement) (a) any proposal or offer from any Person relating to any direct or
indirect acquisition or purchase of assets (including capital stock of any
Subsidiaries) of Pinnacle or any of its Subsidiaries comprising 10% or more of
Pinnacle's consolidated assets or of over 10% of any class of equity
securities of Pinnacle or any of its Material Subsidiaries or (b) any tender
offer or exchange offer that if consummated would result in any Person
beneficially owning 10% or more of any class of equity securities of Pinnacle
or any of its Material Subsidiaries or which would require approval under any
Gaming Law, or (c) any merger, consolidation, business combination,
recapitalization, liquidation, dissolution or similar transaction involving
Pinnacle (or any of its Material Subsidiaries) and a third party.
Notwithstanding the foregoing, consummation of (i) the Principal Asset
Dispositions substantially on the terms and subject to the conditions
contained in the applicable Asset Disposition Agreement in effect as of the
date hereof (or as amended or modified in accordance with this Agreement) and
(ii) the sale of the Inglewood Property and the Other Asset Dispositions on
terms approved by Pinnacle's Board of Directors, in good faith, and (iii) any
transaction which would otherwise constitute a Takeover Proposal but which is
consented to by PHCR in writing prior to the initiation of any substantive
negotiations or discussions with respect thereto, shall not be deemed to
constitute a Takeover Proposal.
"Tax" or "Taxes" means all Federal, state, local and foreign taxes and
other assessments and governmental charges of a similar nature, including any
property Tax (whether imposed directly or through withholdings), including any
interest, penalties and additions to Tax applicable thereto.
"Tax Authority" means the Internal Revenue Service and any other domestic
or foreign governmental authority responsible for the administration or
collection of any Taxes.
"Tax Returns" means all Federal, state, local and foreign returns,
declarations, statements, reports, schedules, forms and information returns
relating to Taxes, and all amendments thereto.
"Termination Fee" has the meaning set forth in Section 7.7(b).
"Title Insurer" has the meaning set forth in Section 7.9(a).
"Title Policies" has the meaning set forth in Section 7.9(a).
"Transaction Documents" shall mean the Voting Agreement and the exhibits
thereto.
"Voting Agreement" means that certain Voting and Contribution Agreement,
dated the date hereof, among PHCR and the stockholders of Pinnacle listed on
the signature pages thereto, together with the exhibits thereto.
ARTICLE II
THE PINNACLE MERGER
Section 2.1 The Pinnacle Merger. Upon the terms and subject to the
conditions set forth in this Agreement and the certificate of merger or other
appropriate documents (in any such case, the "Certificate of Merger"), and in
accordance with the applicable provisions of the DGCL, Pinnacle Acq Corp shall
be merged with and into Pinnacle. Following the Pinnacle Merger, Pinnacle
shall continue as the surviving corporation (the "Pinnacle Surviving
Corporation") and the separate existence of Pinnacle Acq Corp will cease.
Section 2.2 Closing. The closing (the "Closing") of the Pinnacle Merger and
the contribution pursuant to the Voting Agreement will take place at 10:00
a.m., Los Angeles time, on a date (the "Closing Date") to be
A-8
<PAGE>
specified by PHCR, which may be on, but shall be no later than the third
business day after, the day on which there shall have been satisfaction or
waiver of the conditions set forth in Article VIII, at the offices of Skadden,
Arps, Slate, Meagher & Flom LLP, 300 South Grand Avenue, Los Angeles,
California 90071, unless another time date or place is agreed to in writing by
the parties hereto.
Section 2.3 Effective Time. On or before the Closing Date the parties shall
file the Certificate of Merger with the Secretary of State of the State of
Delaware in accordance with the provisions of DGCL Section 251 and make all
other filings or recordings required by law in connection with the Pinnacle
Merger. The Pinnacle Merger shall become effective at such time as the
Certificate of Merger is duly filed with the Secretary of State of the State
of Delaware, or at such other later time as the parties shall agree and
specify in the Certificate of Merger (the time the Pinnacle Merger becomes
effective being the "Effective Time").
Section 2.4 Effects of the Pinnacle Merger. The Pinnacle Merger shall have
the effects set forth in the DGCL. Without limiting the generality of the
foregoing, and subject thereto, at the Effective Time, all the properties,
rights, privileges, powers and franchises of Pinnacle and Pinnacle Acq Corp
shall vest in the Pinnacle Surviving Corporation, and all debts, liabilities
and duties of Pinnacle and Pinnacle Acq Corp shall become the debts,
liabilities and duties of the Pinnacle Surviving Corporation.
Section 2.5 Corporate Governance Documents. The Certificate of
Incorporation of Pinnacle Acq Corp, as in effect immediately prior to the
Effective Time of the Pinnacle Merger, shall become the Certificate of
Incorporation of the Pinnacle Surviving Corporation after the Effective Time,
except that such Certificate of Incorporation shall be amended to provide that
the name of the Pinnacle Surviving Corporation shall be a name selected by
Pinnacle Acq Corp prior to the Effective Date, and thereafter may be amended
in accordance with its terms and as provided by law. The By-laws of Pinnacle
Acq Corp as in effect on the Effective Time shall become the By-laws of the
Pinnacle Surviving Corporation and thereafter may be amended in accordance
with its terms and as provided by law.
Section 2.6 Directors. The directors of Pinnacle Acq Corp immediately prior
to the Effective Time shall become the directors of the Pinnacle Surviving
Corporation, and shall serve in such capacity until the earlier of their
resignation or removal or until their respective successors are duly elected
and qualified, as the case may be.
Section 2.7 Officers. The officers of Pinnacle Acq Corp immediately prior
to the Effective Time shall become the officers of the Pinnacle Surviving
Corporation, and shall serve in such capacity until the earlier of their
resignation or removal or until their respective successors are duly elected
and qualified, as the case may be.
Section 2.8 Further Actions. At and after the Effective Time, the Pinnacle
Surviving Corporation shall take all action as shall be required in connection
with the Pinnacle Merger, including, but not limited to, the execution and
delivery of any further deeds, assignments, instruments or documentation as
are necessary or desirable to carry out the provisions of this Agreement.
ARTICLE III
CONVERSION OF SHARES
Section 3.1 Effect on Capital Stock of Pinnacle and Pinnacle Acq Corp. As
of the Effective Time, by virtue of the Pinnacle Merger and without any action
on the part of the holder of any shares of Pinnacle Common Stock or any shares
of capital stock of Pinnacle Acq Corp:
(a) Capital Stock of Pinnacle. Each issued and outstanding share of
Pinnacle Common Stock (other than (i) shares to be canceled in accordance with
Section 3.1(c) and Pinnacle Dissenting Shares, (ii) shares to be
A-9
<PAGE>
redeemed in accordance with Section 6.1(d) of this Agreement but only to the
extent so redeemed immediately prior to the Effective Time, and (iii) the
Shares Contributed (as defined in the Voting Agreement)) shall be converted
into the right to receive from the Pinnacle Surviving Corporation the Pinnacle
Merger Consideration, without interest. The Paying Agent shall withhold or
deduct for Taxes as required under applicable law. As of the Effective Time,
all shares of Pinnacle Common Stock upon which the Pinnacle Merger
Consideration is payable pursuant to this Section 3.1(a) shall no longer be
outstanding and shall automatically be canceled and retired and shall cease to
exist, and each holder of a certificate representing any such shares of
Pinnacle Common Stock shall cease to have any rights with respect thereto,
except the right to receive the Pinnacle Merger Consideration.
(b) Capital Stock of Pinnacle Acq Corp. Each share of the Pinnacle Acq Corp
Common Stock issued and outstanding immediately prior to the Effective Time
shall be converted into and become one fully paid and nonassessable share of
Pinnacle Surviving Corporation Common Stock.
(c) Cancellation of Treasury Stock and Pinnacle Acq Corp Owned Stock. Each
share of Pinnacle Common Stock that is owned by PHCR, Pinnacle or by any
Subsidiary of Pinnacle and each share of Pinnacle Common Stock that is owned
by Pinnacle Acq Corp shall automatically be canceled and retired and shall
cease to exist.
Section 3.2 Exchange of Certificates.
(a) Paying Agent. Immediately prior to the Effective Time, Pinnacle Acq
Corp shall designate a bank or trust reasonably satisfactory to Pinnacle to
act as paying agent in the Pinnacle Merger (the "Paying Agent"), and, on or
prior to the Effective Time, Pinnacle Acq Corp shall deposit with the Paying
Agent immediately available funds (the "Exchange Funds") in an amount
necessary for the payment of the Pinnacle Merger Consideration upon surrender
of certificates representing Pinnacle Common Stock as part of the Pinnacle
Merger pursuant to Section 3.1, it being understood that any and all interest
earned on the Exchange Fund shall be turned over to the Pinnacle Surviving
Corporation.
(b) Exchange Procedure. As soon as reasonably practicable after the
Effective Time, the Pinnacle Surviving Corporation shall cause the Paying
Agent to mail to each holder of record of a certificate or certificates which
immediately prior to the Effective Time represented outstanding shares of
Pinnacle Common Stock (the "Pinnacle Certificates") whose shares were
converted into the right to receive the Pinnacle Merger Consideration pursuant
to Section 3.1, (i) a letter of transmittal (which shall specify that delivery
shall be effected, and risk of loss and title to the Pinnacle Certificates
shall pass, only upon delivery of the Pinnacle Certificates to the Paying
Agent and shall be in such form and have such other customary provisions as
the Pinnacle Surviving Corporation may reasonably specify) and (ii)
instructions for use in effecting the surrender of the Pinnacle Certificates
in exchange for the Pinnacle Merger Consideration. Upon surrender of a
Pinnacle Certificate for cancellation to the Paying Agent or to such other
agent or agents as may be appointed by the Pinnacle Surviving Corporation,
together with such letter of transmittal, duly executed, and such other
documents as may reasonably be required by the Paying Agent, the holder of
such Pinnacle Certificate shall be entitled to receive in exchange therefor
the Pinnacle Merger Consideration into which the shares of capital stock
theretofore represented by such Pinnacle Certificate shall have been converted
pursuant to Section 3.1, and the Pinnacle Certificate so surrendered shall
forthwith be cancelled. The Exchange Agent shall accept such Pinnacle
Certificates upon compliance with such reasonable terms and conditions as the
Exchange Agent may impose to effect an orderly exchange thereof in accordance
with normal exchange practices. In the event of a transfer of ownership of
such capital stock which is not registered in the transfer records of
Pinnacle, payment may be made to a Person other than the Person in whose name
the Pinnacle Certificate so surrendered is registered, if such Pinnacle
Certificate shall be properly endorsed or otherwise be in proper form for
transfer and the Person requesting such payment shall pay any transfer or
other taxes required by reason of the payment to a Person other than the
registered holder of such Pinnacle Certificate or establish to the
satisfaction of the Pinnacle Surviving Corporation that such tax has been paid
or is not applicable. Until surrendered as contemplated by this Section
3.2(b), each Pinnacle Certificate shall be deemed at any time after the
Effective Time to represent only the right to receive upon such surrender the
Pinnacle Merger Consideration, without interest, into which the
A-10
<PAGE>
shares of capital stock theretofore represented by such Pinnacle Certificate
shall have been converted pursuant to Sections 3.1. No interest will be paid
or will accrue on the consideration payable upon the surrender of any Pinnacle
Certificate. The Paying Agent shall withhold or deduct for Taxes as required
under applicable law.
(c) No Further Ownership Rights in Capital Stock. All consideration paid
upon the surrender of Pinnacle Certificates in accordance with the terms of
this Article III shall be deemed to have been paid in full satisfaction of all
rights pertaining to the shares of capital stock theretofore represented by
such Pinnacle Certificates, and there shall be no further registration of
transfers on the stock transfer books of the Pinnacle Surviving Corporation of
the shares of capital stock which were outstanding immediately prior to the
Effective Time. If, after the Effective Time, the Pinnacle Certificates are
presented to the Pinnacle Surviving Corporation or the Paying Agent for any
reason, they shall be cancelled and exchanged as provided in this Article III,
except as otherwise provided by law.
(d) Termination of Exchange Funds. Any portion of the Exchange Funds which
remains undistributed to the holders of the Pinnacle Certificates for twelve
months after the Effective Time shall be delivered to an entity identified in
writing to the Paying Agent by the Pinnacle Surviving Corporation, upon
demand, and any holders of the Pinnacle Certificates who have not theretofore
complied with this Article III shall thereafter look only to the Pinnacle
Surviving Corporation for payment of their claim for the Pinnacle Merger
Consideration, and any cash or dividends or distributions payable to such
holders pursuant to this Article III.
(e) No Liability. None of PHCR, Pinnacle Acq Corp, Pinnacle, the Pinnacle
Surviving Corporation or the Paying Agent shall be liable to any Person in
respect of any cash delivered to a public official pursuant to any applicable
abandoned property, escheat or similar law.
(f) Pinnacle Dissenting Shares. Notwithstanding Section 3.1, shares of
Pinnacle Common Stock which are issued and outstanding immediately prior to
the Effective Time and which are held by a holder who has not voted such
shares in favor of the Pinnacle Merger and who has delivered a written demand
for relief as a dissenting stockholder in the manner provided by the DGCL and
who, as of the Effective Time, shall not have effectively withdrawn or lost
such right to relief as a dissenting stockholder ("Pinnacle Dissenting
Shares") shall not be converted into a right to receive the Pinnacle Merger
Consideration. The holders of such Pinnacle Dissenting Shares shall be
entitled only to such rights as are granted by Section 262 of the DGCL. Each
holder of Pinnacle Dissenting Shares who becomes entitled to payment for such
shares pursuant to Section 262 of the DGCL shall receive payment therefor from
the Surviving Corporation in accordance with the DGCL; provided, however, that
if any such holder of Pinnacle Dissenting Shares (i) shall have failed to
establish his entitlement to relief as a dissenting stockholder as provided in
Section 262 of the DGCL, (ii) shall have effectively withdrawn his demand for
relief as a dissenting stockholder with respect to such Pinnacle Dissenting
Shares or lost his right to relief as a dissenting stockholder and payment for
his Pinnacle Dissenting Shares under Section 262 of the DGCL, or (iii) shall
have failed to file a complaint with the appropriate court seeking relief as
to determination of the value of all Pinnacle Dissenting Shares within the
time provided in Section 262 of the DGCL, such holder shall forfeit the right
to relief as a dissenting stockholder with respect to such shares of Pinnacle
Common Stock and each such share shall be converted into the right to receive
the Pinnacle Merger Consideration without interest thereon, from the Pinnacle
Surviving Corporation as provided in Section 3.1. Pinnacle shall give Pinnacle
Acq Corp prompt written notice of any demands received by Pinnacle for relief
as a dissenting stockholder and Pinnacle Acq Corp shall have the right to
participate in all negotiations and proceedings with respect to such demands.
Pinnacle shall not, except with the prior written consent of Pinnacle Acq
Corp, make any payment with respect to, or settle or offer to settle, any such
demands.
ARTICLE IV
REPRESENTATIONS AND WARRANTIES OF PINNACLE
Except as set forth in the corresponding numbered sections of the
disclosure schedules delivered by Pinnacle to Pinnacle Acq Corp concurrently
with the execution of this Agreement or referenced in the particular section
A-11
<PAGE>
of this Article IV to which exception is being taken, Pinnacle represents and
warrants to Pinnacle Acq Corp as follows:
Section 4.1 Organization, Standing and Corporate Power. Each of Pinnacle
and its Subsidiaries is a corporation, partnership or limited liability
company duly formed or organized, validly existing and in good standing under
the laws of the jurisdiction in which it is formed or organized and has the
requisite corporate, partnership or limited liability company power and
authority to carry on its business as now being conducted. Each of Pinnacle
and its Subsidiaries is duly qualified or licensed to do business and is in
good standing in each jurisdiction in which the nature of its business or the
ownership or leasing of its properties makes such qualification or licensing
necessary, other than in such jurisdictions where the failure to be so
qualified or licensed (individually or in the aggregate) would not have a
material adverse effect on Pinnacle or any Material Subsidiary of Pinnacle.
Pinnacle has made available to Pinnacle Acq Corp complete and correct copies
of the Certificate of Incorporation and By-laws of Pinnacle and the comparable
charter and organizational documents of each of its Subsidiaries, in each case
as amended to the date of this Agreement. The respective certificates of
incorporation and by-laws or other organizational documents of the
Subsidiaries of Pinnacle do not contain any provision limiting or otherwise
restricting the ability of Pinnacle to control such Subsidiaries.
Section 4.2 Subsidiaries. Pinnacle's Subsidiaries identified on Schedule
4.2(a) own or lease all of the material assets, hold all material Permits and
conduct all of the material business and operations of Pinnacle and its
Subsidiaries, taken as a whole (including, without limitation, all business
and operations associated with Pinnacle's Argentina; Bossier City and Harvey,
Louisiana; Bay St. Louis and Biloxi, Mississippi; and Verdi, Nevada casino
resorts and related facilities, Los Angeles card clubs (which Pinnacle owns or
subleases but does not operate), Phoenix, Arizona horse racing facility, the
project in development in Vevay, Indiana and the potential project based in
Lake Charles, Louisiana in which Pinnacle has an option to lease, and the
lending of funds to the Yakima Tribal Gaming Corporation. Each Subsidiary of
Pinnacle is identified on Schedule 4.2(a). All the outstanding equity
interests of each Subsidiary are owned by Pinnacle, by another wholly owned
Subsidiary of Pinnacle or by Pinnacle and another wholly owned Subsidiary of
Pinnacle, free and clear of all Liens, except as set forth on Schedule 4.2(b).
There are no proxies with respect to any shares of any such Subsidiary. There
are no outstanding obligations of Pinnacle or any of its Subsidiaries to
repurchase, redeem or otherwise acquire any outstanding securities of any of
Pinnacle's Subsidiaries or to provide funds to or make any investment (in the
form of a loan, capital contribution or otherwise) in Pinnacle or any of its
Subsidiaries or other Person.
Section 4.3 Capital Structure. The authorized capital stock of Pinnacle
consists of 40,000,000 shares of Pinnacle Common Stock and 250,000 shares of
Pinnacle Preferred Stock. As of April 16, 2000, (a) 26,297,652 shares of
Pinnacle Common Stock and no shares of Pinnacle Preferred Stock were issued
and outstanding, (b) no shares of Pinnacle Common Stock were held by Pinnacle
in its treasury, and (c) 2,556,667 shares of Pinnacle Common Stock were
reserved for issuance upon exercise of outstanding Pinnacle Stock Options. No
other shares of capital stock or other voting securities of Pinnacle are
authorized, issued or outstanding. There are no outstanding stock appreciation
rights, restricted stock grants or contingent stock grants and there are no
other outstanding contractual rights to which Pinnacle is a party, the value
of which is derived from the value of shares of Pinnacle Common Stock. All
outstanding shares of capital stock of Pinnacle are, and all shares which may
be issued upon exercise or conversion of any security issued by Pinnacle (or
any entity in which Pinnacle owns a direct or indirect interest) will be, when
issued, duly authorized, validly issued, fully paid and nonassessable and not
subject to preemptive rights. There are no bonds, debentures, notes or other
indebtedness of Pinnacle having the right to vote (or convertible into, or
exchangeable for, securities having the right to vote) on any matters on which
stockholders of Pinnacle may vote. Except as set forth above, as of the date
of this Agreement, there are no outstanding securities, options, warrants,
calls, rights, commitments, agreements, arrangements or undertakings of any
kind to which Pinnacle or any of its Subsidiaries is a party, or by which any
of them is bound, obligating Pinnacle or any of its Subsidiaries to issue,
deliver or sell, or cause to be issued, delivered or sold, shares of capital
stock or other voting securities of Pinnacle or of
A-12
<PAGE>
any of its Subsidiaries or obligating Pinnacle or any of its Subsidiaries to
issue, grant, extend or enter into any such security, option, warrant, call,
right, commitment, agreement, arrangement or undertaking.
Section 4.4 Authority; Noncontravention. Pinnacle has the requisite
corporate power and authority to enter into this Agreement and, subject to
approval of this Agreement by the Requisite Vote of the outstanding shares of
Pinnacle Common Stock, to consummate the transactions contemplated by this
Agreement. The execution and delivery of this Agreement by Pinnacle and the
consummation by Pinnacle of the transactions contemplated by this Agreement
have been duly authorized by all necessary corporate action on the part of
Pinnacle, subject, in the case of this Agreement, to approval of this
Agreement by the Requisite Vote of the outstanding shares of Pinnacle Common
Stock and the Pinnacle Compliance Committee. This Agreement has been duly
executed and delivered by Pinnacle and, assuming this Agreement constitutes
the valid and binding obligation of the other parties hereto, constitutes the
valid and binding obligation of Pinnacle, enforceable against Pinnacle in
accordance with its terms. The execution and delivery of this Agreement do
not, and the consummation of the transactions contemplated by this Agreement
and compliance with the provisions of this Agreement will not, require notice
or consent under, conflict with, or result in any violation of, or default
(with or without notice or lapse of time, or both) under, or give rise to a
right of termination, cancellation or acceleration of any obligation or to
loss of a material benefit under, or result in the creation of any Lien upon
any of the properties or assets of Pinnacle or any of its Subsidiaries under,
(a) the Certificate of Incorporation or By-laws of Pinnacle or the comparable
charter or organizational documents of any of its Subsidiaries, (b) other than
subject to the governmental filings and other matters referred to in the
following sentence and except as set forth on Schedule 4.4(a), (i) any loan or
credit agreement, note, bond, mortgage, indenture, lease or other agreement or
instrument or (ii) any permit, concession, franchise or license applicable to
Pinnacle or any of its Subsidiaries or their respective properties or assets
or (c) subject to the governmental filings and other matters referred to in
the following sentence, any judgment, order, decree, statute, law, ordinance,
rule or regulation applicable to Pinnacle or any of its Subsidiaries or their
respective properties or assets, other than, in the case of clauses (b) or
(c), any such conflicts, violations, defaults, rights or Liens that
individually or in the aggregate would not (i) have a material adverse effect
on Pinnacle or any of its Material Subsidiaries, (ii) impair in any material
respect the ability of Pinnacle to perform its obligations under this
Agreement or (iii) prevent or impede in any material respect the consummation
of any of the transactions contemplated by this Agreement.
No consent, approval, order or authorization of, or registration,
declaration or filing with, any Governmental Entity is required by Pinnacle or
any of its Subsidiaries in connection with the execution and delivery of this
Agreement by Pinnacle or the consummation by Pinnacle of the transactions
contemplated by this Agreement, except for (A) the filing of a premerger
notification and report form by Pinnacle under the HSR Act, (B) the filing
with the SEC of such reports under Section 14(a) and Rule 13e-3 of the
Exchange Act as may be required in connection with this Agreement and the
transactions contemplated by this Agreement, (C) the filing of the Certificate
of Merger with the Delaware Secretary of State and appropriate documents with
the relevant authorities of other states in which Pinnacle is qualified to do
business, (D) the obtaining of all Gaming Approvals, each of which is set
forth in Schedule 4.4(b) hereto, (E) such filings as may be required by any
applicable state securities or "blue sky" laws, (F) the consents described on
Schedule 4.4(c) hereto and (G) such other consents, approvals, orders,
authorizations, registrations, declarations and filings the failure of which
to be obtained or made would not, individually or in the aggregate, (1) have a
material adverse effect on Pinnacle, (2) impair, in any material respect, the
ability of Pinnacle to perform its obligations under this Agreement or
(3) prevent or significantly delay the consummation of the transactions
contemplated by this Agreement.
Section 4.5 Opinion of Financial Advisor. The Board of Directors of
Pinnacle and a special committee of the Board of Directors of Pinnacle (the
"Special Committee") have received the opinion of Jefferies & Company, Inc.,
dated April 16, 2000 (the "Fairness Opinion"), to the effect that, as of such
date and subject to the assumptions and qualifications contained therein, the
Pinnacle Merger Consideration is fair to the stockholders of Pinnacle, from a
financial point of view. A copy of the Fairness Opinion has been delivered to
Pinnacle Acq Corp.
A-13
<PAGE>
Section 4.6 SEC Documents; Financial Statements. Pinnacle files and has
filed all required reports, proxy statements, forms, and other documents with
the SEC since January 1, 1996 (the "SEC Documents"). Schedule 4.6(a) hereto
sets forth a complete list of all the required reports, proxy statements,
registration statements, forms, and other documents filed with the SEC since
January 1, 1996 through the date hereof (the "Current SEC Documents"). True
and complete copies of all such SEC Documents have been delivered or made
available to Pinnacle Acq Corp. As of their respective dates, (a) the SEC
Documents complied in all material respects with the requirements of the
Securities Act or the Exchange Act, as the case may be, and the rules and
regulations of the SEC promulgated thereunder applicable to such SEC
Documents, and (b) except to the extent that information contained in any SEC
Document has been revised or superseded by a later filed SEC Document filed
and publicly available prior to the date of this Agreement, none of the SEC
Documents contained any untrue statement of a material fact or omitted to
state a material fact required to be stated therein or necessary in order to
make the statements therein, in light of the circumstances under which they
were made, not misleading. The financial statements of Pinnacle included in
the SEC Documents comply as to form in all material respects with applicable
accounting requirements and the published rules and regulations of the SEC
with respect thereto, have been prepared in accordance with generally accepted
accounting principles applied on a consistent basis during the periods
involved and fairly present the consolidated financial position of Pinnacle
and its consolidated Subsidiaries as of the dates thereof and the consolidated
results of their operations and cash flows for the periods then ended
(subject, in the case of unaudited statements, to normal year-end audit
adjustments). Except as set forth in the Current SEC Documents and in Schedule
4.6(b), and except for liabilities and obligations incurred in the Ordinary
Course of Business, and except for the Asset Dispositions and the transactions
occurring in connection with the construction of the Belterra Resort and
Casino and the riverboat at the site of the Belterra Resort and Casino (the
"Indiana Project") and except for transaction expenses incurred in connection
with the transactions contemplated by this Agreement, since the consolidated
balance sheet as of December 31, 1999 included in the Current SEC Documents
(the "Base Balance Sheet"), neither Pinnacle nor any of its Subsidiaries has
incurred any material liabilities or obligations of any nature (whether
accrued, absolute, contingent or otherwise) required by generally accepted
accounting principles to be set forth on a consolidated balance sheet of
Pinnacle and its consolidated Subsidiaries or in the notes thereto.
Section 4.7 Absence of Certain Changes or Events. Except as disclosed in
the Current SEC Documents, filed and publicly available between January 1,
1999 and April 16, 2000, since the date of the Base Balance Sheet, Pinnacle
and its Subsidiaries have conducted their respective businesses only in the
Ordinary Course of Business consistent with past practice, and, except as set
forth in Schedule 4.7, there has not been (a) any material adverse change in
Pinnacle, (b) any declaration, setting aside or payment of any dividend or
other distribution with respect to its capital stock, (c) any split,
combination or reclassification of any of its capital stock or any issuance or
the authorization of any issuance of any other securities in respect of, in
lieu of or in substitution for shares of its capital stock, (d)(i) any
granting by Pinnacle or any of its Subsidiaries to any employee or consultant
of Pinnacle or any of its Subsidiaries of any increase in compensation, except
in the Ordinary Course of Business consistent with past practice (including in
connection with promotions) or as was required under employment agreements in
effect as of the date of the Base Balance Sheet, (ii) any granting by Pinnacle
or any of its Subsidiaries to any of their respective employees or consultant
of any increase in severance or termination pay, except as part of a standard
employment package to any Person promoted or hired, or as was required under
employment, severance or termination agreements in effect as of the date of
the Base Balance Sheet or (iii) any entry by Pinnacle or any of its
Subsidiaries into any employment, severance or termination agreement with any
executive officer of Pinnacle or any of its Subsidiaries, (e) any damage,
destruction or loss affecting the businesses or assets of Pinnacle or any of
its Subsidiaries, whether or not covered by insurance, that has or reasonably
could be expected to have a material adverse effect on Pinnacle or any
Subsidiary, (f) any change in accounting methods, principles or practices by
Pinnacle affecting its assets, liabilities or business (g) entry into any
commitment or transaction material to Pinnacle and its Subsidiaries taken as a
whole (including, without limitation, any borrowing or sale of assets) except
in the Ordinary Course of Business, (h) any incurrence, assumption or
guarantee by Pinnacle or any of its Subsidiaries of any indebtedness in excess
of $1,000,000, other than in the Ordinary Course of Business and in amounts
and on terms consistent with past practices, (i) any creation or assumption by
Pinnacle or any of its Subsidiaries of any material Lien on any material asset
other
A-14
<PAGE>
than in the Ordinary Course of Business or (j) any making of any loan, advance
or capital contributions to or investment in excess of $500,000 in any Person,
other than loans, advances or capital contributions to or investments in
wholly owned Subsidiaries of Pinnacle (and Belterra Resorts Indiana, LLC) made
in the Ordinary Course of Business consistent with past practice.
Section 4.8 Litigation. Other than the suits, actions and proceedings set
forth on Schedule 4.8(b), Schedule 4.8(a) (Section 1) sets forth all material
suits, actions and proceedings pending or, to the knowledge of Pinnacle,
threatened against Pinnacle or any of its Material Subsidiaries, none of
which, individually or in the aggregate other than as set forth on Schedule
4.8(a) (Section 2), would reasonably be expected to have a material adverse
effect on Pinnacle or any of its Material Subsidiaries, including with respect
to its licenses, permits, registration or other gaming approvals under the
Gaming Laws. Schedule 4.8(b) sets forth all suits, actions and proceedings
pending or, to the knowledge of Pinnacle, threatened against Pinnacle or any
of its Subsidiaries in connection with the transactions contemplated by this
Agreement on the date hereof. Schedule 4.8(c) (Section 1) sets forth all
material judgments, decrees, injunctions, rules or orders (other than rules
and orders issued in the Ordinary Course of Business of Pinnacle or its
Material Subsidiaries which do not result from a violation of law) of any
Governmental Entity or arbitrator outstanding against Pinnacle or any of its
Subsidiaries, other than as set forth on Schedule 4.8(c) (Section 2), none of
which, individually or in the aggregate, would reasonably be expected to have
a material adverse effect on Pinnacle or any of its Subsidiaries, including
with respect to its licenses, permits, registration or other gaming approvals
under the Gaming Laws.
Section 4.9 Absence of Changes in Benefit Plans. Except as set forth in
Schedule 4.9 or as otherwise expressly permitted hereunder, there has not been
any adoption or amendment by Pinnacle or any of its Subsidiaries of any Plan
since the date of the Base Balance Sheet. All employment, consulting,
severance, termination or indemnification agreements, arrangements or
understandings between Pinnacle or any of its Subsidiaries which are required
to be disclosed in the Current SEC Documents have been fully and properly
disclosed therein.
Section 4.10 Employee Benefits; ERISA.
(a) Schedule 4.10(a) contains a true and complete list of each employment,
consulting, bonus, deferred compensation, incentive compensation, stock
purchase, stock option, stock appreciation right or other stock-based
incentive, severance, change-in-control or termination pay, hospitalization or
other medical, disability, life or other insurance, supplemental unemployment
benefits, profit-sharing, pension, or retirement plan, program, agreement or
arrangement, and each other employee benefit plan, program, agreement or
arrangement, sponsored, maintained or contributed to or required to be
contributed to by Pinnacle or any of its Subsidiaries, or by any trade or
business, whether or not incorporated, that together with Pinnacle or any of
its Subsidiaries would be deemed to comprise a controlled group or affiliated
service group or be deemed to be under common control or otherwise aggregated
for purposes of Sections 414(b), (c), (m) or (o) of the Code (an "ERISA
Affiliate"), for the benefit of any current or former employee or director of
Pinnacle, or any of its Subsidiaries or any ERISA Affiliate (the "Plans").
Schedule 4.10(a) identifies each of the Plans that is an "employee welfare
benefit plan," or "employee pension benefit plan" as such terms are defined in
Sections 3(1) and 3(2) of ERISA (such plans being hereinafter referred to
collectively as the "ERISA Plans"). None of the Plans is subject to Title IV
of ERISA. None of Pinnacle, any of its Subsidiaries nor any ERISA Affiliate
has any formal plan or commitment, whether legally binding or not, to create
any additional Plan or modify or change any existing Plan that would affect
any current or former employee or director of Pinnacle, any of its
Subsidiaries or any ERISA Affiliate.
(b) With respect to each of the Plans, Pinnacle has heretofore delivered or
as promptly as practicable after the date hereof shall deliver to Pinnacle Acq
Corp true and complete copies of each of the following documents, as
applicable:
(i) a copy of the Plan documents (including all amendments thereto) for
each written Plan or a written description of any Plan that is not
otherwise in writing;
A-15
<PAGE>
(ii) a copy of the annual report or Internal Revenue Service Form 5500
Series, if required under ERISA, with respect to each ERISA Plan for the
last three Plan years ending prior to the date of this Agreement for which
such a report was filed;
(iii) a copy of the actuarial report, if required under ERISA, with
respect to each ERISA Plan for the last three Plan years ending prior to
the date of this Agreement;
(iv) a copy of the most recent Summary Plan Description ("SPD"),
together with all Summaries of Material Modification issued with respect to
such SPD, if required under ERISA, with respect to each ERISA Plan, and all
other material employee communications relating to each ERISA Plan;
(v) if the Plan is funded through a trust or any other funding vehicle,
a copy of the trust or other funding agreement (including all amendments
thereto) and the latest financial statements thereof, if any;
(vi) all contracts relating to the Plans with respect to which Pinnacle,
any of its Subsidiaries or any ERISA Affiliate may have any liability,
including insurance contracts, investment management agreements,
subscription and participation agreements and record keeping agreements;
and
(vii) the most recent determination letter received from the IRS with
respect to each Plan that is intended to be qualified under Section 401(a)
of the Code.
(c) No liability under Title IV of ERISA has been incurred by Pinnacle, any
of its Subsidiaries or any ERISA Affiliate since the effective date of ERISA
that has not been satisfied in full, and no condition exists that presents a
material risk to Pinnacle, or any of its Subsidiaries or any ERISA Affiliate
of incurring any liability under such Title. To the extent this representation
applies to Sections 4064, 4069 or 4204 of Title IV of ERISA, it is made not
only with respect to the ERISA Plans but also with respect to any employee
benefit plan, program, agreement or arrangement subject to Title IV of ERISA
to which Pinnacle, any of its Subsidiaries or any ERISA Affiliate made, or was
required to make, contributions during the past six years. All such plans,
programs, agreements or arrangements are listed on Schedule 4.10(c).
(d) None of Pinnacle, any of its Subsidiaries, any ERISA Affiliate, any of
the ERISA Plans, any trust created thereunder, nor to Pinnacle's knowledge,
any trustee or administrator thereof has engaged in a transaction or has taken
or failed to take any action in connection with which Pinnacle, any of its
Subsidiaries, any ERISA Affiliate, any ERISA Plan or any such trust could be
subject to any material liability for either a civil penalty assessed pursuant
to Section 409 or 502(i) of ERISA or a tax imposed pursuant to Section 4975(a)
or (b), 4976 or 4980B of the Code.
(e) All contributions which Pinnacle, any of its Subsidiaries or any ERISA
Affiliate is required to pay under the terms of each of the ERISA Plans have
been timely paid in full or properly recorded on the financial statements or
records of Pinnacle or its Subsidiaries.
(f) Each of the Plans has been operated and administered in all material
respects in accordance with applicable Laws, including but not limited to
ERISA and the Code.
(g) There has been no material failure by any of the ERISA Plans that is
intended to be "qualified" within the meaning of Section 401(a) of the Code to
meet the requirements of such qualification. Except as disclosed on Schedule
4.10(g) hereto, Pinnacle has applied for and received a currently effective
determination letter from the IRS stating that it is so qualified, and no
event has occurred which would affect such qualified status.
(h) Except as disclosed on Schedule 4.10(h), no Plan provides benefits,
including without limitation death or medical benefits (whether or not
insured), with respect to current or former employees of Pinnacle, its
Subsidiaries or any ERISA Affiliate after retirement or other termination of
service (other than (i) coverage mandated by applicable Laws, (ii) death
benefits or retirement benefits under any "employee pension plan," as that
term is defined in Section 3(2) of ERISA, or (iii) benefits, the full direct
cost of which is borne by the current or former employee (or beneficiary
thereof)).
A-16
<PAGE>
(i) Except as disclosed on Schedule 4.10(i), the consummation of the
transactions contemplated by this Agreement will not (i) entitle any current
or former employee, officer or director of Pinnacle, any of its Subsidiaries
or any ERISA Affiliate to severance pay, unemployment compensation or any
other similar termination payment, or (ii) accelerate the time of payment or
vesting, or increase the amount of or otherwise enhance any benefit due, or
any option or other equity security held by, any such employee, officer or
director.
(j) There are no pending or, to Pinnacle's knowledge, threatened or
anticipated claims by or on behalf of any Plan, by any employee or beneficiary
under any such Plan or otherwise involving any such Plan (other than routine
claims for benefits).
Section 4.11 Taxes.
(a) Each of Pinnacle and its Subsidiaries has timely filed (or has had
timely filed on its behalf) or will file or cause to be timely filed, all
material Tax Returns required by applicable law to be filed by it prior to or
as of the Closing Date. All such Tax Returns and amendments thereto are, or
will be before the Closing Date, true, complete and correct in all material
respects, except to the extent reserved as set forth in Section 4.11(b).
(b) Each of Pinnacle and its Subsidiaries has paid (or has had paid on its
behalf), or has established (or has had established on its behalf and for its
sole benefit and recourse), or will establish or cause to be established on or
before the Closing Date, adequate reserves in accordance with generally
accepted accounting principles on the balance sheets that are included in the
Current SEC Documents for the payment of, all material Taxes due with respect
to any period ending prior to or as of the Closing Date.
(c) Except as set forth in Schedule 4.11(c), (i) no Audit by a Tax
Authority is pending or threatened with respect to any material Taxes due from
Pinnacle or any of its Subsidiaries, (ii) there are no outstanding waivers
extending the statutory period of limitation relating to the payment of
material Taxes due from Pinnacle or any of its Subsidiaries for any taxable
period ending prior to the Closing Date which are expected to be outstanding
as of the Closing Date, and (iii) no issue has been raised by any Tax
Authority in any Audit of Pinnacle or any of its Subsidiaries that if raised
with respect to any other period not so audited could be expected to result in
a material proposed deficiency for any period not so audited.
(d) Except as set forth on Schedule 4.11(d), no deficiency or adjustment
for any Taxes has been proposed, asserted or assessed against Pinnacle or any
of its Subsidiaries that has not been resolved or paid or for which an
adequate accrual has not been established in accordance with generally
accepted accounting principles which would reasonably be expected to have a
material adverse effect on Pinnacle. There are no Liens for Taxes upon the
assets of Pinnacle or any of its Subsidiaries, except Liens for current Taxes
not yet due and payable and for which adequate accruals have been established
in accordance with generally accepted accounting principles.
(e) Except as set forth on Schedule 4.11(e), all Tax sharing agreements,
Tax indemnity agreements and similar agreements to which Pinnacle or any of
its Subsidiaries is a party are disclosed in the Current SEC Documents.
Section 4.12 Environmental Matters.
(a) Each of Pinnacle and the Material Subsidiaries is in substantial
compliance with all applicable Federal, state, local and foreign laws and
regulations relating to pollution or protection of human health or the
environment, including, without limitation, ambient air, surface water, ground
water, land surface or subsurface strata, and natural resources (together
"Environmental Laws" and including, without limitation, laws and regulations
relating to emissions, discharges, releases or threatened releases of
chemicals, pollutants, contaminants, wastes, toxic or hazardous substances or
wastes, petroleum and petroleum products, polychlorinated biphenyls ("PCBs"),
or asbestos or asbestos-containing materials ("Materials of Environmental
Concern")), or otherwise relating to the manufacture, processing,
distribution, use, treatment, storage, disposal, transport or handling of
Materials of Environmental Concern, except for such non-compliance as would
not be
A-17
<PAGE>
reasonably likely to result in liability to Pinnacle or any Material
Subsidiary of more than $100,000 on an individual basis or more than $250,000
in the aggregate. Such compliance includes, but is not limited to, the
possession by Pinnacle and the Material Subsidiaries of all permits and other
governmental authorizations required under all applicable Environmental Laws,
and substantial compliance with the terms and conditions thereof, except for
such non-compliance as would not be reasonably likely to result in liability
to Pinnacle or any Material Subsidiary of more than $100,000 on an individual
basis or more than $250,000 in the aggregate.
(b) Neither Pinnacle nor any of its Material Subsidiaries has received any
communication (written or oral, in the case of oral, only such as would
reasonably be likely to result in a cause of action or written claim or
violation), whether from a governmental authority, citizens group, employee or
otherwise, that alleges that Pinnacle or any such Material Subsidiary is not
in substantial compliance with any Environmental Laws, and, to the knowledge
of Pinnacle, there are no circumstances that may prevent or interfere with
such compliance in the future, except for such non-compliance as would not be
reasonably likely to result in liability to Pinnacle or any Material
Subsidiary of more than $100,000 on an individual basis or more than $250,000
in the aggregate. To Pinnacle's knowledge after reasonable efforts, Pinnacle
has provided to Pinnacle Acq Corp all environmental site assessment reports
(such as "Phase I" or "Phase II" reports) and all reports regarding the
investigation or remediation of Materials of Environmental Concern in soil or
ground water, including documentation of soil or ground water sampling and
analysis (or portions of all of the foregoing as may exist in Pinnacle's
files), in Pinnacle's possession, except for such reports that do not reveal
any conditions not generally disclosed in reports previously provided to
Pinnacle Acq Corp or on Schedule 4.12 with respect to the Cypress
Fee/Inglewood Gas Plant Area and Boomtown, Verdi properties only, and except
for such reports that do not reveal new conditions that, individually or in
the aggregate, would be reasonably expected to result in liability to Pinnacle
or any Material Subsidiary of more than $25,000. Notwithstanding the
foregoing, Pinnacle will use its best efforts to timely provide all such
reports to Pinnacle Acq Corp.
(c) There is no claim, action, cause of action, notice of investigation or
other notice (written or oral, in the case of oral, only such as would
reasonably be likely to result in a cause of action or written claim or
violation) (together "Environmental Claim") that has been received by Pinnacle
or any Material Subsidiary by any Person or entity alleging potential
liability (including, without limitation, potential liability for
investigatory costs, cleanup costs, governmental response costs, natural
resources damages, property damages, personal injuries, or penalties) arising
out of, based on or resulting from (i) the presence, or release into the
environment, of any Material of Environmental Concern at any location, whether
or not owned or operated by Pinnacle or (ii) circumstances forming the basis
of any violation, or alleged violation, of any Environmental Law, that in
either case is pending or to Pinnacle's knowledge, threatened against Pinnacle
or any of its Material Subsidiaries or against any Person or entity whose
liability for any Environmental Claim Pinnacle or any of its Material
Subsidiaries has retained or assumed either contractually or by operation of
law, which matters referred to in clauses (i) and (ii) would be reasonably
likely to result in liability to Pinnacle or any Material Subsidiary of more
than $50,000 on an individual basis or more than $100,000 in the aggregate.
(d) To Pinnacle's knowledge, there are no past or present actions,
activities, circumstances, conditions, events or incidents, including, without
limitation, the release, emission, discharge, presence or disposal of any
Material of Environmental Concern, that would reasonably be expected to result
in liability to Pinnacle or any Material Subsidiary of more than $250,000 on
an individual basis or more than $500,000 in the aggregate.
(e) To Pinnacle's knowledge after reasonable efforts, all underground
storage tanks located on any property owned, leased, operated or controlled by
Pinnacle or any of its Subsidiaries are identified in Paragraph 7 of Schedule
4.12.
Section 4.13 Permits; Compliance with Laws.
(a) Since January 1, 1997, each of Pinnacle, its Subsidiaries and their
respective officers, directors and other personnel has in effect all Federal,
state, local and foreign governmental approvals, authorizations, certificates,
filings, franchises, orders, registrations, findings of suitability, licenses,
notices, permits, applications and rights,
A-18
<PAGE>
including all authorizations under any applicable Law, including, without
limitation, any applicable Gaming Laws ("Permits"), necessary for Pinnacle and
its Subsidiaries to own, lease or operate their properties and assets and to
carry on their business as now conducted, other than such Permits the absence
of which would not, individually or in the aggregate, have a material adverse
effect on Pinnacle or any of its Material Subsidiaries, and there has occurred
no default under any such Permit other than such defaults which, individually
or in the aggregate, would not have a material adverse effect on Pinnacle or
any of its Material Subsidiaries, result in a limitation or condition on any
Permit or result in the imposition of a fine or penalty in excess of $50,000
against Pinnacle or any of its Material Subsidiaries. To the knowledge of
Pinnacle, no event has occurred, and no facts or circumstances exist, which
would adversely affect the ability of Pinnacle to obtain all necessary Permits
to allow Pinnacle to conduct its business with respect to the Indiana Project,
in the manner Pinnacle proposes to conduct such business. To the knowledge of
Pinnacle, no event has occurred which permits, or upon the giving of notice or
passage of time or both would permit, revocation, non-renewal, modification,
suspension or termination of any Permit that currently is in effect the loss
of which either individually or in the aggregate would reasonably be expected
to have a material adverse effect on Pinnacle or any of its Material
Subsidiaries. Neither Pinnacle nor any of its Material Subsidiaries knows of
any facts, which, if known to any Gaming Authority, would reasonably be
expected to result in the revocation or suspension of a Permit under any
Gaming Laws or would reasonably be expected to disqualify it or them from
licensing under any Gaming Laws, except such revocations, suspensions or
disqualifications as could not be reasonably expected to have a material
adverse effect on Pinnacle or any of its Material Subsidiaries. All such
Permits are held only by Pinnacle or a Subsidiary of Pinnacle. Pinnacle, its
Subsidiaries and their respective officers, directors and other key personnel
are in compliance with all applicable statutes, laws, ordinances, rules,
orders and regulations of any Governmental Entity, except for possible
noncompliance which individually or in the aggregate would not have a material
adverse effect on Pinnacle or any of its Material Subsidiaries.
(b) Except as set forth on Schedule 4.13, each of Pinnacle, its
Subsidiaries and their respective officers, directors and other key personnel
is in compliance with all applicable Law, including any applicable Gaming
Laws, except for possible noncompliance which, individually or in the
aggregate, would not have a material adverse effect on Pinnacle or any of its
Material Subsidiaries, result in a limitation or condition on any Permit or
result in the imposition of a fine or penalty in excess of $50,000 against
Pinnacle or any of its Subsidiaries for which an accrual has not been
established under generally accepted accounting principles.
(c) Neither Pinnacle, any Subsidiary of Pinnacle nor any officer or
director of Pinnacle or any Subsidiary of Pinnacle has received any written
claim, demand, notice, complaint, court order or administrative order from any
Governmental Entity in the past three years, which remains unresolved on the
date hereof or which was not favorably disposed of, asserting that a material
Permit of it or them, as applicable, under any Laws, including any Gaming Laws
should be limited, revoked or suspended. No investigation or review by any
Governmental Entity with respect to Pinnacle or any of its Subsidiaries is
pending, or, to the best knowledge of Pinnacle, threatened, nor has any
Governmental Entity indicated to Pinnacle an intention to conduct the same,
other than those the outcome of which would not, individually or in the
aggregate, reasonably be expected to have a material adverse effect on
Pinnacle or any of its Material Subsidiaries.
Section 4.14 State Takeover Statutes. Assuming none of Pinnacle Acq Corp,
PHCR or Colony III has owned 15% or more of Pinnacle's capital stock at any
point during the last three years, Pinnacle and the Board of Directors of
Pinnacle, including the Special Committee, have each taken all action required
to be taken in order to exempt this Agreement (as it may be amended from time
to time), and the transactions contemplated hereby (excluding the Harveys
Merger) from, and this Agreement and the transactions contemplated hereby
(excluding the Harveys Merger) are exempt from, the requirements of the
provisions of Section 203 of the DGCL and other antitakeover laws and
regulations of any U.S. state, including without limitation the State of
Delaware. Pinnacle has heretofore delivered to Pinnacle Acq Corp complete and
correct copies of a resolution of the Board of Directors of Pinnacle, and of
the Special Committee that Section 203 of the DGCL and all other antitakeover
laws and regulations of any U.S. state, including without limitation the State
of Delaware, are and shall be inapplicable to the Pinnacle Merger and the
transactions contemplated by this Agreement (excluding the Harveys Merger), as
this Agreement may be amended from time to time.
A-19
<PAGE>
Section 4.15 Brokers. Schedule 4.15 sets forth any broker's, finder's,
financial advisor's or other similar fee or commission payable in connection
with the transactions contemplated by this Agreement based upon arrangements
made by or on behalf of Pinnacle or any of its Subsidiaries. Pinnacle has
provided Pinnacle Acq Corp true and correct copies of all agreements between
Pinnacle and any Person listed on Schedule 4.15 hereto.
Section 4.16 Trademarks, etc. Except as disclosed on Schedule 4.16, the
material patents, trademarks (registered or unregistered), trade names,
service marks and copyrights and applications therefor owned, used or filed by
or licensed to Pinnacle and its Material Subsidiaries (collectively,
"Intellectual Property Rights") are sufficient to allow each of Pinnacle and
its Material Subsidiaries exclusive use thereof and to conduct, and continue
to conduct, its business as currently conducted or as Pinnacle proposes to
conduct such business. Each of Pinnacle and its Material Subsidiaries owns or
has unrestricted right to use the Intellectual Property Rights in order to
allow it to conduct, and continue to conduct, its business as currently
conducted or as Pinnacle proposes to conduct such business, and the
consummation of the transactions contemplated hereby will not alter or impair
such ability in any respect which individually or in the aggregate would be
reasonably likely to have a material adverse effect on Pinnacle. Neither
Pinnacle nor any of its Subsidiaries has received any written notice from any
other Person pertaining to or challenging the right of Pinnacle or any of its
Subsidiaries to use any of the Intellectual Property Rights, which challenge
or other assertion, if upheld or successful, individually or in the aggregate
would be reasonably likely to have a material adverse effect on Pinnacle.
Except as disclosed on Schedule 4.16, no claims are pending by any Person with
respect to the ownership, validity, enforceability or use of any such
Intellectual Property Rights challenging or questioning the validity or
effectiveness of any of the foregoing which claims would reasonably be
expected to have a material adverse effect on Pinnacle. Neither Pinnacle nor
any of its Subsidiaries has made any claim of a violation or infringement by
others of its rights to or in connection with the Intellectual Property Rights
in any such case where such claims (individually or in the aggregate) would
reasonably be expected to have a material adverse effect on Pinnacle.
Section 4.17 Title to Properties.
(a) Schedule 4.17(a) sets forth a complete list of all real property and
interests in real property owned in fee by Pinnacle or one of its Subsidiaries
(collectively, the "Owned Properties") and sets forth all real property and
interests in real property leases, licenses or similar interests held by
Pinnacle or any of its Subsidiaries (collectively, the "Leased Properties" and
together with the Owned Properties, the "Real Properties") as of the date
hereof.
(b) Except as disclosed in Schedule 4.17(b), each of Pinnacle and each of
its Subsidiaries has sufficiently good and valid title to the Owned
Properties, an adequate leasehold, license or similar interest in each of the
Leased Properties, and such Real Properties allow Pinnacle and each of its
Subsidiaries to conduct, and continue to conduct, its business as currently
conducted or, with respect to the Indiana Project, as Pinnacle proposes to
conduct such business. Each Real Property is sufficiently free of Liens to
allow each of Pinnacle and each of its Subsidiaries to conduct, and continue
to conduct, its business as currently conducted, or, with respect to the
Indiana Project, as Pinnacle proposes to conduct such business, and, subject
to obtaining the required consents, the consummation of the transactions
contemplated by this Agreement will not alter or impair such ability in any
respect which individually or in the aggregate would be reasonably likely to
have a material adverse effect on Pinnacle or any of its Material
Subsidiaries. Pinnacle and its Subsidiaries hold their respective interests in
each of the Real Properties subject only to the Permitted Liens and the Bank
Credit Facility. Each of Pinnacle and its Subsidiaries enjoys peaceful and
undisturbed possession of each of the Real Properties, except for such
breaches of the right to peaceful and undisturbed possession that do not
materially interfere with the ability of Pinnacle and its Subsidiaries to
conduct its business as currently conducted on such Real Property or, with
respect to the Indiana Project, as Pinnacle proposes to conduct such business.
Except as disclosed on Schedule 4.17(b), there is no pending or, to Pinnacle's
knowledge, contemplated condemnation, eminent domain or similar proceeding or
special assessment which would have a material adverse effect on any of the
Real Properties owned by Pinnacle or its Subsidiaries on a project-by-project
basis. Except as disclosed in Schedule 4.17(b), each Leased Property is
subject to a lease, license or other agreement (collectively, the "Existing
Leases") which is in full force and effect and has not been amended except as
disclosed in Schedule 4.17(a), and, to Pinnacle's knowledge, no party
A-20
<PAGE>
thereto is in default or breach under any such Existing Lease. To Pinnacle's
knowledge, no event has occurred which, with the passage of time or the giving
of notice or both, would cause a breach of or default under any of such
Existing Leases. With respect to each parcel of Real Property, (i) except as
set forth on Schedule 4.17(b), neither Pinnacle nor any of its Subsidiaries
has entered into any material outstanding contract for construction on any
such parcel other than the Indiana Project; (ii) all improvements, buildings
and systems (including, without limitation, heating, air conditioning,
electrical and plumbing) on any such parcel are in operating condition, normal
wear and tear excepted, except where such non-operational condition would not
have a material adverse effect on any of the Real Properties owned by Pinnacle
or its Subsidiaries (on a project-by-project basis), and to Pinnacle's
knowledge are safe for their current occupancy and use; (iii) except as
disclosed on the surveys previously delivered by Pinnacle to Pinnacle Acq Corp
and for minor encroachments, the buildings and improvements located on each
such parcel (A) are located within the boundary lines of such parcel and, to
Pinnacle's knowledge, are not in violation of applicable setback requirements,
local comprehensive plan provisions, zoning laws and ordinances, building code
requirements, permits, licenses or other forms of approval, regulation or
restrictions by any Governmental Entity, and (B) do not encroach on any
easement which may burden the land, except in each of (A) and (B), where such
violations or encroachments would not have a material adverse effect on any of
the Real Properties owned by Pinnacle or its Subsidiaries(on a project-by-
project basis); and (iv) neither Pinnacle nor its Subsidiaries has received
from any party or Governmental Entity any written notice of any material
violation of applicable setback requirements, local comprehensive plan
provisions, zoning laws and ordinances, or building code requirements, which
has not been remedied; (v) all facilities located on each parcel of the Real
Properties have received all material approvals of Governmental Entities
(including, without limitation, certificates of occupancy, licenses and
permits) required in connection with the ownership, operation or use thereof
and have been operated and maintained in accordance with applicable laws,
ordinances, rules and regulations or any violations thereof have been cured
except where non-compliance would not have a material adverse effect on any of
the Real Property (on a project-by-project basis); (vi) except as set forth on
Schedule 4.17(c), there are no leases, license or other agreements (other than
concession agreements and contracts with parties providing entertainment to
the patrons of the Real Properties) granting to any party or parties the right
of use or occupancy of any portion exceeding five percent (5%) of the gross
revenues of such Real Property on a project-by-project basis; (vii) except as
set forth on Schedule 4.17(d), there are no outstanding options or rights of
first refusal or similar rights to purchase any such parcel or any portion
thereof or interest therein; (viii) all facilities located on each parcel of
Real Property are connected to and supplied with utilities and other services
necessary for their ownership, operation or use, all of which services are
adequate to conduct business at each of the Real Properties as currently
conducted in accordance with all applicable laws, ordinances, rules and
regulations, except where non-compliance would not have a material adverse
effect on such Real Property; and (x) to Pinnacle's knowledge, no Real
Property has any physical defect or condition which would materially impair
the current use of such Real Property.
(c) The parcels constituting the Owned Properties are assessed separately
from all other adjacent property for purposes of real property taxes.
(d) There are no material commitments to or agreements between Pinnacle or
any of its Subsidiaries and any Governmental Entity affecting the Real
Property which are not listed in any schedule to this Agreement or described
in the SEC Documents.
(e) Except as disclosed in Schedule 4.17(e) or as shown in the policies of
title insurance, surveys or preliminary title reports (if more recent)
delivered previously to Pinnacle Acq Corp, there are no commitments,
agreements, understandings or other restrictions materially adversely
affecting the ability of Pinnacle or any of its Subsidiaries, as applicable,
to continue to utilize the Real Property as it is currently being utilized or,
with respect to the Indiana Project, to improve or develop such Real Property
in the manner currently contemplated.
Section 4.18 Insurance. To the knowledge of Pinnacle, Pinnacle and its
Subsidiaries have obtained and maintained in full force and effect insurance
with responsible and reputable insurance companies or associations in such
amounts, on such terms and covering such risks, including fire and other risks
insured against by extended coverage, as is customarily carried by Persons
conducting businesses similar to those of Pinnacle in the
A-21
<PAGE>
locations in which Pinnacle conducts its businesses and each has maintained in
full force and effect public liability insurance, insurance against claims for
personal injury or death or property damage occurring in connection with any
of the activities of Pinnacle or its Subsidiaries or any of any properties
owned, occupied or controlled by Pinnacle or its Subsidiaries, in such amount
as reasonably deemed necessary by Pinnacle or its Subsidiaries or as may be
required by a lender under any and all documents evidencing any loan or credit
facility to which Pinnacle or its Subsidiaries is a party or by a landlord
under any lease or similar arrangement to which Pinnacle or its Subsidiaries
is a party. Except as set forth on Schedule 4.18(a), there is no claim by
Pinnacle or any of its Subsidiaries pending under any of such policies or
bonds as to which coverage has been questioned, denied or disputed by the
underwriters of such policies or bonds, except such claims that, individually
and in the aggregate, are not having and could not reasonably be expected to
have a material adverse effect on Pinnacle. All premiums payable under all
such policies and bonds have been paid or financed by Pinnacle or one of
Pinnacle's Subsidiaries. Pinnacle does not know of any threatened termination
of, or premium increase with respect to, any of such policies or bonds, except
such terminations or premium increases that, individually and in the aggregate
could not reasonably be expected to have a material adverse effect on
Pinnacle. Except as set forth on Schedule 4.18(b), Pinnacle does not know of
any pending or threatened uninsured claims which individually or in the
aggregate could be reasonably excepted to have a material adverse effect on
Pinnacle.
Section 4.19 Contracts; Debt Instruments. Except as disclosed in the
Current SEC Documents or set forth in Schedule 4.19(a), there are no (a)
agreements of Pinnacle or any of its Subsidiaries containing an unexpired
covenant not to compete or similar restriction applying to Pinnacle or any of
its Subsidiaries, (b) interest rate, currency or commodity hedging, swap or
similar derivative transactions to which Pinnacle is a party, (c) other
material contracts or amendments thereto that would be required to be filed as
an exhibit to a Form 10-K filed by Pinnacle with the SEC on or prior to the
date of this Agreement and which have not been so filed, (d) written
agreements to which Pinnacle or any of its Material Subsidiaries is a party
which, by its terms, directly obligates any stockholder of Pinnacle with
respect to any of the obligations of Pinnacle or any of its Material
Subsidiaries under such agreement or (e) agreements, contracts, indentures or
other instruments (i) relating to any liabilities or obligations, contingent
or otherwise, of Pinnacle or any of its Material Subsidiaries, including those
(A) evidenced by bankers' acceptances or similar instruments issued or
accepted by banks, (B) relating to any capitalized lease obligations or (C)
evidenced by a letter of credit or a reimbursement obligation of such Person
with respect to any letter of credit, (ii) in respect of borrowed money, (iii)
evidenced by bonds, notes, debentures or similar instruments, (iv)
representing the balance deferred and unpaid of the purchase price of any
property or services, except (other than accounts payable or other obligations
to trade creditors which have remained unpaid for greater than 60 days past
their original due date) those incurred in the Ordinary Course of Business
that would constitute ordinarily a trade payable to trade creditors; (v) all
liabilities and obligations of others of the kind described in the preceding
clause (i), (ii), (iii) or (iv) that Pinnacle or any of its Material
Subsidiaries has guaranteed or that is otherwise their respective legal
liability or which are secured by any assets or property of Pinnacle or any of
its Material Subsidiaries. Each of the material agreements to which Pinnacle
or any of its Material Subsidiaries is a party is a valid and binding
obligation of Pinnacle or its Material Subsidiary, as the case may be, and, to
Pinnacle's knowledge, of each other party thereto, and each such agreement is
in full force and effect and is enforceable by Pinnacle or its Material
Subsidiary in accordance with its terms, except that (i) such enforcement may
be subject to bankruptcy, insolvency, reorganization, moratorium or other
similar laws now or hereafter in effect relating to creditors' rights
generally and (ii) the remedy of specific performance and injunctive relief
may be subject to equitable defenses and to the discretion of the court before
which any proceeding therefor may be brought. Except as set forth on Schedule
4.19(b), there are no existing defaults (or circumstances or events that, with
the giving of notice or lapse of time or both would become defaults) of
Pinnacle or any of its Material Subsidiaries (or, to the knowledge of
Pinnacle, any other party thereto) under any such agreements except for
defaults that have not and would not, individually or in the aggregate, have a
material adverse effect on Pinnacle or any Material Subsidiary.
Section 4.20 Board Consent and Recommendation. The Board of Directors of
Pinnacle has determined that the Pinnacle Merger, this Agreement and the
transactions contemplated by this Agreement are advisable and fair to and in
the best interests of the stockholders of Pinnacle and resolved to recommend
that the stockholders
A-22
<PAGE>
of Pinnacle approve the Pinnacle Merger, this Agreement and the transactions
contemplated by this Agreement. The Special Committee has, by unanimous vote,
recommended that the Board of Directors and the stockholders of Pinnacle
approve the Pinnacle Merger, this Agreement and the transactions contemplated
by this Agreement.
Section 4.21 Accounting Controls. Since January 1, 1997, Pinnacle and its
Subsidiaries have maintained a system of internal accounting controls
sufficient to provide reasonable assurance that (a) transactions are executed
in accordance with management's general or specific authorizations, (b)
transactions are recorded as necessary to permit preparation of financial
statements in conformity with generally accepted accounting principles and to
maintain asset accountability, (c) access to assets is permitted only in
accordance with management's general or specific authorization, and (d) the
recorded accountability for assets is compared with the existing assets at
reasonable intervals and appropriate action is taken with respect to any
differences.
Section 4.22 Affiliate Transactions. Except as disclosed in the Current SEC
Documents or as disclosed in Schedule 4.22, there are no contracts,
liabilities, transactions or relationships that would be required to be
disclosed by Pinnacle by Item 404 of Regulation S-K of the Securities Act and
Exchange Act.
Section 4.23 Vote Required. The affirmative vote of the holders of a
majority of the outstanding shares of Pinnacle Common Stock entitled to vote
thereon (the "Requisite Vote") is the only vote of the holders of any class or
series of Pinnacle's capital stock necessary to approve this Agreement and the
transactions contemplated hereby.
Section 4.24 Material Subsidiaries. Other than with respect to the
operations of the properties that are subject to the Principal Asset
Dispositions, the Material Subsidiaries conduct all of the material operations
relating to Pinnacle's gaming facilities in Nevada, Louisiana, Mississippi and
Indiana, and, other than with respect to the properties that are subject to
the Principal Asset Dispositions, no other entity in which Pinnacle owns a
direct or indirect interest owns any material assets, licenses, permits or
personnel, or performs any material services with respect to, such operations.
ARTICLE V
REPRESENTATIONS AND WARRANTIES OF
HOLDING AND PINNACLE ACQ CORP
Except as set forth in the corresponding numbered sections of the
disclosure schedules delivered by Pinnacle Acq Corp to Pinnacle concurrently
with the execution of this Agreement or referenced in the particular section
of this Article V to which exception is being taken, PHCR and Pinnacle Acq
Corp each represents and warrants to Pinnacle as follows:
Section 5.1 Organization, Standing and Corporate Power. Each of PHCR and
Pinnacle Acq Corp is a corporation duly organized, validly existing and in
good standing under the laws of the jurisdiction in which it is organized and
has the requisite corporate power and authority to carry on its business as
now being conducted. Each of PHCR and Pinnacle Acq Corp is duly qualified or
licensed to do business and is in good standing in each jurisdiction in which
the nature of its business or the ownership or leasing of its properties makes
such qualification or licensing necessary, other than in such jurisdictions
where the failure to be so qualified or licensed (individually or in the
aggregate) would not have a material adverse effect on PHCR or Pinnacle Acq
Corp. Each of PHCR and Pinnacle Acq Corp has made available to Pinnacle
complete and correct copies of its certificate of incorporation and by-laws in
effect on the date of this Agreement.
Section 5.2 Authority; Noncontravention. Each of PHCR and Pinnacle Acq Corp
has the requisite corporate power and authority to enter into this Agreement
and to consummate the transactions contemplated by this Agreement. The
execution and delivery of this Agreement by each of PHCR and Pinnacle Acq Corp
and the consummation by each of PHCR and Pinnacle Acq Corp of the transactions
contemplated by this Agreement have been duly authorized by all necessary
corporate action on the part of each of PHCR and Pinnacle Acq Corp,
A-23
<PAGE>
respectively, subject to approval of this Agreement and the transactions
contemplated hereby by the Harveys Casino Resorts Compliance Committee. This
Agreement has been duly executed and delivered by each of PHCR and Pinnacle
Acq Corp and, assuming this Agreement constitutes the valid and binding
obligation of Pinnacle, constitutes a valid and binding obligation of each of
PHCR and Pinnacle Acq Corp, enforceable against each of PHCR and Pinnacle Acq
Corp in accordance with its terms. Except as set forth on Schedule 5.2(a), the
execution and delivery of this Agreement do not, and the consummation of the
transactions contemplated by this Agreement and compliance with the provisions
of this Agreement will not, require notice or consent under, conflict with, or
result in any violation of, or default (with or without notice or lapse of
time, or both) under, or give rise to a right of termination, cancellation or
acceleration of any obligation or to loss of a material benefit under, or
result in the creation of any Lien upon any of the properties or assets of
PHCR or Pinnacle Acq Corp under, (a) the respective certificates of
incorporation or by-laws of PHCR or Pinnacle Acq Corp, (b) other than subject
to the governmental filings and other matters referred to in the following
sentence, (i) any loan or credit agreement, note, bond, mortgage, indenture,
lease or other agreement, instrument or (ii) any permit, concession, franchise
or license applicable to PHCR or Pinnacle Acq Corp or their respective
properties or assets or (c) subject to the governmental filings and other
matters referred to in the following sentence, any judgment, order, decree,
statute, law, ordinance, rule or regulation applicable to PHCR or Pinnacle Acq
Corp or their respective properties or assets, other than, in the case of
clauses (b) or (c), any such conflicts, violations, defaults, rights or Liens
that individually or in the aggregate would not (i) have a material adverse
effect on PHCR or Pinnacle Acq Corp, (ii) impair in any material respect the
ability of PHCR or Pinnacle Acq Corp to perform their respective obligations
under this Agreement or (iii) prevent or impede in any material respect the
consummation of any of the transactions contemplated by this Agreement.
No consent, approval, order or authorization of, or registration,
declaration or filing with, any Governmental Entity is required by PHCR or
Pinnacle Acq Corp in connection with the execution and delivery of this
Agreement by PHCR and Pinnacle Acq Corp or the consummation by PHCR and
Pinnacle Acq Corp of any of the transactions contemplated by this Agreement,
except for (A) the filing of a premerger notification and report form by PHCR
and Pinnacle Acq Corp under the HSR Act, (B) the filing with the SEC of such
reports under Section 14(a) and Rule 13e-3 of the Exchange Act as may be
required in connection with this Agreement and the transactions contemplated
by this Agreement, (C) the filing of the Certificate of Merger with the
Delaware Secretary of State and appropriate documents with the relevant
authorities of other states in which PHCR or Pinnacle Acq Corp is qualified to
do business, (D) the obtaining of all Gaming Approvals, each of which are set
forth in Schedule 5.2(b), (E) such filings as may be required by an applicable
state securities or "blue sky" laws, and (F) such other consents, approvals,
orders, authorizations, registrations, declarations and filings the failure of
which to be obtained or made would not, individually or in the aggregate, (1)
have a material adverse effect on PHCR or Pinnacle Acq Corp, (2) impair, in
any material respect, the ability of PHCR or Pinnacle Acq Corp to perform
their respective obligations under this Agreement or (3) prevent or
significantly delay the consummation of the transactions contemplated by this
Agreement.
Section 5.3 Interim Operations of Pinnacle Acq Corp. Each of PHCR and
Pinnacle Acq Corp was formed solely for the purpose of engaging in the
transactions contemplated hereby and has not engaged in any business
activities or conducted any operations other than in connection with the
transactions contemplated hereby.
Section 5.4 Licensing Matters. Subject to the last sentence of this Section
5.4, none of PHCR, Pinnacle Acq Corp or any of their respective Affiliates
knows of any facts, which, if known to the Gaming Authorities, would
reasonably be expected to disqualify any of them, any of their Subsidiaries or
any of their respective officers, directors and any other person required to
make any filings or required to be found suitable (the "Licensed Persons")
from being licensed under the Gaming Laws or which would prevent or materially
delay the grant of licenses or approvals necessary under the Gaming Laws
necessary for PHCR and Pinnacle Acq Corp to consummate the transactions
contemplated hereby. Notwithstanding the foregoing, (a) the term "Licensed
Persons" as used herein shall exclude any limited partner of any investment
vehicle used by Colony Capital, Inc. ("Colony") or Colony III in connection
with the transactions contemplated hereby (each a "Colony LP");
A-24
<PAGE>
(b) none of PHCR, Pinnacle Acq Corp or any of their respective Affiliates
makes any representation or warranty herein regarding the likelihood of any
determination by a Gaming Authority or otherwise, that any Colony LP be
required to make any filings or be found suitable under the Gaming Laws in
connection with the transactions contemplated hereby, or the impact of any
such determination on the granting of the licenses or approvals necessary
under the Gaming Laws for PHCR and Pinnacle Acq Corp to consummate the
transactions contemplated hereby.
Section 5.5 Litigation. Except as described on Schedule 5.5, as of the date
of this Agreement, there is no action, suit or proceeding pending or, to the
knowledge of Pinnacle Acq Corp and PHCR, threatened against PHCR or any of its
Subsidiaries or affecting any of their respective properties or assets nor are
any Governmental Entity investigations or audits pending before any court or
governmental agency or body against PHCR or any of its Subsidiaries or
affecting any of their respective assets or properties which, individually or
in the aggregate would reasonably be expected to affect adversely the ability
of PHCR or Pinnacle Acq Corp to consummate the transactions contemplated by
this Agreement.
Section 5.6 Financing. Pinnacle Acq Corp has delivered to Pinnacle copies
of a written commitment letter with respect to $900 million aggregate
principal amount of senior debt facilities and one or more "highly confident"
letters with respect to $550 million aggregate principal amount of senior
subordinated debt (the commitment letter and the highly confident letters
being referred to herein as, the "Financing Letters"). As of the date hereof,
such letters are in full force and effect and have not been terminated.
Section 5.7 No Other Agreements. As of the date hereof, except for this
Agreement, the Voting Agreement and the transactions contemplated hereby and
thereby, none of Pinnacle Acq Corp, PHCR or any of their Affiliates has made
any other agreements or arrangements concerning the Pinnacle Merger or
Pinnacle or any of its Subsidiaries with (a) any director, officer, employee
or consultant of Pinnacle, or (b) any stockholder beneficially owning 5% or
more of the outstanding shares of Pinnacle Common Stock.
Section 5.8 Harveys Merger. Harveys shall be the surviving entity of the
Harveys Merger.
ARTICLE VI
COVENANTS RELATING TO CONDUCT OF BUSINESS
Section 6.1 Conduct of Business.
(a) During the term of this Agreement, except with the prior written
consent of Pinnacle Acq Corp (requests for which shall be considered in good
faith on a timely basis under the circumstances by Pinnacle Acq Corp) and
except as specifically required by this Agreement or permitted under
subsection (b) or (c) of this Section 6.1, Pinnacle shall and shall cause its
Subsidiaries to carry on their respective businesses in the Ordinary Course of
Business and use all reasonable efforts to preserve intact their current
business organizations, keep available the services of their current officers
and key employees and preserve their relationships consistent with past
practice with gaming customers, suppliers, licensors, licensees, distributors
and others having business dealings with them to the end that their goodwill
and ongoing businesses shall be unimpaired in all material respects at the
Effective Time. Except as expressly permitted or contemplated by the terms of
this Agreement, without limiting the generality of the foregoing, Pinnacle
shall not, and shall not permit any of its Subsidiaries to:
(i) (A) declare, set aside or pay any dividends on, or make any other
distributions in respect of, any of its capital stock, other than dividends
and distributions by any direct or indirect wholly owned Subsidiary of
Pinnacle to its Parent, (B) split, combine or reclassify any of its capital
stock or issue or authorize the issuance of any other securities in respect
of, in lieu of or in substitution for shares of its capital stock or (C)
except as shall be required under currently existing terms of any stock-
based benefit plan appearing on Schedule 4.10(a), purchase, redeem or
otherwise acquire or amend the terms of any shares of capital stock of
Pinnacle or any of its Subsidiaries or any other securities thereof or any
rights, warrants, options to
A-25
<PAGE>
acquire or any securities convertible into or exchangeable for any such
shares or other securities (other than, after notice to Pinnacle Acq Corp,
(1) redemptions, purchases or other acquisitions required by applicable
provisions under Gaming Laws and (2) issuances or redemptions of capital
stock of wholly owned Subsidiaries occurring between Pinnacle and any of
its wholly owned Subsidiaries or occurring between wholly owned
Subsidiaries of Pinnacle);
(ii) issue, deliver, sell, grant, pledge or otherwise encumber or amend
any shares of its capital stock, any other voting securities or any
securities convertible or exchangeable into, or any rights, warrants or
options to acquire, any such shares, voting securities or convertible or
exchangeable securities (other than the issuance of Pinnacle Common Stock
upon the exercise of employee stock options and contingent incentive plans
appearing on Schedule 4.10(a) (including with respect to contingent shares
of Pinnacle Common Stock) outstanding on the date of this Agreement in
accordance with their present terms);
(iii) amend its Certificate of Incorporation, By-laws or other
comparable charter or organizational documents;
(iv) except in connection with the transactions contemplated by this
Agreement, voluntarily take any action that would result in the failure to
maintain the listing of Pinnacle Common Stock on the NYSE;
(v) develop, acquire or agree to develop or acquire any projects, assets
or lines of business, including without limitation by merging or
consolidating with, or by purchasing all or a substantial portion of the
assets of, or by any other manner, any business or any corporation,
partnership, joint venture, association or other business organization or
division thereof, or any assets that are material, individually or in the
aggregate, to Pinnacle or any of its Material Subsidiaries, except (A)
purchases of inventory, furnishings and equipment in the Ordinary Course of
Business or (B) expenditures consistent with Pinnacle's current capital
budget, as set forth in Schedule 6.1(a)(v)(B) (the "Budget") or (C)
acquisitions or projects identified on Schedule 6.1(a)(v)(C);
(vi) except as set forth on Schedule 6.1(a)(vi), sell, lease, license,
swap, barter, transfer or otherwise convey, mortgage or otherwise encumber
or subject to any Lien or prevent from becoming subject to a Lien any of
its properties or assets that are material, individually or in the
aggregate, to Pinnacle or any of its Material Subsidiaries, except
transactions in the Ordinary Course of Business;
(vii) (A) other than (1) working capital borrowings in the Ordinary
Course of Business, (2) projects set forth in Schedule 6.1(a)(vii), (3)
specific projects at existing, operational facilities referred to and
consistent with that specified in the Budget and (4) other incurrences of
indebtedness which, in the aggregate, do not exceed $20.0 million, incur
any indebtedness, forgive any debt obligations of any Person to Pinnacle or
its Subsidiaries, issue or sell any debt securities or warrants or other
rights to acquire any debt securities of Pinnacle or any of its
Subsidiaries, guarantee any debt securities of another Person, enter into
any "keep well" or other agreement to maintain any financial statement
condition of another Person or enter into any arrangement having the
economic effect of any of the foregoing or (B) other than (1) to Pinnacle
or any direct or indirect Subsidiary of Pinnacle, (2) advances to
employees, suppliers or customers in the Ordinary Course of Business, (3)
projects set forth in Schedule 6.1(a)(vii), and (4) specific projects
referred to and consistent with that specified in the Budget, make any
loans, advances or capital contributions to, or investments in, any other
Person;
(viii) settle any Audit relating to material Taxes pending as of the
date hereof or arising on or after the date hereof, make any material Tax
election, or amend any material Tax Return in any respect;
(ix) pay, discharge, settle or satisfy any material claims, liabilities
or obligations (absolute, accrued, asserted or unasserted, contingent or
otherwise), other than the payment, discharge, settlement or satisfaction
in the Ordinary Course of Business or in accordance with their terms of
liabilities reflected or reserved against in the Base Balance Sheet or
incurred in the Ordinary Course of Business or the optional redemption of
the 13% First Mortgage Notes due 2003 issued by Casino Magic of Louisiana,
Corp. at prices, and on terms consistent with the Indenture governing such
debt, as in effect on the date hereof, or, except in the
A-26
<PAGE>
Ordinary Course of Business, waive the benefits of, or agree to modify in
any manner, any confidentiality, standstill or similar agreement to which
Pinnacle or any of its Subsidiaries is a party;
(x) make any change in the compensation payable or to become payable to
any of its officers, directors, employees, agents or consultants (other
than (i) general increases in wages to employees who are not officers,
directors or Affiliates in the Ordinary Course of Business and (ii) salary
increases and bonuses payable to Pinnacle officers pursuant to the terms of
any agreement existing as of the date hereof or disclosed on Schedule
6.1(a)(x)) or pursuant to regular annual reviews in the Ordinary Course of
Business or pursuant to or to Persons providing management services, enter
into or amend any Plan or make any loans to any of its officers, directors,
employees, Affiliates, agents or consultants or make any change in its
existing borrowing or lending arrangements for or on behalf of any of such
Persons pursuant to a Plan or otherwise;
(xi) pay or make any accrual or arrangement for payment of any pension,
retirement allowance or other employee benefit pursuant to any Plan, to any
officer, director, employee, consultant or Affiliate or pay or agree to pay
or make any accrual or arrangement for payment to any officers, directors,
employees, consultants or Affiliates of Pinnacle of any amount relating to
unused vacation days, except payments and accruals made in the Ordinary
Course of Business; adopt or pay, grant, issue, accelerate or accrue salary
or other payments or benefits pursuant to any Plan with or for the benefit
of any director, officer, employee, agent or consultant, whether past or
present, other than as required under applicable law or the current terms
of any Plan; or amend in any material respect any Plan in a manner
inconsistent with the foregoing;
(xii) except as required by Law, enter into any collective bargaining
agreement;
(xiii) except pursuant to agreements existing on the date hereof and
except as otherwise disclosed on Schedule 6.1(a)(xiii), make any payments
(other than regular compensation payable to officers and employees of
Pinnacle in the Ordinary Course of Business) or other distributions to, or
enter into any transaction, agreement or arrangement with, any of
Pinnacle's or any of its Subsidiaries' Affiliates, officers, directors,
stockholders or their Affiliates, associates or family members or do or
enter into any of the foregoing with respect to employees, agents or
consultants other than in the Ordinary Course of Business;
(xiv) except in the Ordinary Course of Business and except as otherwise
permitted by this Agreement modify or amend in a manner adverse to Pinnacle
or it Subsidiaries the material economic terms of any material contract or
agreement or terminate any material contract or agreement to which Pinnacle
or any Subsidiary is a party or waive, release or assign any material
rights or claims;
(xv) fail to make any scheduled principal or interest payment on
indebtedness evidenced by debt instruments to which Pinnacle or any of its
Subsidiaries is a party; or
(xvi) authorize any of, or commit or agree to take any of, the foregoing
actions except as otherwise permitted by this Agreement.
(b) Development Projects. Pinnacle, Pinnacle Acq Corp and PHCR agree that
Pinnacle, without the prior written consent of Pinnacle Acq Corp otherwise
required under Section 6.1(a), may expend amounts consistent with and in the
manner prescribed by the written budget, plans and policies previously
provided to Pinnacle Acq Corp related to the development opportunities and
activities for the Indiana Project, including, without limitation, the hiring
of employees and the entering into of employment agreements with senior
management personnel (to the extent contained therein).
(c) Asset Dispositions. Schedule 6.1(c) sets forth (i) certain asset sales
that are presently being undertaken by Pinnacle or its Subsidiaries (the
"Principal Asset Dispositions") and (ii) the estimate of Pinnacle's management
of the net (after tax and transaction expenses and determined substantially in
accordance with the methodology used in the financial model delivered to
Pinnacle on the date hereof) proceeds to be received by Pinnacle in connection
with each such sale. Schedule 6.1(c) also sets forth certain additional asset
sales which are presently being undertaken by Pinnacle or its Subsidiaries
(the "Other Asset Dispositions" and, together with the Principal Asset
Dispositions, the "Asset Dispositions"). Notwithstanding the foregoing clauses
(a) and (b),
A-27
<PAGE>
Pinnacle shall be permitted to consummate (i) the Principal Asset Dispositions
(other than the sale of the Inglewood Property), substantially on the terms
and subject to the conditions contained in the applicable Asset Disposition
Agreement in effect as of the date hereof (or as amended in accordance with
this Agreement), (ii) the sale of the Inglewood Property substantially in
accordance with the terms of the draft purchase agreement provided to Pinnacle
Acq Corp on April 14, 2000 (except with respect to price, which in no event
shall generate Net Proceeds of less than $13,054,000), and (iii) the Other
Asset Dispositions on terms approved by Pinnacle's Board of Directors, in good
faith. Except for amendments, waivers or modifications which would not
reasonably be expected to significantly delay the consummation of the
transactions contemplated by this Agreement, impair in any material respect
the ability of Pinnacle to perform its obligations under this Agreement and
which are not materially adverse to the original terms of such Principal Asset
Disposition, Pinnacle shall not amend, waive, or modify any of the terms or
conditions contained in the agreements (or in the case of the Inglewood
Property, the draft purchase agreement delivered to Pinnacle Acq Corp on April
14, 2000) relating to the Principal Asset Disposition (the "Asset Disposition
Agreements") without the prior written consent of Pinnacle Acq Corp.
(d) Redemption. Notwithstanding the foregoing provisions of this Section
6.1, immediately prior to the Effective Time, Pinnacle shall redeem the shares
of Pinnacle Common Stock owned by R.D. Hubbard on the date hereof that are not
being contributed to PHCR under the Voting Agreement for a price equal to the
Pinnacle Merger Consideration (including any Class A CPR that would be payable
at the Effective Time).
(e) Other Actions. Pinnacle shall not, and shall not permit any of its
Subsidiaries to, take any action that would result in any of its
representations and warranties set forth in this Agreement that are qualified
as to materiality becoming untrue and those not so qualified becoming untrue
in any material respect.
Section 6.2 Advice of Changes. PHCR, Pinnacle Acq Corp and Pinnacle shall
promptly advise the other party orally and in writing of:
(a) Any representation or warranty made by it contained in this Agreement
becoming untrue or inaccurate in any material respect;
(b) The failure by it to comply with or satisfy in any material respect any
covenant, condition or agreement to be complied with or satisfied by it under
this Agreement; or
(c) Any change or event having, or which, insofar as can reasonably be
foreseen, would have, a material adverse effect on such party and its
Subsidiaries taken as a whole or on the truth of their respective
representations and warranties or the ability of the conditions set forth in
Article VIII to be satisfied;
provided, however, that no such notification shall affect the representations,
warranties, covenants or agreements of the parties or the conditions to the
obligations of the parties under this Agreement. Additionally, Pinnacle shall
furnish to Pinnacle Acq Corp, as promptly as practicable following Pinnacle
Acq Corp's request therefor, all information reasonably necessary for Pinnacle
Acq Corp accurately to determine (i) what amounts, if any, payable under any
of the Plans or any other contract, agreement, or arrangement with respect to
which Pinnacle or any of its Subsidiaries may have any liability could fail to
be deductible for Federal income tax purposes by virtue of section 162(a)(1),
section 162(m) or section 280G of the Code, or (ii) whether Pinnacle or any of
its Subsidiaries has entered into any contract, agreement or arrangement that
would result in the disallowance of any tax deductions pursuant to section
280G of the Code.
Section 6.3 No Solicitation.
(a) Pinnacle shall not, nor shall it permit any of its Subsidiaries to, nor
shall it authorize or permit any agent, officer, director or employee of, or
any investment banker, attorney or other advisor or representative of,
Pinnacle or any of its Subsidiaries to, directly or indirectly, (i) solicit or
initiate, or encourage any inquiries regarding or the submission of, any
Takeover Proposal (including, without limitation, any proposal or offer to
Pinnacle's stockholders) or (ii) participate in any discussions or
negotiations regarding, or furnish to any Person any non-public information
with respect to, or take any other action to facilitate the making of any
proposal that
A-28
<PAGE>
would constitute a Takeover Proposal; provided, if in the opinion of the Board
of Directors of Pinnacle, after consultation with outside legal counsel, such
failure to act would be inconsistent with its fiduciary duties to Pinnacle's
stockholders under applicable law, Pinnacle may, in response to an
unsolicited, written Competitive Proposal (or Takeover Proposal which, based
on the advice of its financial advisors, the Board of Directors of Pinnacle
determines in good faith is reasonably likely to result in a Competitive
Proposal), and subject to compliance with Section 6.3(c) and pursuant to an
executed confidentiality agreement with customary terms and conditions and, in
any case, which includes customary standstill provisions which prohibit such
party from seeking to directly or indirectly accomplish a Takeover Proposal
except with the consent of the Board of Directors of Pinnacle, and which
expressly permits Pinnacle to fulfill its obligations under Section 6.3(c),
(A) furnish information with respect to Pinnacle to the Person who made such
unsolicited proposal and (B) participate in negotiations with such Person
regarding such Competitive Proposal (or Takeover Proposal which, based on the
advice of its financial advisors, the Board of Directors of Pinnacle
determines in good faith is reasonably likely to result in a Competitive
Proposal). Without limiting the foregoing, it is understood that any violation
of the restrictions set forth in the preceding sentence by any director,
officer, employee, Affiliate or agent, of Pinnacle or any of its Subsidiaries
(each a "Covered Person"), whether or not such Person is purporting to act on
behalf of Pinnacle or any of its Subsidiaries or otherwise, shall be deemed to
be a breach of this Section 6.3(a) by Pinnacle; provided that it is understood
that this Section 6.3(a) shall not be deemed to have violated if in response
to an unsolicited inquiry, a Covered Person states solely that he or she is
subject to the terms of this Agreement and provides only public information in
response to the inquiry. All Covered Persons shall immediately cease and cause
to be terminated any existing activities, discussions and negotiations with
any parties conducted heretofore with respect to, or that could reasonably be
expected to lead to, any of the foregoing.
(b) Neither the Board of Directors of Pinnacle nor any committee thereof
shall (i) withdraw or modify, or publicly propose to withdraw or modify in a
manner adverse to Pinnacle Acq Corp the approval or recommendation by such
Board of Directors or any such committee of this Agreement or the Pinnacle
Merger, (ii) approve or recommend, or publicly propose to approve or
recommend, any Takeover Proposal or (iii) cause Pinnacle to enter into any
agreement with respect to any Takeover Proposal. Notwithstanding the
foregoing, the Board of Directors of Pinnacle or the Special Committee, prior
to the approval of this Agreement or the Pinnacle Merger (including as the
same may be modified hereafter) by the Requisite Vote, to the extent required
by the fiduciary duties to Pinnacle's stockholders under applicable Law, after
consultation with outside legal counsel, may, subject to the terms of this and
the following sentences of this Section 6.3(b), withdraw or modify its
approval or recommendation of this Agreement or the Pinnacle Merger, or
approve or recommend a Competitive Proposal, in each case at any time after
12:00 noon, Los Angeles time, on the fifth day following Pinnacle Acq Corp's
receipt of written notice (a "Notice of Competitive Proposal") advising
Pinnacle Acq Corp that the Board of Directors of Pinnacle has received a
Competitive Proposal, specifying the material terms and conditions of such
Competitive Proposal and identifying the Person making such Competitive
Proposal. Pinnacle Acq Corp shall have the opportunity, until the end of the
fifth day after it receives a Notice of Competitive Proposal, to make an offer
to the Board of Directors of Pinnacle. Neither the Board of Directors of
Pinnacle nor any committee of the Board of Directors may withdraw, or modify
or publicly propose to withdraw, or modify in a manner adverse to Pinnacle Acq
Corp, its approval or recommendation of this Agreement or the Pinnacle Merger
or approve or recommend a Competitive Proposal unless and until it shall have
determined, in its good faith judgment (i) the value of the consideration
(based on the opinion, with only customary qualifications, of an independent
financial advisor of good national reputation in such matters) of such
proposal exceeds the value of each of the Pinnacle Merger Consideration and
any alternative proposal presented by Pinnacle Acq Corp or any of its
Affiliates and (ii) such proposal is more favorable to Pinnacle's stockholders
than the Pinnacle Merger and any alternative proposal presented by Pinnacle
Acq Corp or any of its Affiliates. In addition, if Pinnacle enters into an
agreement with respect to any Competitive Proposal, it shall, concurrently
with entering into such agreement, pay, or cause to be paid, to Pinnacle Acq
Corp the Termination Fee.
(c) In addition to the obligations of Pinnacle set forth in paragraph (b),
Pinnacle shall advise Pinnacle Acq Corp promptly of any request for non-public
information or of any Takeover Proposal, or any proposal with respect to any
Takeover Proposal, the material terms and conditions of such request or
Takeover Proposal, and
A-29
<PAGE>
the identity of the Person making any such Takeover Proposal or inquiry.
Pinnacle will use reasonable efforts to keep Pinnacle Acq Corp informed of the
status and details (including amendments or proposed amendments) of any such
request, Takeover Proposal or inquiry.
(d) Rule 14e-2 Disclosure. Nothing contained in this Section 6.3 shall
prohibit Pinnacle from taking and disclosing to its stockholders a position
contemplated by and in accordance with Rule 14e-2 promulgated under the
Exchange Act if, in the good faith judgment of the Board of Directors of
Pinnacle or the Special Committee, following consultation with outside
counsel, failure so to disclose would be a violation of its obligations under
applicable law; provided, however, that, neither Pinnacle nor its Board of
Directors, the Special Committee, nor any other committee thereof shall
withdraw or modify, or propose publicly to withdraw or modify, its position
with respect to the Pinnacle Merger or this Agreement, except in accordance
with the provisions of Section 6.3(b).
ARTICLE VII
ADDITIONAL AGREEMENTS
Section 7.1 Stockholders Meeting. Pinnacle will, as soon as practicable,
and in no event later than 120 days after the date hereof, duly call, give
notice of, convene and hold a meeting of the holders of Pinnacle Common Stock
(the "Pinnacle Stockholders Meeting"); provided however, the time period set
forth in this Section 7.1 shall toll from the 51st day to the 80th day that
the Proxy Statement (as defined below) and the Schedule 13E-3 (as defined
below) are filed with the SEC and remain under review by the SEC (but in no
event shall such period toll for more than 30 days in total or the Pinnacle
Stockholders Meeting occur later than the 150th day after the date hereof);
provided further that such tolling period shall only be available if the Proxy
Statement and the Schedule 13E-3 are filed in accordance with the provisions
of Section 7.2 hereof and Pinnacle has used its reasonable best efforts to
respond to SEC comments to such disclosure documentation promptly and
completely. Subject to the provisions of Section 6.3(b), Pinnacle will,
through its Board of Directors, recommend to its stockholders approval of this
Agreement, the Pinnacle Merger and the other transactions contemplated by this
Agreement.
Section 7.2 Proxy Statement and Other Filings; Auditor's Letter.
(a) Pinnacle shall, as promptly as practicable after the execution of this
Agreement, and in no event later than 45 days after the date hereof, prepare
and file with the SEC a proxy statement (together with any amendments or
supplements thereto, the "Proxy Statement") and a Rule 13E-3 Transaction
Statement on Schedule 13E-3 (together with any amendments or supplements
thereto, the "Schedule 13E-3") in connection with the Pinnacle Merger.
Pinnacle Acq Corp shall, upon request of Pinnacle, furnish Pinnacle with such
information concerning itself, PHCR and Colony as may be required by law or
any Governmental Entity in connection with the Proxy Statement and Schedule
13E-3. Pinnacle shall cause the Proxy Statement and the Schedule 13E-3 to
comply as to form in all material respects with the applicable provisions of
the Exchange Act. Pinnacle agrees that the Proxy Statement, the Schedule 13E-3
and each amendment or supplement thereto at the time it is filed shall not
include an untrue statement of material fact or omit to state a material fact
required to be stated therein or necessary to make the statements therein, in
light of the circumstances in which they were made, not misleading; provided,
however, that the foregoing shall not apply to the extent that any untrue
statement of a material fact or omission to state material fact was made by
Pinnacle in reliance upon and in conformity with information concerning
Pinnacle Acq Corp, PHCR, Colony III or their Affiliates furnished to Pinnacle
by Pinnacle Acq Corp or its attorneys or advisors specifically for use in the
Proxy Statement or Schedule 13E-3. As promptly as possible after clearance by
the SEC of the Proxy Statement, Pinnacle shall mail the Proxy Statement to its
stockholders. Pinnacle Acq Corp and the Pinnacle Surviving Corp shall
indemnify and hold harmless Pinnacle, its Subsidiaries and their respective
officers, directors, employees and agents from and against any and all losses,
liabilities, costs, and expenses (including reasonable attorneys' fees)
directly arising out of any untrue statement of material fact (or omission of
a statement of material fact necessary in
A-30
<PAGE>
order to make the statements therein not materially misleading) made in the
Proxy Statement, Schedule 13E-3 or any amendment or supplement thereto in
reliance upon and in conformity with information concerning Pinnacle Acq Corp,
PHCR, Colony III or their Affiliates furnished to Pinnacle in writing by
Pinnacle Acq Corp specifically for use in the Proxy Statement or Schedule 13E-
3. Pinnacle shall indemnify and hold harmless Pinnacle Acq Corp, the Pinnacle
Surviving Corp, PHCR, Colony, their respective Subsidiaries and Affiliates and
their respective officers, directors, stockholders, partners, members,
equityholders, employees and agents from and against any and all losses,
liabilities, costs, and expenses (including reasonable attorneys' fees)
directly arising out of any untrue statement of material fact (or omission of
a statement of material fact necessary in order to make the statements therein
not materially misleading) made in the Proxy Statement, Schedule 13E-3 or any
amendment or supplement thereto and directly attributable to information
provided by Pinnacle.
(b) As promptly as practicable, each party hereto shall properly prepare
and file any other filings required under the Exchange Act, the Securities Act
or any other Laws relating to the Pinnacle Merger (collectively, "Other
Filings").
(c) PHCR and Pinnacle Acq Corp shall furnish Pinnacle with all information
concerning them as Pinnacle may reasonably request in connection with the
preparation of the Proxy Statement, the Schedule 13E-3 and the Other Filings.
(d) Pinnacle shall provide copies of drafts of the Proxy Statement and the
Schedule 13E-3 to Pinnacle Acq Corp and its counsel at least 5 Business Days
prior to the date of any filing of such document with the SEC (including with
respect to each amendment or supplement thereto) so as to allow Pinnacle Acq
Corp to comment on such documents. Prior to filing any Proxy Statement or
Schedule 13E-3 with the SEC, Pinnacle shall consider in good faith any
comments on such Proxy Statement or Schedule 13E-3, as the case may be, made
by, or changes requested by, Pinnacle Acq Corp or its attorneys or advisors.
Pinnacle shall also promptly provide Pinnacle Acq Corp with copies of any
correspondence received from the SEC, and shall permit representatives of
Pinnacle Acq Corp to attend any telephone call with the SEC which discusses
comments made by the staff.
Section 7.3 Access to Information; Confidentiality.
(a) Pinnacle shall afford to Pinnacle Acq Corp, and to its officers,
employees, accountants, counsel, financial advisers and other representatives,
reasonable access during normal business hours during the period prior to the
Effective Time to all the properties, books, contracts, commitments and
records of Pinnacle and its Subsidiaries and, during such period, Pinnacle
shall furnish promptly to Pinnacle Acq Corp (a) a copy of each report,
schedule, registration statement and other document filed by it or its
Subsidiaries during such period pursuant to the requirements of Federal or
state securities laws and (b) all other information concerning its or its
Subsidiaries' business, properties and personnel as Pinnacle Acq Corp may
reasonably request. Except as otherwise agreed to by Pinnacle, notwithstanding
termination of this Agreement, Pinnacle Acq Corp will keep, and will cause its
officers, employees, accountants, counsel, financial advisers and other
representatives and affiliates to keep, all Confidential Information (as
defined below) confidential and not to disclose any Confidential Information
to any Person other than Pinnacle Acq Corp or Pinnacle Acq Corp's directors,
officers, employees, affiliates or agents, and then only on a confidential
basis; provided, however, that Pinnacle Acq Corp may disclose Confidential
Information (i) as required by law, rule, regulation or judicial process, (ii)
to its attorneys, accountants, financial advisors, lenders, placement agents
and underwriters on a confidential basis or (iii) as required by any
Governmental Entity. For purposes of this Agreement, "Confidential
Information" shall include all information about Pinnacle which has been
furnished by Pinnacle to Pinnacle Acq Corp; provided, however, that
Confidential Information does not include information which (A) is or becomes
generally available to the public other than as a result of a disclosure by
Pinnacle Acq Corp, its attorneys, accountants or financial advisors not
permitted by this Agreement, (B) was available to Pinnacle Acq Corp on a non-
confidential basis prior to its disclosure to Pinnacle Acq Corp by Pinnacle or
(C) becomes available to Pinnacle Acq Corp on a non-confidential basis from a
Person other than Pinnacle who, to the knowledge of Pinnacle Acq Corp, is not
otherwise bound by a confidentiality agreement with Pinnacle or is not
otherwise prohibited from transmitting
A-31
<PAGE>
the relevant information to Pinnacle Acq Corp. In the event of termination of
this Agreement for any reason, Pinnacle Acq Corp shall promptly return all
Confidential Information to Pinnacle.
(b) Pinnacle Acq Corp shall use reasonable efforts to keep Pinnacle
informed of the status of its application for Gaming Approvals and its
activities related to obtaining the Financing.
(c) All permits and other governmental authorizations currently held by
Pinnacle and its Material Subsidiaries pursuant to the Environmental Laws will
be identified in writing to Pinnacle Acq Corp prior to Closing.
Section 7.4 Reasonable Efforts; Notification. Upon the terms and subject to
the conditions set forth in this Agreement, each of the parties agrees to use
all reasonable efforts to take, or cause to be taken (including through its
officers and directors and other appropriate personnel), all actions, and to
do, or cause to be done, and to assist and cooperate with the other parties in
doing, all things necessary, proper or advisable to consummate and make
effective, in the most expeditious manner practicable, the Pinnacle Merger,
the Financing and the other transactions contemplated by this Agreement,
including (a) the obtaining of all necessary actions or nonactions, waivers,
consents and approvals from Governmental Entities and the making of all
necessary registrations and filings (including filings with Governmental
Entities, if any) and the taking of all reasonable steps as may be necessary
to obtain Permits or waivers from, or to avoid an action or proceeding by, any
Governmental Entity (including in respect of any Gaming Law), (b) the seeking
of all necessary consents, approvals or waivers from third parties, (c) the
defending of any lawsuits or other legal proceedings, whether judicial or
administrative, challenging this Agreement or the consummation of any of the
transactions contemplated by this Agreement, including seeking to have any
stay or temporary restraining order entered by any court or other Governmental
Entity vacated or reversed and (d) the execution and delivery of any
additional instruments necessary to consummate the transactions contemplated
by, and to fully carry out the purposes of, this Agreement. In connection with
and without limiting the foregoing, Pinnacle and its Board of Directors shall
(including through its officers and directors and other appropriate personnel)
(i) take all reasonable action necessary to ensure that no U.S. state
takeover, business combination, control share, fair price or fair value
statute or similar statute or regulation is or becomes applicable to the
Pinnacle Merger, this Agreement or any of the other transactions contemplated
by this Agreement, (ii) if any U.S. state takeover, business combination,
control share, fair price or fair value statute or similar statute or
regulation becomes applicable to the Pinnacle Merger, this Agreement or any
other transaction contemplated by this Agreement, take all reasonable action
to ensure that the Pinnacle Merger and the other transactions contemplated by
this Agreement may be consummated as promptly as practicable on the terms
contemplated by this Agreement and otherwise to minimize the effect of such
statute or regulation on the Pinnacle Merger, this Agreement and the other
transactions contemplated by this Agreement, and (iii) take all reasonable
action to assist PHCR and Pinnacle Acq Corp in connection with efforts
reasonably related to obtaining and effectuating the Financing for the
Pinnacle Merger and related transactions including, but not limited to,
successful syndication of the credit facility and sale of subordinated notes,
participation in road shows, preparation of offering circulars and information
memoranda (including providing all financial and other information necessary
therefor), delivery of officers' certificates and opinions as are customary in
financings of this type, delivery of guarantees by Pinnacle and its
Subsidiaries and granting of pledges and security interests in and liens on
assets of Pinnacle and its Subsidiaries; provided that no obligation of
Pinnacle and its Subsidiaries under any guarantee or security document shall
be effective until the Effective Time. Notwithstanding the foregoing, the
parties acknowledge that none of Pinnacle Acq Corp or its Affiliates are
obligated by this Section 7.4(a) or any other provision of this Agreement to
obtain any consent, approval, license, waiver, order, decree, determination of
suitability or other authorization or to make any filing with respect to any
limited partner of Colony III or any of its Affiliates. Nothing herein shall
be deemed to require Pinnacle Acq Corp or its Affiliates to take any steps
(including without limitation the expenditure of funds) or provide any
information to obtain any consent, approval, license, waiver, order, decree,
determination of suitability or other authorization, other than is customary
in Argentina and the States of Arizona, California, Colorado, Indiana, Iowa,
Louisiana, Mississippi and Nevada for such matters.
A-32
<PAGE>
Section 7.5 Stock Option Plans; Change of Control Plan.
(a) As soon as practicable following the date of this Agreement, but in any
event no later than 30 days before the Closing Date, the Board of Directors of
Pinnacle (or, if appropriate, any committee administering the Pinnacle Stock
Option Plans) shall adopt such resolutions or use all reasonable efforts to
take such other actions as are required to provide that except as set forth in
the Voting Agreement each then outstanding stock option (whether or not
vested) to purchase shares of Pinnacle Common Stock (a "Pinnacle Stock
Option") heretofore granted under any stock option or other stock-based
incentive plan, program or arrangement of Pinnacle (collectively, the
"Pinnacle Stock Option Plans") shall be canceled immediately prior to the
Effective Time in exchange for payment of an amount in cash equal to the
product of (i) the number of shares of Pinnacle Common Stock subject to such
Pinnacle Stock Option immediately prior to the fifth Business Day prior to the
Closing Date and (ii) the excess, if any, of the cash amount of the Pinnacle
Merger Consideration over the per share exercise price of such Pinnacle Stock
Option. In addition, in the event that the Inglewood Sale shall not have
closed on or prior to the fifth Business Day prior to the Closing Date,
holders of In the Money Pinnacle Stock Options (as defined in Section 10.11)
also shall receive one Class A CPR for each share issuable upon exercise. A
listing of all outstanding Pinnacle Stock Options as of the date hereof,
showing what portions of such Pinnacle Stock Options are exercisable as of
such date, the dates upon which such Pinnacle Stock Options were granted, and
the exercise price of such Pinnacle Stock Options, is set forth in Schedule
7.5.
(b) All Pinnacle Stock Option Plans shall terminate as of the Effective
Time, and the provisions in any other Plan providing for the issuance,
transfer or grant of any capital stock of Pinnacle or any interest in respect
of any capital stock of Pinnacle shall be deleted as of the Effective Time.
Immediately following the Effective Time, no holder of a Pinnacle Stock Option
or any participant in any Pinnacle Stock Option Plan shall have any right
thereunder to acquire any capital stock of Pinnacle, Pinnacle Acq Corp, PHCR
or the Pinnacle Surviving Corporation.
Section 7.6 Indemnification and Insurance.
(a) The indemnification obligations set forth in Pinnacle's Certificate of
Incorporation and By-laws on the date of this Agreement shall be duplicated,
to the extent permissible under the DGCL, in the Pinnacle Surviving
Corporation's Certificate of Incorporation and By-laws and shall not be
amended, repealed or otherwise modified for a period of six years after the
Effective Time in any manner that would adversely affect the rights thereunder
of individuals who on or prior to the Effective Time were directors, officers,
employees or agents of Pinnacle. The indemnification obligations set forth in
Pinnacle's Certificate of Incorporation and By-laws on the date of this
Agreement and in the respective organizational documents of Pinnacle's
Subsidiaries shall not be amended, repealed or otherwise modified for a period
of six years after the Effective Time in any manner that would adversely
affect the rights thereunder of individuals who on or prior to the Effective
Time were directors, officers, employees or agents of Pinnacle or any of its
Subsidiaries (together with the persons listed in the previous sentence, the
"Indemnified Parties").
(b) Prior to the Effective Time, Pinnacle shall have procured directors'
and officers' liability insurance for a period of six years from the Effective
Time, (which policy shall be of at least the same coverage, with carriers
comparable to Pinnacle's and its Subsidiaries' existing carriers, containing
terms and conditions which are no less favorable to those covered in
Pinnacle's and its Subsidiaries' existing directors' and officers' liability
policy) to cover those Persons who are covered on the date of this Agreement
by Pinnacle's and its Subsidiaries' directors' and officers' liability
insurance policy with respect to those matters covered by Pinnacle's and its
Subsidiaries' directors' and officers' liability policy.
(c) Section 7.6 shall survive the consummation of the Pinnacle Merger at
the Effective Time, is intended to benefit Pinnacle, the Pinnacle Surviving
Corporation and the Indemnified Parties (and the heirs and representatives of
the Indemnified Parties), and shall be binding on all successors and assigns
of Pinnacle Acq Corp and the Pinnacle Surviving Corporation and shall be
enforceable by each Indemnified Party and his or her heirs and
representatives.
A-33
<PAGE>
Section 7.7 Fees.
(a) Except as provided below, all fees and expenses incurred in connection
with the Pinnacle Merger, this Agreement and the transactions contemplated
hereby shall be paid by the party incurring such fees or expenses, whether or
not the Pinnacle Merger is consummated.
(b) Pinnacle shall pay, or cause to be paid, in same day funds to Pinnacle
Acq Corp $25 million (the "Termination Fee") upon demand if (A) Pinnacle Acq
Corp or Pinnacle, as applicable, terminates this Agreement pursuant to Section
9.1 (f) and prior to such termination a Significant Takeover Proposal shall
have been made; (B) Pinnacle Acq Corp terminates this Agreement pursuant to
Section 9.1(e); (C) Pinnacle terminates this Agreement pursuant to Section
9.1(g); or (D) prior to any other termination of this Agreement pursuant to
Section 9.1(d) or Section 9.1(c)(A) (which termination does not follow from
the failure of Pinnacle Acq Corp to cause any condition specified in Section
8.3 to be satisfied), (x) a Competitive Proposal (disregarding for this
purpose the proviso in the definition thereof) or (y) a Significant Takeover
Proposal ("Triggering Proposal"), shall have been made on or after March 2,
2000 and within 12 months of such termination, a transaction constituting a
Significant Takeover Proposal is consummated or Pinnacle enters into an
agreement (which is thereafter consummated) with respect to, or the Board of
Directors of Pinnacle or a committee thereof approves or recommends, or
publicly proposes to approve or recommend, a Significant Takeover Proposal
(which is thereafter consummated).
(c) Notwithstanding Section 7.7(b)(D)(y) above, the Termination Fee in such
event shall not be payable by Pinnacle in the event that Pinnacle makes a good
faith demonstration, reasonably satisfactory to Pinnacle Acq Corp, that (A)
such Significant Takeover Proposal is made by a Person (i) who is unaffiliated
with the Person that made the Triggering Proposal, and (ii) who did not
solicit, have significant discussions or engage in any negotiations with, or
receive any non-public information from Pinnacle, its Subsidiaries or any of
Pinnacle's Covered Persons during the period in which this Agreement was in
effect, (B) such Significant Takeover Proposal is not related to, contemplated
by, or otherwise connected, directly or indirectly, with the Triggering
Proposal and (C) there is no direct or indirect nexus or causal effect between
the Triggering Proposal and the Significant Takeover Proposal (which Pinnacle
may demonstrate (X)(1) by establishing the Triggering Proposal has been
terminated or withdrawn, (2) the initial contact relating to such Significant
Takeover Proposal is made to or by Pinnacle, any of its Subsidiaries or any of
Pinnacle's Covered Persons a significant time after such termination or
withdrawal, and (3) during the period beginning on the date the Triggering
Proposal is terminated or withdrawn and ending on the date of the initial
contact regarding the Significant Takeover Proposal, neither Pinnacle, its
Subsidiaries nor its Covered Persons shall have solicited, initiated,
encouraged or entertained any inquiries regarding or the submission of, or
participated in any discussions or negotiations regarding, or furnished any
information with respect to, any Significant Takeover Proposal or (Y)
otherwise.
(d) Only one Termination Fee shall be payable to Pinnacle Acq Corp pursuant
to the terms hereof.
Section 7.8 Public Announcement. PHCR and Pinnacle Acq Corp and their
respective Affiliates, on the one hand, and Pinnacle, on the other hand, will
consult with each other before issuing, and provide each other the opportunity
to review and comment upon, any press release or other public statements with
respect to the transactions contemplated by this Agreement, including the
Pinnacle Merger, and shall not issue any such press release or make any such
public statement prior to such consultation, except as may be required by
applicable law, court process or by obligations pursuant to any listing
agreement with any national securities exchange or national securities
quotation system (in which case the parties will use reasonable efforts to
cooperate in good faith with respect to such press release or other public
statement). The parties agree that the initial press release to be issued with
respect to the transactions contemplated by this Agreement shall be in the
form heretofore agreed to by the parties.
Section 7.9 Title Insurance, Surveys, and Flood Insurance.
(a) As promptly as practicable after the date hereof but in no event later
than ninety (90) days prior to the Effective Time, Pinnacle shall deliver
copies of previous owner policies or other title evidence sufficient to obtain
A-34
<PAGE>
commitments (the "Commitments") to be issued by a title company acceptable to
Pinnacle Acq Corp (the "Title Insurer") for the issuance of an ALTA Leasehold
Policy of Title Insurance, an ALTA Owner's or Lender's Policy of Title
Insurance or a "date-down" of such policies, as applicable, for such of the
Real Properties as Pinnacle Acq Corp shall designate (collectively, the "Title
Policies"). Each of the Title Policies shall name an entity designated by
Pinnacle Acq Corp as insured and shall show leasehold title or fee simple
title to each of the Real Properties vested at the Effective Time in Pinnacle
or its Subsidiaries, subject only to the Permitted Liens, provided, however,
no monetary liens (other than those being contested by Pinnacle or its
Subsidiaries in good faith) shall encumber the title to any Real Property,
including, without limitation, the Bank Credit Facility. The Commitments and
the Title Policies to be issued by the Title Insurer shall have all standard
and general exceptions deleted so as to afford full "extended form coverage"
and shall contain contiguity (where appropriate), survey, and such other
endorsements as may be reasonably requested by Pinnacle Acq Corp or its
lender. At the Closing, Pinnacle and its Subsidiaries shall deliver such
affidavits or other instruments as the Title Insurer may reasonably require to
delete standard and general exceptions and to provide the endorsements
reasonably required hereunder. Pinnacle and its Subsidiaries shall cause the
Commitments to be later-dated to cover the Closing and to cause the Title
Insurer to delete all Schedule B-1 requirements and all standard and general
exceptions in the Commitment at the Closing as directed by Pinnacle Acq Corp.
(b) As promptly as practicable after the date hereof but in no event later
than ninety (90) days prior to the Effective Time, Pinnacle and its
Subsidiaries shall deliver to Pinnacle Acq Corp and Title Insurer an as-built
survey of each of the Owned Properties and the Leased Properties which
constitute ground leases, except the Asset Dispositions other than the
property located in Compton, California (collectively, the "Surveys"),
prepared by a registered land surveyor or engineer, licensed in the state
where such Owned Property or Leased Property is located, dated on or after the
date hereof, certified to Pinnacle Acq Corp, Title Insurer, and such other
entities as Pinnacle Acq Corp may designate in writing to Pinnacle, and
conforming to current ALTA/ACSM Minimum Detail Requirements for Land Title
Surveys, sufficient to cause Title Insurer to delete the standard printed
survey exception. The Surveys shall show only Permitted Liens. Each Survey
shall show access from the land to dedicated roads and shall include a flood
plain certification. Any survey may be a recertification of a prior survey,
provided that it meets the above-described criteria.
(c) To the extent any Real Property is located within an area designated as
"flood prone" or a "special flood hazard area" (as defined under the
regulations adopted under the National Flood Insurance Act of 1968 and the
Flood Disaster Protection Act of 1973), at Pinnacle Acq Corp's request,
Pinnacle shall obtain and maintain flood insurance, if available, in an amount
specified by Pinnacle Acq Corp with respect to such Real Property.
(d) Pinnacle and its Subsidiaries shall use reasonable efforts to obtain
prior to Closing estoppel certificates in form and substance reasonably
satisfactory to Pinnacle Acq Corp and its lenders from each of the lessors
under the leases described on Schedule 4.17(b).
(e) If the Commitments reveal any mortgages, deeds of trust, ground leases
or similar matters affecting the Leased Properties which will remain of record
after the Closing and are senior in priority to the respective Lease and for
which Pinnacle or its Subsidiary has not previously obtained a nondisturbance
and attornment agreement, then Pinnacle and its Subsidiaries shall use their
reasonable efforts to obtain non-disturbance and attornment agreements in form
and substance reasonably acceptable to Pinnacle Acq Corp and its lenders, from
the applicable mortgagees, holders of beneficial interests under the deeds of
trust, ground lessors and similar parties.
(f) Pinnacle and its Subsidiaries shall use their reasonable efforts and
shall cooperate with Pinnacle Acq Corp to obtain, prior to Closing, (i) any
required consents to any assignments and/or financing of any of the Leased
Properties, and (ii) any modifications reasonably and customarily required by
Pinnacle Acq Corp's lender to the leases for the Leased Properties.
Section 7.10 Transfer Taxes. All liability for any transfer or other
similar taxes in connection with the exchange of Pinnacle Common Stock to the
Pinnacle Acq Corp or the consummation of any other transaction contemplated by
this Agreement shall be borne by Pinnacle.
A-35
<PAGE>
Section 7.11 Financing.
(a) Pinnacle Acq Corp shall use its commercially reasonable efforts to
obtain and effectuate the Financing. Pinnacle shall use its commercially
reasonable efforts to cooperate with and assist Pinnacle Acq Corp in obtaining
and effectuating the Financing; provided that "commercially reasonable
efforts" shall not require Pinnacle Acq Corp to expend money in excess of the
expenses set forth in Exhibit A hereto, seek or provide any equity or
supplemental investment in connection with the transactions contemplated
hereby, or amend in any manner adverse to Pinnacle Acq Corp any of the terms
set forth on Exhibit A hereto.
(b) Neither Pinnacle Acq Corp nor PHCR shall, and each shall cause Harveys
not to, voluntarily enter into any agreement, commitment or understanding with
respect to or concerning any financing, acquisition, disposition or corporate
transaction not contemplated hereby or by the Voting Agreement which would, as
of the date of such transaction, reasonably be expected to materially impair
the ability of PHCR to obtain the Financing. Pinnacle shall have no remedy
with respect to this Section 7.11, and Pinnacle shall not be permitted to
claim a breach under this Section 7.11 unless and until such time as this
Agreement is terminated (i) by Pinnacle Acq Corp solely because of the failure
of the condition Section 8.2(f) hereof to be satisfied, or (ii) by Pinnacle or
by Pinnacle Acq Corp pursuant to Section 9.1(h) hereof.
Section 7.12 Tax Treatment. Each of PHCR and Pinnacle shall use its
reasonable best efforts to cause the Harveys Merger, the Pinnacle Merger and
the contributions described in the Voting Agreement to qualify as an exchange
governed by section 351 of the Code.
Section 7.13 Tender Offer and Consent Solicitations. To the extent required
in connection with the transactions contemplated hereby, Pinnacle Acq Corp
shall use its reasonable best efforts to obtain the consent or valid tender,
without subsequent withdrawal, of not less than 50% of each tranche of the
outstanding principal amount of debt of Pinnacle pursuant to a consent
solicitation and/or tender offer for such debt; provided that "reasonable best
efforts" shall not require Pinnacle Acq Corp to expend money in excess of the
expenses set forth in Exhibit A hereto, seek or provide any equity or
supplemental investment in connection with the transactions contemplated
hereby, or amend in any manner adverse to Pinnacle Acq Corp any of the terms
set forth in Exhibit A hereto.
Section 7.14 Termination of Voting Agreement. Upon any termination of this
Agreement pursuant to the terms of Article IX hereof, the Voting Agreement
shall also terminate and become void and have no effect, without any
liability, or obligation on the part of the parties thereto.
Section 7.15 Compliance Committees. Pinnacle shall, and Pinnacle Acq Corp
shall cause Harveys to, use their reasonable best efforts to cause the
compliance committees of the Boards of Directors of Pinnacle and Harveys,
respectively, to review and approve this Agreement and the transactions
contemplated hereby as promptly as practicable after the date hereof.
Section 7.16 Atlantic Land Warrant. Pinnacle shall use its commercially
reasonable efforts to cause the warrant agreement governing the Atlantic Land
Warrant to be amended to provide for each of the following: (i) in the event
that the Inglewood Sale shall have closed on or prior to the fifth Business
Day prior to the Closing Date, then, as of the Effective Time, the Atlantic
Land Warrant shall be converted into the right to receive from the Pinnacle
Surviving Corporation an amount in cash equal to the product of (x) the number
of shares of Pinnacle Common Stock that were subject to the Atlantic Land
Warrant immediately prior to the Effective Time and (y) the excess (if any) of
the cash amount of the Pinnacle Merger Consideration over the exercise price
per share of the Atlantic Land Warrant immediately prior to the Effective
Time; (ii) in the event that the Inglewood Sale shall not have closed on or
prior to the fifth Business Day prior to the Closing Date, the holder of the
Atlantic Land Warrant shall not receive the amount contemplated by clause (i)
above and shall instead be deemed to have received a number of Class B CPRs
(as defined in Section 10.11 hereof) equal to the number of shares of Pinnacle
Common Stock that were subject to the Atlantic Land Warrant immediately prior
to the Effective Time; and (iii) as of the Effective Time, the Atlantic Land
Warrant shall no longer be outstanding and shall
A-36
<PAGE>
automatically be canceled and shall cease to exist, and the holder of the
Atlantic Land Warrant shall cease to have any rights with respect thereto,
except the right to receive the consideration (if any) described in
clause (i) above which such holder is entitled to receive.
Section 7.17 Filing of Corporate Gaming License Applications. PHCR and
Pinnacle Acq Corp shall, and PHCR shall cause Harveys and Harveys Acq Corp to,
file, within sixty days of the date of this Agreement, corporate applications
for gaming licenses in each jurisdiction in which Gaming Approvals are
required to permit such persons to consummate the transactions contemplated by
this Agreement and the Harveys Merger Agreement; provided that if advised by
any of their gaming counsel that filing any such corporate application for
gaming licenses in such 60-day period is not conducive to the timely
satisfaction of the condition set forth in Section 8.3(d), then PHCR and
Pinnacle Acq Corp shall, and PHCR shall cause Harveys and Harveys Acq Corp to,
file such corporate applications for gaming licenses as soon after such 60-day
period as is appropriate; provided, further, that Pinnacle and each of its
Affiliates shall reasonably cooperate to the extent needed to facilitate the
approval of such application. Nothing in this Section 7.17 shall require any
of PHCR, Pinnacle Acq Corp, Harveys or Harveys Acq Corp to file during such
60-day period any gaming license applications with respect to any individual.
In addition, nothing in this Section 7.17 shall obligate any of PHCR, Pinnacle
Acq Corp, Harveys, Harveys Acquisition Corporation, or any of their respective
Affiliates to obtain any consent, approval, license, waiver, order, decree,
determination of suitability or other authorization or make any filing or
application with respect to any limited partner of Colony III or its
Affiliates.
ARTICLE VIII
CONDITIONS PRECEDENT
Section 8.1 Conditions to Each Party's Obligation to Effect the Pinnacle
Merger. The respective obligations of each party to effect the Pinnacle Merger
is subject to the satisfaction or waiver on or prior to the Closing Date of
the following conditions:
(a) Stockholder Approval. This Agreement shall have been approved and
adopted by the Requisite Vote in accordance with applicable Law and the
Certificate of Incorporation of Pinnacle.
(b) No Injunctions or Restraints. No statute, rule, regulation, executive
order, decree, temporary restraining order, preliminary or permanent
injunction or other order enacted, entered, promulgated, enforced or issued by
any Governmental Entity or other legal restraint or prohibition preventing the
consummation of the Pinnacle Merger or the transactions contemplated hereby
shall be in effect; provided, in the case of a decree, injunction or other
order, each of the parties shall have used their best efforts to prevent the
entry of any such injunction or other order and to appeal as promptly as
possible any decree, injunction or other order that may be entered.
(c) HSR Act. Any waiting period (and any extension thereof) applicable to
the transaction contemplated by this Agreement under the HSR Act shall have
expired or shall have been terminated.
Section 8.2 Conditions to Obligations of Pinnacle Acq Corp. The obligations
of Pinnacle Acq Corp to effect the Pinnacle Merger are further subject to the
satisfaction or waiver on or prior to the Closing Date of the following
conditions:
(a) Representations and Warranties. The representations and warranties of
Pinnacle contained herein that are qualified as to materiality shall be true
and accurate, and those not so qualified shall be true and accurate in all
material respects, in each case on the date hereof and at and as of the
Effective Time with the same force and effect as though made at and as of the
Effective Time (except to the extent a representation or warranty speaks
specifically as of an earlier date or except as contemplated by this
Agreement), and Pinnacle Acq Corp shall have received a certificate signed on
behalf of Pinnacle by its President and its Chief Financial Officer to such
effect.
A-37
<PAGE>
(b) Covenants. Pinnacle shall have performed, in all material respects, all
obligations and complied, in all material respects, with all covenants
required by this Agreement to be performed or complied with by it at or prior
to the Effective Time, and Pinnacle Acq Corp shall have received certificates
signed on behalf of Pinnacle by its President and its Chief Financial Officer
to such effect.
(c) No Material Adverse Effect. From the date hereof through and including
the Effective Time, no event or events shall have occurred which, individually
or in the aggregate, would reasonably be expected to have a material adverse
effect on Pinnacle or the transactions contemplated hereby.
(d) Gaming Authority Approval. All licenses, permits, registrations,
authorizations, consents, waivers, orders, findings of suitability or other
approvals required to be obtained from, and all filings, notices or
declarations required to be made with, any Gaming Authority or Governmental
Entity to permit Pinnacle Acq Corp and Pinnacle to consummate the Pinnacle
Merger, to permit Harveys Acq Corp and Harveys to complete the Harveys Merger,
and to permit the Pinnacle Surviving Corporation and the Harveys Surviving
Corporation and each of their respective Subsidiaries to conduct their
respective businesses in the jurisdictions regulated by such Gaming
Authorities after the Effective Time in the same manner as conducted by
Pinnacle and Harveys and their respective Subsidiaries prior to the Effective
Time (collectively, the "Gaming Approvals") shall have been obtained or made,
as applicable; provided that this condition shall not be deemed satisfied if
any Gaming Approval obligates Pinnacle Acq Corp or Harveys Acq Corp, or any of
their respective Affiliates to obtain any consent, approval, license, waiver,
order, decree, determination of suitability or other authorization or make any
filing or application with respect to any limited partner of Colony III or its
Affiliates.
(e) Consents. All consents, waivers, orders, approvals, authorizations,
registrations, findings of suitability, licensing and action of (i) any
Governmental Entity other than a Gaming Authority required to permit the
consummation of the Pinnacle Merger, and (ii) any third party listed on
Schedule 4.4(a) or 4.4(b) hereof with respect to which consent is indicated on
such Schedule to be obtained, shall have been obtained or made, free of any
condition that would be materially adverse to Pinnacle or the transactions
contemplated hereby.
(f) Financing. Pinnacle Acq Corp and Harveys Acq Corp shall have received
the cash proceeds of the Financing.
(g) Tender Offers and Consent Solicitations. To the extent required in
connection with the transactions contemplated hereby, Pinnacle Acq Corp shall
have received valid consents and related tenders under the outstanding
principal amount of debt of Pinnacle and Harveys pursuant to tender offers for
such debt. Pinnacle Acq Corp shall have received the requisite consents under
the instruments under which such debt was issued for any amendments of such
instruments necessary in connection with the transactions contemplated hereby
and such amendments shall have become effective in accordance with the terms
of such instruments.
(h) Principal Asset Dispositions. The Principal Asset Dispositions (other
than the Inglewood Sale) shall have been consummated on substantially the
terms and subject to the conditions contained in the applicable Asset
Disposition Agreement, Pinnacle shall have received therefrom not less than
the net proceeds indicated on Schedule 6.1(c) hereto, and the Chief Financial
Officer of Pinnacle shall have delivered a certificate to Pinnacle Acq Corp
certifying that his good faith reasonable estimate of net proceeds from such
Principal Asset Dispositions are not less than the amounts set forth on
Schedule 6.1(c) hereto.
(i) Transaction Documents. The transactions contemplated by the Transaction
Documents shall have been consummated immediately prior to the Effective Time.
(j) Dissenting Shares. The aggregate number of Pinnacle Dissenting Shares
shall not exceed 5% of the total number of shares of Pinnacle Common Stock
outstanding immediately prior to the Pinnacle Stockholders Meeting.
(k) Indiana Project. (i) All material phases of the Indiana Project (other
than the golf course and performance theater) shall have been substantially
completed and opened to the public by not later than
A-38
<PAGE>
September 15, 2000; and (ii) the costs associated with the Indiana Project
shall not be, in the aggregate, more than $207 million, and the project (other
than the golf course and performance theater) will have been completed in
substantial conformity with the written budgets, plans and policies relating
to the Indiana Project provided to Pinnacle Acq Corp prior to the date hereof.
Section 8.3 Conditions to Obligations of Pinnacle. The obligations of
Pinnacle to effect the Pinnacle Merger are further subject to the satisfaction
or waiver on or prior to the Closing Date of the following conditions:
(a) Representations and Warranties. The representations and warranties of
Pinnacle Acq Corp contained herein that are qualified as to materiality shall
be true and accurate, and those not so qualified shall be true and accurate in
all material respects, in each case at and as of the Effective Time with the
same force and effect as though made at and as of the Effective Time (except
to the extent a representation or warranty speaks specifically as of an
earlier date or except as contemplated by this Agreement), and Pinnacle shall
have received certificates signed on behalf of Pinnacle Acq Corp by its
President to such effect.
(b) Agreements and Covenants. Pinnacle Acq Corp shall have performed, in
all material respects, all obligations and complied, in all material respects,
with all covenants required by this Agreement to be performed or complied with
by it at or prior to the Effective Time, and Pinnacle shall have received a
certificate signed on behalf of Pinnacle Acq Corp by its President to such
effect.
(c) Gaming Authority Approval. All licenses, permits, registrations,
authorizations, consents, waivers, orders, findings of suitability or other
approvals required to be obtained from, and all filings, notices or
declarations required to be made with, any Gaming Authority to permit Pinnacle
Acq Corp to consummate the Pinnacle Merger shall have been obtained or made,
as applicable.
ARTICLE IX
TERMINATION, AMENDMENT AND WAIVER
Section 9.1 Termination. This Agreement may be terminated at any time prior
to the Effective Time, whether before or after approval of matters presented
in connection with the Pinnacle Merger by the stockholders of Pinnacle:
(a) by mutual written consent of each of the parties;
(b) by either Pinnacle Acq Corp or Pinnacle if any Governmental Entity
shall have issued an order, decree or ruling or taken any other action
permanently enjoining, restraining or otherwise prohibiting the acceptance for
payment of, or payment for, shares of Pinnacle Common Stock pursuant to the
Pinnacle Merger and such order, decree or ruling or other action shall have
become final and nonappealable; provided, in the case of an order, decree,
ruling or other order, each of the parties shall have used their best efforts
to prevent the entry of any such order, decree, ruling or other order and to
appeal as promptly as possible any order, decree, ruling or other order that
may be entered; provided further, the right to terminate this Agreement
pursuant to the foregoing clause shall not be available to any party that
fails to comply with Section 7.4;
(c) (A) by either Pinnacle Acq Corp or Pinnacle, at any time after January
15, 2001 if the Effective Time shall not have occurred on or prior to such
date other than due to the failure of the party seeking to terminate this
Agreement to perform its obligations under this Agreement required to be
performed at or before the Closing; provided, however, that, Pinnacle Acq Corp
may, at its option, (x) extend such date for up to six months if (i) it can
demonstrate to Pinnacle's reasonable good faith satisfaction that there is a
reasonable likelihood that it will receive the Gaming Approvals by such date,
and (ii) Pinnacle Acq Corp delivers to Pinnacle commitment letter(s) and
highly confident letter(s) reflecting amounts that are at least sufficient to
cover the Financing with expiration dates that are at least coextensive with
the date of such extension (and "Extended Commitment"); or
A-39
<PAGE>
(y) extend the January 15, 2001 date for up to two months if the parties shall
have received from any responsible individual of each Gaming Authority (i) the
approval of which is required to be obtained to permit Pinnacle Acq Corp and
Harveys Acq Corp to consummate the Pinnacle Merger and Harveys Merger,
respectively and (ii) which has not prior to January 15, 2001 finally
determined whether such approval shall be granted, reasonable assurance
(written or oral) that a hearing is scheduled or can reasonably be expected to
be scheduled prior to March 15, 2001;
(B) Notwithstanding the foregoing, in the event that Pinnacle or Pinnacle
Acq Corp receives a final and nonappealable written statement from any of the
Gaming Authorities that states that such Gaming Authority has disapproved or
will not give approval to this Agreement, which disapproval would cause
Pinnacle Acq Corp to be unable to consummate the Pinnacle Merger, or if
Pinnacle Acq Corp has finally withdrawn (with no intent to resubmit) its
gaming application with such Gaming Authority, such party may terminate this
Agreement with written notice of such termination given to the other party
hereto; provided that no party may terminate this Agreement pursuant to the
terms of this sentence if such party is in material breach of this Agreement;
(d) by Pinnacle Acq Corp, if this Agreement has not been approved by the
Requisite Vote of the outstanding shares of Pinnacle Common Stock within 120
days after the date hereof; provided however, the time period set for in this
Section shall toll from the 51st day to the 80th day that the Proxy Statement
and the Schedule 13E-3 are filed with the SEC and remain under review by the
SEC (but in no event shall such period toll for more than 30 days in total or
the Pinnacle Stockholders Meeting occur later than the 150th day after the
date hereof); provided further that such tolling period shall only be
available if the Proxy Statement and the Schedule 13E-3 are filed in
accordance with the provisions of Section 7.2 hereof and Pinnacle has used its
reasonable best efforts to respond to SEC comments to such disclosure
documentation promptly and completely;
(e) by Pinnacle Acq Corp if the Board of Directors of Pinnacle amends,
modifies or withdraws its recommendation or publicly proposes to amend, modify
in a manner adverse to Pinnacle Acq Corp, or withdraw its recommendation of
the Pinnacle Merger or this Agreement or if, following a Takeover Proposal,
Pinnacle fails to comply with its obligations under Sections 6.3 and 7.4
hereof;
(f) by either Pinnacle or Pinnacle Acq Corp if, at a duly held stockholders
meeting of Pinnacle or any adjournment thereof at which this Agreement is
voted upon, the Requisite Vote in favor of the adoption of this Agreement
shall not have been obtained; or
(g) by Pinnacle in connection with simultaneously entering into a
definitive agreement in accordance with Section 6.3(b); provided, it has
complied with all provisions thereof, including the notice provisions therein,
and that it simultaneously makes payment of the Termination Fee.
(h) by Pinnacle Acq Corp or Pinnacle in the event that the Financing
Letters shall have been withdrawn or terminated by the issuing lenders, and
Pinnacle Acq Corp is unable, despite the exercise of its reasonable efforts,
to obtain a replacement commitment letter(s) and/or highly confident letter(s)
reflecting amounts that are at least sufficient to cover the Financing, within
20 Business Days following such withdrawal or termination.
Section 9.2 Effect of Termination. In the event of termination of this
Agreement by either Pinnacle or Pinnacle Acq Corp as provided in Section 9.1,
this Agreement shall forthwith become void and have no effect, without any
liability or obligation on the part of Pinnacle Acq Corp or Pinnacle, other
than the provisions of Section 7.2, Section 7.3, Section 7.7, this Section 9.2
and Article X (other than Section 10.11) and except to the extent that such
termination results from the wilful and material breach by a party of any of
its representations, warranties, covenants or agreements set forth in this
Agreement, in which case each other party shall be entitled to recover all
damages allowable at law and all relief available in equity; provided that,
upon receipt by Pinnacle Acq Corp of the Termination Fee in accordance with
the provisions hereof, Pinnacle Acq Corp shall have no further rights
hereunder, at law or in equity, to damages or other relief and shall release
and forever discharge Pinnacle, and each of its past, present and future
representatives, affiliates, stockholders, directors, officers, employees,
subsidiaries, successors and assigns from any and all claims, demands,
proceedings or other
A-40
<PAGE>
obligations, known or unknown, both at law and in equity, which Pinnacle Acq
Corp may ever have against such persons arising out of any matter, cause or
event occurring at or prior to the Effective Time; provided further that the
limitation set forth in the previous proviso is not intended to act as a
limitation of liability in the event that the Termination Fee is not payable
pursuant to the terms hereof.
Section 9.3 Amendment. This Agreement may be amended by the mutual
agreement of the parties at any time before or after any required approval of
matters presented in connection with the Pinnacle Merger by the stockholders
of Pinnacle; provided, that after any such approval, there shall not be made
any amendment that by law requires further approval by such stockholders
without the further approval of such stockholders. This Agreement may not be
amended except by an instrument in writing signed on behalf of each of the
parties.
Section 9.4 Extension; Waiver. At any time prior to the Effective Time, the
parties may (a) extend the time for the performance of any of the obligations
or other acts of the other parties, (b) waive any inaccuracies in the
representations and warranties of the other party contained in this Agreement
or in any document delivered pursuant to this Agreement or (c) subject to the
proviso of Section 9.3, waive compliance by the other party with any of the
agreements or conditions contained in this Agreement. Any agreement on the
part of a party to any such extension or waiver shall be valid only if set
forth in an instrument in writing signed on behalf of such party. The failure
of any party to this Agreement to assert any of its rights under this
Agreement or otherwise shall not constitute a waiver of those rights.
Section 9.5 Procedure for Termination, Amendment, Extension or Waiver. A
termination of this Agreement pursuant to Section 9.1, an amendment of this
Agreement pursuant to Section 9.3 or an extension or waiver pursuant to
Section 9.4 shall, in order to be effective, require in the case of Pinnacle
Acq Corp or Pinnacle, action by its Board of Directors or the duly authorized
designee of its Board of Directors.
ARTICLE X
GENERAL PROVISIONS
Section 10.1 Nonsurvival of Representations. None of the representations
and warranties in this Agreement shall survive the Effective Time. This
Section 10.1 shall not limit any covenant or agreement of the parties which by
its terms contemplates performance after the Effective Time of the Pinnacle
Merger.
Section 10.2 Representations and Warranties. Notwithstanding anything in
this Agreement to the contrary, the disclosure of any information on any
schedule to this Agreement shall be deemed to constitute the disclosure of
such information for all other schedules to this Agreement to the extent that
it is clear from a reading of such information that it is applicable to such
other schedules.
Section 10.3 Notices. All notices, requests, claims, demands and other
communications under this Agreement shall be in writing and shall be deemed
given if delivered personally or sent by overnight courier (providing proof of
delivery) to the parties or sent by telecopy (providing confirmation of
transmission) at the following addresses or telecopy number (or at such other
address or telecopy number for a party as shall be specified by like notice):
(a) if to Pinnacle Acq Corp or PHCR, to:
c/o Harveys Casino Resorts
Highway 50 & Stateline Avenue
Lake Tahoe, Nevada 89449
Attention: Charles W. Scharer
Telephone: 775-586-6756
Facsimile: 775-586-6852
and
A-41
<PAGE>
c/o Colony Capital, Inc.
1999 Avenue of the Stars, Suite 1200
Los Angeles, California 90067
Telephone: 310-282-8820
Facsimile: 310-282-8813
Attention: Jonathan H. Grunzweig
with a copy to:
Skadden, Arps, Slate, Meagher & Flom LLP
300 South Grand Avenue, Suite 3400
Los Angeles, California 90071
Attention: Nick P. Saggese, Esq.
Telephone: 213-687-5550
Facsimile: 213-687-5600
(b) if to Pinnacle, to
Pinnacle Entertainment, Inc.
330 North Brand Boulevard, Suite 1100
Glendale, California 91203
Attention: Loren Ostrow, Esq.
Telephone: 818-662-5900
Facsimile: 818-662-5901
with a copy to:
Irell & Manella LLP
1800 Avenue of the Stars, Suite 900
Los Angeles, California 90067
Attention: Alvin Segel, Esq.
Telephone: 310-203-7069
Facsimile: 310-203-7199
and
Munger, Tolles & Olson LLP
355 South Grand Avenue, Suite 3500
Los Angeles, California 90071
Attention: Simon Lorne, Esq.
Telephone: 213-683-9100
Facsimile: 213-687-3702
Section 10.4 Interpretation. When a reference is made in this Agreement to
an Article, Section or Schedule, such reference shall be to an Article or
Section of or a Schedule to, this Agreement unless otherwise indicated. The
table of contents and headings contained in this Agreement are for reference
purposes only and shall not affect in any way the meaning or interpretation of
this Agreement. Whenever the words "include," "includes" or "including" are
used in this Agreement, they shall be deemed to be followed by the words
"without limitation." The Transaction Documents and the consummation of the
transactions contemplated by such Transaction Documents are transactions
contemplated by this Agreement. To the extent any restriction on the
activities of Pinnacle or its Subsidiaries under the terms of this Agreement
requires prior approval under any Gaming Law, such restriction shall be of no
force or effect unless and until such approval is obtained. If any provision
of this Agreement is illegal or unenforceable under any Gaming Law, such
provision shall be void and of no force or effect.
A-42
<PAGE>
Section 10.5 Counterparts. This Agreement may be executed in one or more
counterparts, all of which shall be considered one and the same agreement and
shall become effective when one or more counterparts have been signed by each
of the parties and delivered to the other parties.
Section 10.6 Entire Agreement; No Third-Party Beneficiaries. This Agreement
and the Voting Agreement constitute the entire agreements, and supersede all
prior agreements and understandings, both written and oral, among the parties
with respect to the subject matter of these agreements and are not intended to
confer upon any Person other than the parties any rights or remedies
hereunder, except that (i) officers, directors, employees and agents of
Pinnacle and its Subsidiaries are intended beneficiaries of the covenants and
agreements set forth in Section 7.6 and (ii) the holders of Pinnacle Stock
Options are the intended beneficiaries of the covenants and agreements set
forth in Section 7.5.
Section 10.7 Governing Law. THIS AGREEMENT SHALL BE GOVERNED BY, AND
CONSTRUED IN ACCORDANCE WITH, THE LAWS OF THE STATE OF DELAWARE, WITHOUT
REGARD TO ANY APPLICABLE CONFLICTS OF LAW.
Section 10.8 Gaming Laws. Each of the provisions of this Agreement is
subject to and shall be enforced in compliance with the Gaming Laws.
Section 10.9 Assignment. Neither this Agreement nor any of the rights,
interests or obligations under this Agreement shall be assigned, in whole or
in part, by operation of law or otherwise by any of the parties without the
prior written consent of the other parties, except that Pinnacle Acq Corp may
assign, in its sole discretion, any of or all its rights, interests and
obligations under this Agreement to any controlled affiliate of Colony
Capital, Inc., provided such party assumes Pinnacle Acq Corp's obligations
hereunder, and Pinnacle Acq Corp remains liable hereunder. Subject to the
preceding sentence, this Agreement will be binding upon, inure to the benefit
of, and be enforceable by, the parties and their respective successors and
assigns.
Section 10.10 Enforcement. The parties agree that irreparable damage would
occur in the event that any of the provisions of this Agreement were not
performed in accordance with their specific terms or were otherwise breached.
It is accordingly agreed that the parties shall be entitled to an injunction
or injunctions to prevent breaches of this Agreement and to enforce
specifically the terms and provisions of this Agreement in any court of the
United States located in the State of Delaware or in Delaware state court,
this being in addition to any other remedy to which they are entitled at law
or in equity. In addition, each of the parties hereto (a) consents to commit
itself to the personal jurisdiction of any Federal court located in the State
of Delaware or any Delaware state court in the event any dispute arises out of
this Agreement or any of the transactions contemplated by this Agreement, (b)
agrees that it will not attempt to deny or defeat such personal jurisdiction
by motion or other request for leave from any such court and (c) agrees that
it will not bring any action relating to this Agreement or any of the
transactions contemplated by this Agreement in any court other than a Federal
or state court sitting in the State of Delaware.
Section 10.11 Inglewood Sale; CPRs.
(a) Upon the occurrence of an event set forth below, the Pinnacle Merger
Consideration shall be adjusted in the manner set forth below with respect to
such event:
(i) In the event that the Inglewood Sale shall have closed on or prior
to the fifth Business Day prior to the Closing Date and the Net Proceeds to
Pinnacle from the Inglewood Sale are equal to or greater than $40,750,000,
then the Pinnacle Merger Consideration shall equal $25.00 in cash.
(ii) In the event that the Inglewood Sale shall have closed on or prior
to the fifth Business Day prior to the Closing Date and the Net Proceeds to
Pinnacle from the Inglewood Sale are greater than $13,054,000 but less than
$40,750,000, then the Pinnacle Merger Consideration shall equal the sum of
(x) $24.00 in cash, and (y) the Proceeds Adjustment, in cash.
A-43
<PAGE>
(iii) In the event that the Inglewood Sale shall have closed on or prior
to the fifth Business Day prior to the Closing Date and the Net Proceeds to
Pinnacle from the Inglewood Sale are less than or equal to $13,054,000,
then there shall be no adjustment to the Pinnacle Merger Consideration.
(iv) In the event that the Inglewood Sale shall not have closed on or
prior to the fifth Business Day prior to the Closing Date, then the
Pinnacle Merger Consideration shall equal (i) $24.00 in cash, and (ii) one
Class A CPR; provided that, the holder of the Atlantic Land Warrant shall
not receive the Pinnacle Merger Consideration and shall instead receive
that number of Class B CPRs equal to the number of shares issuable upon
exercise of the Atlantic Land Warrant immediately prior to the Effective
Time and no other consideration.
(b) As used in this Agreement, the following terms shall have the following
respective meanings:
"Class A CPR" means a contingent payment right representing the right to
receive from the Pinnacle Surviving Corporation (or, at its option, PHCR),
in cash, the Class A CPR Amount, if any. The Paying Agent shall distribute
to holders of Class A CPRs the Class A CPR Amount, if any, as soon as
practicable following the closing of the Inglewood Sale. Payments in
respect of Class A CPRs shall be without interest and less any withholding
or deduction for Taxes required under applicable law. The CPRs shall not
represent an equity or other ownership interest in PHCR or the Pinnacle
Surviving Corporation, shall not be transferable by the holders thereof,
except by operation of law or will, shall not be represented by any form of
certificate or instrument, and shall not bear interest. Holders of Class A
CPRs shall have no voting or other rights as stockholders of PHCR or the
Pinnacle Surviving Corporation. No amount shall be payable with respect to
the Class A CPRs if the Inglewood Sale shall not have closed prior to
December 31, 2001 (the "Expiration Date"). If the Inglewood Sale shall not
have closed prior to the Expiration Date, no further obligations shall be
owing in respect of the Class A CPRs or the provisions of this Section
10.11.
"Class B CPR" means a contingent payment right representing the right to
receive from the Pinnacle Surviving Corporation (or, at its option, PHCR),
in cash the Class B CPR Amount, if any. The Paying Agent shall distribute
to holders of Class B CPRs the Class B CPR Amount, if any, as soon as
practicable following the closing of the Inglewood Sale. Payments in
respect of Class B CPRs shall be without interest and less any withholding
or deduction for Taxes required under applicable law. The Class B CPRs
shall not represent an equity or other ownership interest in PHCR or the
Pinnacle Surviving Corporation, shall not be transferable by the holders
thereof, except by operation of law or will, shall not be represented by
any form of certificate or instrument, and shall not bear interest. Holders
of Class B CPRs shall have no voting or other rights as stockholders of
PHCR or the Pinnacle Surviving Corporation. No amount shall be payable with
respect to the Class B CPRs if the Inglewood Sale shall not have closed
prior to the Expiration Date. If the Inglewood Sale shall not have closed
prior to the Expiration Date, no further obligations shall be owing in
respect of the Class B CPRs or the provisions of this Section 10.11.
"Class A CPR Adjustment" means the quotient determined by dividing (a)
the difference of (1) the Net Proceeds to the Pinnacle Surviving
Corporation from the Inglewood Sale, minus (2) $13,054,000, minus (3) the
product of (x) the Class B CPR Amount, and (y) the number of Class B CPRs
outstanding, by (b) the sum of (1) the total number of shares of Pinnacle
Common Stock outstanding immediately prior to the Effective Time, plus (2)
the Implied Option Shares Number plus (3) the number of shares redeemed in
accordance with Section 6.1(d) of this Agreement; provided that, if such
number is negative, it shall be deemed to be zero.
"Class A CPR Amount" means, with respect to an event described below,
the amount set forth below with respect to such event:
(A) In the event that Net Proceeds to the Pinnacle Surviving
Corporation from the Inglewood Sale are equal to or greater than
$40,750,000, then the Class A CPR Amount shall equal $1.00.
(B) In the event that the Net Proceeds to the Pinnacle Surviving
Corporation from the Inglewood Sale are greater than $13,054,000 but
less than $40,750,000, then the Class A CPR Amount shall equal the
Class A CPR Adjustment.
A-44
<PAGE>
(C) In the event that the Net Proceeds to the Pinnacle Surviving
Corporation from the Inglewood Sale are less than or equal to
$13,054,000, then the Class A CPR Amount shall equal zero dollars ($0).
"Class B CPR Adjustment" means the difference of (a) the quotient
determined by dividing (1) the difference of (x) Net Proceeds to the
Pinnacle Surviving Corporation from the Inglewood Sale, minus
(y) $13,054,000, by (2) the total number of Class A CPRs and Class B CPRs
outstanding, minus (b) $0.78; provided that, if such number is negative, it
shall be deemed to be zero.
"Class B CPR Amount" means, with respect to an event described below,
the amount set forth below with respect to such event:
(A) In the event that Net Proceeds to the Pinnacle Surviving
Corporation from the Inglewood Sale are equal to or greater than
$40,750,000, then the Class B CPR Amount shall equal $0.22.
(B) In the event that the Net Proceeds to the Pinnacle Surviving
Corporation from the Inglewood Sale are greater than $13,054,000 but
less than $40,750,000, then the Class B CPR Amount shall equal the
Class B CPR Adjustment.
(C) In the event that the Net Proceeds to the Pinnacle Surviving
Corporation from the Inglewood Sale are less than or equal to
$13,054,000, then the Class B CPR Amount shall equal zero dollars ($0).
"Gross Proceeds" means the aggregate dollar amount of any and all gross
proceeds to Pinnacle or the Pinnacle Surviving Corporation, as the case may
be, from the Inglewood Sale.
"Implied Option Shares Number" means the number obtained by multiplying
(a) the quotient derived by dividing (1) the difference of (x) the Maximum
Option Consideration, minus (y) the aggregate exercise price of all In the
Money Pinnacle Options, by (2) the Maximum Option Consideration, times (b)
the total number of shares of Pinnacle Common Stock issuable upon exercise
of the In the Money Pinnacle Options.
"In the Money Pinnacle Options" means Pinnacle Options with an exercise
price less than $24.00 per share.
"Inglewood Sale" means the sale or other disposition for value of the
entire Inglewood Property, whether accomplished in a single transaction or
in more than one transaction; provided, however, that if the Inglewood Sale
is accomplished in more than one transaction, the Inglewood Sale shall not
be deemed to have been closed until such time as the transaction with
respect to the last remaining portion of the Inglewood Property shall have
closed.
"Maximum Option Consideration" means the product derived by multiplying
(a) $24.00, times (b) the total number of shares of Pinnacle Common Stock
issuable upon exercise of the In the Money Pinnacle Options.
"Net Proceeds" means the sum of (a) the product determined by
multiplying (i) 0.58 by (ii) the difference of (x) the Gross Proceeds,
minus (y) Pinnacle's inside tax basis in the Inglewood Property, plus (b)
Pinnacle's inside tax basis in the Inglewood Property.
"Proceeds Adjustment" means an amount of cash equal to the quotient
determined by dividing (a) the difference of (1) the Net Proceeds to
Pinnacle from the Inglewood Sale, minus (2) $13,054,000, minus (3) the
Warrant Adjustment Amount, by (b) the sum of (1) the total number of shares
of Pinnacle Common Stock outstanding immediately prior to the Effective
Time, plus (2) the Implied Option Shares Number, plus (3) the number of
shares redeemed in accordance with Section 6.1(d) of this Agreement;
provided that, if such number is negative, it shall be deemed to be zero.
"Warrant Adjustment Amount" means the difference of (a) the quotient
determined by dividing (1) the difference of (x) Net Proceeds to the
Pinnacle Surviving Corporation from the Inglewood Sale,
A-45
<PAGE>
minus (y) $13,054,000, by (2) the sum of (x) the total number of shares of
Pinnacle Common Stock outstanding, plus (y) the total number of shares of
Pinnacle Common Stock issuable upon exercise of the In the Money Options
plus (c) the total number of shares of Pinnacle Common Stock issuable upon
exercise of the Atlantic Land Warrant, plus (d) the number of shares
redeemed in accordance with Section 6.1(d) of this Agreement minus (b)
$0.78; provided that, if such number is negative, it shall be deemed to be
zero.
(c) In the event that the Inglewood Sale shall not have closed on or prior
to the fifth Business Day prior to the Closing Date, the Pinnacle Surviving
Corporation shall use its commercially reasonable efforts to consummate the
Inglewood Sale during the period beginning on the date following the Closing
Date and continuing through to but not including the Expiration Date;
provided, however, that none of PHCR, Pinnacle Acq Corp or the Pinnacle
Surviving Corporation shall have any liability for breach of this Section
10.11(c) except to the extent that any such breach shall have resulted from a
willful and material breach by such party.
(d) The obligation of the Pinnacle Surviving Corporation to pay the Class A
CPR Amount and the Class B CPR Amount shall be secured by a letter of credit
in an amount of $27,696,000 to be obtained at or prior to the Effective Time
issued in favor of the Paying Agent (or in the event that the Paying Agent is
unwilling to act in such capacity, a bank or title company reasonably
acceptable to Pinnacle and Pinnacle Acq Corp), which shall expire on the
Expiration Date.
(e) A committee comprised of member of the present Board of Directors of
Pinnacle or their designee(s) (the "Inglewood Sale Committee") shall have
approval rights over any proposed sale of the Inglewood Property and such
sales effort shall be managed by the present president of Realty Investment
Group, Inc., or such other person as may be mutually agreed to by the Pinnacle
Surviving Corporation and the Inglewood Sale Committee.
[signature pages follow]
A-46
<PAGE>
IN WITNESS WHEREOF, PHCR, Pinnacle and Pinnacle Acq Corp have caused this
Agreement to be signed by their respective officers thereunto duly authorized,
all as of the date first written above.
PH CASINO RESORTS, INC.
By: /s/ Charles W. Scharer
-------------------------------
Name: Charles W. Scharer
Title: President
PINNACLE ENTERTAINMENT, INC.
By: /s/ Paul Alanis
---------------------------------
Name: Paul Alanis
Title: President
PINNACLE ACQUISITION CORPORATION
By: /s/ Charles W. Scharer
-------------------------------
Name: Charles W. Scharer
Title: President
A-47
<PAGE>
ANNEX A1
Pinnacle Entertainment, Inc.
330 North Brand Boulevard, Suite 1100
Glendale, California 91203
August [ ], 2000
PH Casino Resorts, Inc.
Pinnacle Acquisition Corporation
c/o Colony Capital, Inc.
1999 Avenue of the Stars, Suite 1200
Los Angeles, CA 90067
PH Casino Resorts, Inc.
Pinnacle Acquisition Corporation
c/o Harveys Casino Resorts
Highway 50 & Stateline Avenue
Lake Tahoe, Nevada 89449
Re: Extension of Date for Stockholders Meeting
Gentlemen:
Reference is made to that certain Agreement and Plan of Merger dated as of
April 17, 2000 (the "Merger Agreement") among PH Casino Resorts, Inc.
("PHCR"), Pinnacle Acquisition Corporation ("Pinnacle Acq Corp") and Pinnacle
Entertainment, Inc. ("Pinnacle"). Capitalized terms used in this letter and
not otherwise herein defined shall have the meanings ascribed to them in the
Merger Agreement.
Under Section 9.1(d) of the Merger Agreement, Pinnacle Acq Corp has the
right to terminate the Merger Agreement if the Merger Agreement has not been
approved by the Requisite Vote of the outstanding shares of Pinnacle Common
Stock within 120 days after the date of the Merger Agreement, subject to a
limited tolling of such time period (up to 30 days) on the terms set forth in
the provisions of Section 7.1 of the Merger Agreement for SEC review of the
Proxy Statement and Schedule 13E-3 (the "Stockholders Meeting Deadline").
Under Section 7.1 of the Merger Agreement, Pinnacle is obligated to duly call,
give notice of, convene and hold the Pinnacle Stockholders Meeting as soon as
practicable, and in any event no later than the Stockholders Meeting Deadline.
In addition, Pinnacle has the right to terminate the Merger Agreement in
connection with simultaneously entering into a definitive agreement in
accordance with Section 6.3(b) of the Merger Agreement under certain
circumstances relating to its acceptance of a Competitive Proposal, provided
that Pinnacle has complied with all provisions of Section 6.3(b) and with the
terms of Section 9.1(g) of the Merger Agreement. Under Section 6.3(b) of the
Merger Agreement, the Board of Directors of Pinnacle or the Special Committee,
prior to the approval of the Merger Agreement or the Pinnacle Merger by the
Requisite Vote, to the extent required by the fiduciary duties to Pinnacle's
stockholders under applicable Law, after consultation with outside legal
counsel, may, subject to the terms of Section 6.3(b) of the Merger Agreement,
take certain actions in connection with the receipt of a Competitive Proposal,
including approving a Competitive Proposal.
This letter shall memorialize the agreement of the parties that even though
Pinnacle shall remain obligated under the Merger Agreement to duly call, give
notice of, convene and hold the Pinnacle Stockholders Meeting as soon as
practicable (1) Pinnacle shall no longer be obligated to hold the Pinnacle
Stockholders Meeting by the Stockholders Meeting Deadline; provided, however,
that Pinnacle shall remain obligated to file the Proxy Statement and the
Schedule 13E-3 in accordance with the provisions of Section 7.2 of the Merger
Agreement and to use its reasonable best efforts to respond to SEC comments
for such disclosure documentation promptly and completely, and (2) provided
that Pinnacle complies with its obligations to hold the Pinnacle Stockholders
A1-1
<PAGE>
PH Casino Resort, Inc.
Pinnacle Acquisition Corporation
August [ ], 2000
Meeting as described in the immediately following paragraph and the Pinnacle
Stockholders Meeting is held in accordance with the immediately following
paragraph, Pinnacle Acq Corp and PHCR hereby waive their right, pursuant to
Section 9.1(d) of the Merger Agreement, to terminate the Merger Agreement if
the Merger Agreement has not been approved by the Requisite Vote of the
outstanding shares of Pinnacle Common Stock on or prior to the Stockholders
Meeting Deadline.
Pinnacle shall use its reasonable best efforts to hold the Pinnacle
Stockholders Meeting as soon as practicable after the date on which Pinnacle
files a definitive Proxy Statement with the United States Securities and
Exchange Commission. The parties have agreed that PHCR and Pinnacle Acq Corp
shall have the right to terminate the Merger Agreement pursuant to Section
9.1(d) thereof if the Merger Agreement has not been approved by the Requisite
Vote of the outstanding shares of Pinnacle Common Stock on or prior to [ ],
2000, or such other later date as Pinnacle Acq Corp and PHCR shall determine
in their sole discretion.
The parties have also agreed that, notwithstanding the foregoing,
Pinnacle's right to terminate the Merger Agreement under Section 9.1(g) of the
Merger Agreement shall terminate upon the Stockholders Meeting Deadline even
though the Pinnacle Stockholders Meeting may be held after the Stockholders
Meeting Deadline.
Consistent and in accordance with Section 9.4 of the Merger Agreement, the
parties hereto acknowledge that, other than as expressly provided herein, this
Agreement shall have no effect on the rights, obligations, duties (fiduciary
or otherwise) or remedies available or due under the Merger Agreement or
applicable law, whether legal, equitable or otherwise.
If you concur that the foregoing accurately memorializes our agreement with
respect to these matters, please so indicate by signing below and returning a
copy to me.
Sincerely,
By: Lynn P. Reitnouer
AGREED AND ACCEPTED ON AUGUST , 2000:
PH Casino Resorts, Inc.
By:
___________________
Name:
_________________
Title:
__________________
Pinnacle Acquisition Corporation
By:
___________________
Name:
_________________
Title:
__________________
A1-2
<PAGE>
ANNEX B
April 17, 2000
The Special Committee of the Board of Directors
The Board of Directors
PINNACLE ENTERTAINMENT, INC.
330 North Brand Boulevard
Suite 1100
Glendale, CA 91203-2308
To the Special Committee of the Board of Directors and the Board of Directors:
We understand that Pinnacle Entertainment, Inc., a Delaware corporation
("Pinnacle"), and Harveys Casino Resorts, a Nevada corporation (the
"Purchaser") majority owned by Colony Capital, Inc. ("Colony"), propose to
enter into an Agreement and Plan of Merger dated as of April 17, 2000 (the
"Merger Agreement") whereby Pinnacle and the Purchaser will merge (the
"Transaction"). Pursuant to the Merger Agreement, each share of Pinnacle
common stock, par value $0.10 per share ("Pinnacle Common Stock"), outstanding
immediately prior to the effective time of the Transaction will receive up to
$25.00, $24.00 in cash plus up to $1.00 per share contingent upon the
occurrence of, and amount of proceeds from, the sale of certain real estate
located in Inglewood, California, (the "Acquisition Consideration"). You have
requested Jefferies & Company, Inc.'s ("Jefferies") opinion as investment
bankers as to whether the Acquisition Consideration is fair, from a financial
point of view, to the holders of Pinnacle Common Stock.
In our review and analysis and in rendering this opinion, we have with your
permission assumed and relied upon the accuracy and completeness of all
information provided to us by Pinnacle's management, as well as publicly
available information, and have not verified such information. We have not
conducted a physical inspection of any of the properties or facilities of
Pinnacle, nor have we made, been provided with or considered any independent
evaluation or appraisals of any of such properties or facilities. The
Acquisition Consideration was based on negotiations between Pinnacle and the
Purchaser during which Jefferies provided investment banking services to the
Special Committee of the Board of Directors of Pinnacle (the "Committee").
In conducting our analysis and rendering our opinion as expressed herein,
we have reviewed and considered such financial and other factors as we have
deemed appropriate under the circumstances including, among others, the
following: (i) the Merger Agreement; (ii) the historical financial condition
and results of operations of Pinnacle, including the Annual Reports on Form
10-K of Pinnacle for the years ended December 31, 1997, 1998, and 1999; (iii)
certain internal financial and non-financial information prepared by the
management of Pinnacle, which data was made available to us in our role as
financial advisor to the Committee; (iv) published information regarding the
financial performance and operating characteristics of a selected group of
companies which we deemed comparable; (v) business prospects of Pinnacle as
projected by the management of Pinnacle; (vi) the historical and current
market prices for Pinnacle Common Stock and for the equity securities of
certain other companies with businesses that we consider relevant to our
inquiry; and (vii) publicly available information, including research reports
on companies we considered relevant to our inquiry. We have met with certain
officers and employees of Pinnacle to discuss the foregoing as well as other
matters we believed relevant to our opinion. We have also taken into account
general economic, monetary, political, market and other conditions as well as
our experience in connection with similar transactions and securities
valuation generally. Our opinion is based upon all of such conditions as they
exist currently and can be evaluated on the date hereof. Existing conditions
are subject to rapid and unpredictable changes and such changes could impact
our opinion. Our opinion does not constitute a recommendation of the
Transaction over any alternative transactions which may be available to
Pinnacle and does not address Pinnacle's underlying business decision to
effect the Transaction.
For purposes of rendering this opinion and based on your direction and with
your consent, Jefferies has assumed that, in all respects material to its
analysis, the representations and warranties of Pinnacle contained in
B-1
<PAGE>
the Merger Agreement are true and correct, Pinnacle and Colony will each
perform all of the covenants and agreements to be performed by it under the
Merger Agreement, and all conditions to the obligations of Pinnacle to
consummate the Transaction will be satisfied without any waiver thereof.
Jefferies is a registered broker-dealer. Jefferies has acted as financial
advisor to the Committee in connection with the Transaction and will receive
(i) a cash fee upon rendering of the opinion and (ii) a cash fee at the
closing of the Transaction. Jefferies maintains a market in Pinnacle Common
Stock and regularly publishes research reports regarding securities of
Pinnacle. In the ordinary course of business, Jefferies and its affiliates may
actively trade or hold the securities of Pinnacle for their own account and
the accounts of customers and, accordingly, may at any time hold a long or
short position in securities of Pinnacle.
Based upon and subject to the foregoing, we are of the opinion as
investment bankers that the Acquisition Consideration to be received by the
holders of Pinnacle Common Stock pursuant to the Transaction is fair, from a
financial point of view, to such holders.
It is understood and agreed that this opinion is provided for the use and
benefit of the Committee as one element in its consideration of the
Transaction. Without limiting the foregoing, this opinion does not constitute
a recommendation to any shareholder of Pinnacle as to whether to tender such
holder's Pinnacle Common Stock or as to how such person should vote with
respect to the proposed Transaction.
Sincerely,
/s/ JEFFERIES & COMPANY, INC.
B-2
<PAGE>
ANNEX C
SECTION 262 OF THE GENERAL CORPORATION LAW OF THE STATE OF DELAWARE
(S) 262. Appraisal Rights.
(a) Any stockholder of a corporation of this State who holds shares of
stock on the date of the making of a demand pursuant to subsection (d) of this
section with respect to such shares, who continuously holds such shares
through the effective date of the merger or consolidation, who has otherwise
complied with subsection (d) of this section and who has neither voted in
favor of the merger or consolidation nor consented thereto in writing pursuant
to Section 228 of this title shall be entitled to an appraisal by the Court of
Chancery of the fair value of the stockholder's shares of stock under the
circumstances described in subsections (b) and (c) of this section. As used in
this section, the word "stockholder" means a holder of record of stock in a
stock corporation and also a member of record of a nonstock corporation; the
words "stock" and "share" mean and include what is ordinarily meant by those
words and also membership or membership interest of a member of a nonstock
corporation; and the words "depository receipt" mean a receipt or other
instrument issued by a depository representing an interest in one or more
shares, or fractions thereof, solely of stock of a corporation, which stock is
deposited with the depository.
(b) Appraisal rights shall be available for the shares of any class or
series of stock of a constituent corporation in a merger or consolidation to
be effected pursuant to Section 251 (other than a merger effected pursuant to
Section 251(g) of this title), Section 252, Section 254, Section 257, Section
258, Section 263 or Section 264 of this title:
(1) Provided, however, that no appraisal rights under this section shall
be available for the shares of any class or series of stock, which stock,
or depository receipts in respect thereof, at the record date fixed to
determine the stockholders entitled to receive notice of and to vote at the
meeting of stockholders to act upon the agreement of merger or
consolidation, were either (i) listed on a national securities exchange or
designated as a national market system security on an interdealer quotation
system by the National Association of Securities Dealers, Inc. or (ii) held
of record by more than 2,000 holders; and further provided that no
appraisal rights shall be available for any shares of stock of the
constituent corporation surviving a merger if the merger did not require
for its approval the vote of the stockholders of the surviving corporation
as provided in subsection (f) of Section 251 of this title.
(2) Notwithstanding paragraph (1) of this subsection, appraisal rights
under this section shall be available for the shares of any class or series
of stock of a constituent corporation if the holders thereof are required
by the terms of an agreement of merger or consolidation pursuant to
Sections 251, 252, 254, 257, 258, 263 and 264 of this title to accept for
such stock anything except:
a. Shares of stock of the corporation surviving or resulting from
such merger or consolidation, or depository receipts in respect
thereof;
b. Shares of stock of any other corporation, or depository receipts
in respect thereof, which shares of stock (or depository receipts in
respect thereof) or depository receipts at the effective date of the
merger or consolidation will be either listed on a national securities
exchange or designated as a national market system security on an
interdealer quotation system by the National Association of Securities
Dealers, Inc. or held of record by more than 2,000 holders;
c. Cash in lieu of fractional shares or fractional depository
receipts described in the foregoing subparagraphs a. and b. of this
paragraph; or
d. Any combination of the shares of stock, depository receipts and
cash in lieu of fractional shares or fractional depository receipts
described in the foregoing subparagraphs a., b. and c. of this
paragraph.
(3) In the event all of the stock of a subsidiary Delaware corporation
party to a merger effected under Section 253 of this title is not owned by
the parent corporation immediately prior to the merger, appraisal rights
shall be available for the shares of the subsidiary Delaware corporation.
C-1
<PAGE>
(c) Any corporation may provide in its certificate of incorporation that
appraisal rights under this section shall be available for the shares of any
class or series of its stock as a result of an amendment to its certificate of
incorporation, any merger or consolidation in which the corporation is a
constituent corporation or the sale of all or substantially all of the assets
of the corporation. If the certificate of incorporation contains such a
provision, the procedures of this section, including those set forth in
subsections (d) and (e) of this section, shall apply as nearly as is
practicable.
(d) Appraisal rights shall be perfected as follows:
(1) If a proposed merger or consolidation for which appraisal rights are
provided under this section is to be submitted for approval at a meeting of
stockholders, the corporation, not less than 20 days prior to the meeting,
shall notify each of its stockholders who was such on the record date for
such meeting with respect to shares for which appraisal rights are
available pursuant to subsections (b) or (c) hereof that appraisal rights
are available for any or all of the shares of the constituent corporations,
and shall include in such notice a copy of this section. Each stockholder
electing to demand the appraisal of such stockholder's shares shall deliver
to the corporation, before the taking of the vote on the merger or
consolidation, a written demand for appraisal of such stockholder's shares.
Such demand will be sufficient if it reasonably informs the corporation of
the identity of the stockholder and that the stockholder intends thereby to
demand the appraisal of such stockholder's shares. A proxy or vote against
the merger or consolidation shall not constitute such a demand. A
stockholder electing to take such action must do so by a separate written
demand as herein provided. Within 10 days after the effective date of such
merger or consolidation, the surviving or resulting corporation shall
notify each stockholder of each constituent corporation who has complied
with this subsection and has not voted in favor of or consented to the
merger or consolidation of the date that the merger or consolidation has
become effective; or
(2) If the merger or consolidation was approved pursuant to Section 228
or Section 253 of this title, each constituent corporation, either before
the effective date of the merger or consolidation or within ten days
thereafter, shall notify each of the holders of any class or series of
stock of such constituent corporation who are entitled to appraisal rights
of the approval of the merger or consolidation and that appraisal rights
are available for any or all shares of such class or series of stock of
such constituent corporation, and shall include in such notice a copy of
this section; provided that, if the notice is given on or after the
effective date of the merger or consolidation, such notice shall be given
by the surviving or resulting corporation to all such holders of any class
or series of stock of a constituent corporation that are entitled to
appraisal rights. Such notice may, and, if given on or after the effective
date of the merger or consolidation, shall, also notify such stockholders
of the effective date of the merger or consolidation. Any stockholder
entitled to appraisal rights may, within 20 days after the date of mailing
of such notice, demand in writing from the surviving or resulting
corporation the appraisal of such holder's shares. Such demand will be
sufficient if it reasonably informs the corporation of the identity of the
stockholder and that the stockholder intends thereby to demand the
appraisal of such holder's shares. If such notice did not notify
stockholders of the effective date of the merger or consolidation, either
(i) each such constituent corporation shall send a second notice before the
effective date of the merger or consolidation notifying each of the holders
of any class or series of stock of such constituent corporation that are
entitled to appraisal rights of the effective date of the merger or
consolidation or (ii) the surviving or resulting corporation shall send
such a second notice to all such holders on or within 10 days after such
effective date; provided, however, that if such second notice is sent more
than 20 days following the sending of the first notice, such second notice
need only be sent to each stockholder who is entitled to appraisal rights
and who has demanded appraisal of such holder's shares in accordance with
this subsection. An affidavit of the secretary or assistant secretary or of
the transfer agent of the corporation that is required to give either
notice that such notice has been given shall, in the absence of fraud, be
prima facie evidence of the facts stated therein. For purposes of
determining the stockholders entitled to receive either notice, each
constituent corporation may fix, in advance, a record date that shall be
not more than 10 days prior to the date the notice is given, provided, that
if the notice is given on or after the effective date of the merger or
consolidation, the record date shall be such effective date. If no record
date is fixed and the notice is given prior to the effective date, the
record date shall be the close of business on the day next preceding the
day on which the notice is given.
C-2
<PAGE>
(e) Within 120 days after the effective date of the merger or
consolidation, the surviving or resulting corporation or any stockholder
who has complied with subsections (a) and (d) hereof and who is otherwise
entitled to appraisal rights, may file a petition in the Court of Chancery
demanding a determination of the value of the stock of all such
stockholders. Notwithstanding the foregoing, at any time within 60 days
after the effective date of the merger or consolidation, any stockholder
shall have the right to withdraw such stockholder's demand for appraisal
and to accept the terms offered upon the merger or consolidation. Within
120 days after the effective date of the merger or consolidation, any
stockholder who has complied with the requirements of subsections (a) and
(d) hereof, upon written request, shall be entitled to receive from the
corporation surviving the merger or resulting from the consolidation a
statement setting forth the aggregate number of shares not voted in favor
of the merger or consolidation and with respect to which demands for
appraisal have been received and the aggregate number of holders of such
shares. Such written statement shall be mailed to the stockholder within 10
days after such stockholder's written request for such a statement is
received by the surviving or resulting corporation or within 10 days after
expiration of the period for delivery of demands for appraisal under
subsection (d) hereof, whichever is later.
(f) Upon the filing of any such petition by a stockholder, service of a
copy thereof shall be made upon the surviving or resulting corporation,
which shall within 20 days after such service file in the office of the
Register in Chancery in which the petition was filed a duly verified list
containing the names and addresses of all stockholders who have demanded
payment for their shares and with whom agreements as to the value of their
shares have not been reached by the surviving or resulting corporation. If
the petition shall be filed by the surviving or resulting corporation, the
petition shall be accompanied by such a duly verified list. The Register in
Chancery, if so ordered by the Court, shall give notice of the time and
place fixed for the hearing of such petition by registered or certified
mail to the surviving or resulting corporation and to the stockholders
shown on the list at the addresses therein stated. Such notice shall also
be given by 1 or more publications at least 1 week before the day of the
hearing, in a newspaper of general circulation published in the City of
Wilmington, Delaware or such publication as the Court deems advisable. The
forms of the notices by mail and by publication shall be approved by the
Court, and the costs thereof shall be borne by the surviving or resulting
corporation.
(g) At the hearing on such petition, the Court shall determine the
stockholders who have complied with this section and who have become
entitled to appraisal rights. The Court may require the stockholders who
have demanded an appraisal for their shares and who hold stock represented
by certificates to submit their certificates of stock to the Register in
Chancery for notation thereon of the pendency of the appraisal proceedings;
and if any stockholder fails to comply with such direction, the Court may
dismiss the proceedings as to such stockholder.
(h) After determining the stockholders entitled to an appraisal, the
Court shall appraise the shares, determining their fair value exclusive of
any element of value arising from the accomplishment or expectation of the
merger or consolidation, together with a fair rate of interest, if any, to
be paid upon the amount determined to be the fair value. In determining
such fair value, the Court shall take into account all relevant factors. In
determining the fair rate of interest, the Court may consider all relevant
factors, including the rate of interest that the surviving or resulting
corporation would have had to pay to borrow money during the pendency of
the proceeding. Upon application by the surviving or resulting corporation
or by any stockholder entitled to participate in the appraisal proceeding,
the Court may, in its discretion, permit discovery or other pretrial
proceedings and may proceed to trial upon the appraisal prior to the final
determination of the stockholder entitled to an appraisal. Any stockholder
whose name appears on the list filed by the surviving or resulting
corporation pursuant to subsection (f) of this section and who has
submitted such stockholder's certificates of stock to the Register in
Chancery, if such is required, may participate fully in all proceedings
until it is finally determined that such stockholder is not entitled to
appraisal rights under this section.
(i) The Court shall direct the payment of the fair value of the shares,
together with interest, if any, by the surviving or resulting corporation
to the stockholders entitled thereto. Interest may be simple or compound,
as the Court may direct. Payment shall be so made to each such stockholder,
in the case of
C-3
<PAGE>
holders of uncertificated stock forthwith, and the case of holders of shares
represented by certificates upon the surrender to the corporation of the
certificates representing such stock. The Court's decree may be enforced as
other decrees in the Court of Chancery may be enforced, whether such surviving
or resulting corporation be a corporation of this State or of any state.
(j) The costs of the proceeding may be determined by the Court and taxed
upon the parties as the Court deems equitable in the circumstances. Upon
application of a stockholder, the Court may order all or a portion of the
expenses incurred by any stockholder in connection with the appraisal
proceeding, including, without limitation, reasonable attorney's fees and the
fees and expenses of experts, to be charged pro rata against the value of all
the shares entitled to an appraisal.
(k) From and after the effective date of the merger or consolidation, no
stockholder who has demanded appraisal rights as provided in subsection (d) of
this section shall be entitled to vote such stock for any purpose or to
receive payment of dividends or other distributions on the stock (except
dividends or other distributions payable to stockholders of record at a date
which is prior to the effective date of the merger or consolidation);
provided, however, that if no petition for an appraisal shall be filed within
the time provided in subsection (e) of this section, or if such stockholder
shall deliver to the surviving or resulting corporation a written withdrawal
of such stockholder's demand for an appraisal and an acceptance of the merger
or consolidation, either within 60 days after the effective date of the merger
or consolidation as provided in subsection (e) of this section or thereafter
with the written approval of the corporation, then the right of such
stockholder to an appraisal shall cease. Notwithstanding the foregoing, no
appraisal proceeding in the Court of Chancery shall be dismissed as to any
stockholder without the approval of the Court, and such approval may be
conditioned upon such terms as the Court deems just.
(l) The shares of the surviving or resulting corporation to which the
shares of such objecting stockholders would have been converted had they
assented to the merger or consolidation shall have the status of authorized
and unissued shares of the surviving or resulting corporation.
C-4
<PAGE>
--------------------------------------------------------------------------------
PROXY
PINNACLE ENTERTAINMENT, INC.
Proxy for 2000 Annual Meeting of Stockholders
The undersigned hereby acknowledges receipt of the Notice of Annual Meeting
of Stockholders of Pinnacle Entertainment, Inc. (the "Company") and the
accompanying Proxy Statement relating to the above-referenced Annual Meeting,
and hereby appoints R.D. Hubbard, or in his absence, Loren S. Ostrow, with full
power to each of substitution in each, as attorneys and proxies of the
undersigned.
Said proxies are hereby given authority to vote all shares of common stock of
the Company which the undersigned may be entitled to vote at the 2000 Annual
Meeting of Stockholders of the Company, and at any and all adjournments or
postponements thereof on behalf of the undersigned on the matters set forth on
the reverse side hereof and in the manner designated thereon.
This proxy is solicited by the Board of Directors of the Company, and when
properly executed, the shares represented hereby will be voted in accordance
with the instructions in this proxy. If no direction is made, this proxy will
be voted FOR the approval and adoption of the Merger Agreement and FOR the
election of all nominees named as directors of the Company.
PLEASE DATE, SIGN AND RETURN THIS PROXY CARD PROMPTLY
IN THE ENCLOSED ENVELOPE
(See reverse side)
--------------------------------------------------------------------------------
FOLD AND DETACH HERE
<PAGE>
--------------------------------------------------------------------------------
Please mark
your votes as [X]
indicated in
this example
FOR AGAINST ABSTAIN
1. Approval and Adoption of Agreement and Plan [ ] [ ] [ ]
of Merger, dated as of April 17, 2000, by
and among Pinnacle Entertainment, Inc., PH
Casino Resorts, Inc. and Pinnacle
Acquisition Corporation
2. Election of Nine Directors: WITHOLD
AUTHORITY
Nominees: FOR FROM
Paul R. Alanis Michael Ornest ALL ALL
R.D. Hubbard Timothy J. Parrott [ ] [ ]
Robert T. Manfuso Lynn P. Reitnouer
James L. Martineau Marlin Torguson
Gary G. Miller
For all nominees except:
(Instruction: To withhold authority to vote for any individual nominee, write
that nominee's name in the space provided below).
_______________________________________
This Proxy will be voted as directed or, if no direction is indicated, the
proxies are authorized to vote in their discretion "FOR" the approval and
adoption of the Merger Agreement and "FOR" the election of the above-listed
nominees or such substitute nominee(s) for directors as the Board of Directors
of Pinnacle Entertainment, Inc. shall select. This Proxy also confers
discretionary authority on the proxies to vote as to any other matter that is
properly brought before the Annual Meeting that the Board of Directors did not
have notice of prior to the date specified in the Proxy Statement.
____________________________________________________________________________
Dated: ________________________, 20000
_______________________________________
(Signature)
_______________________________________
(Title)
_______________________________________
(Signature if held jointly)
Note: Please date and sign exactly as
your name(s) appear on this proxy card.
If shares are registered in more than one
name, all such persons should sign. A
corporation should sign in its full
corporate name by a duly authorized
officer, stating his title. When signing
as attorney, executor, administrator,
trustee or guardian, please sign in your
official capacity and give your full
title as such. If a partnership, please
sign in the partnership name by an
authorized person.
--------------------------------------------------------------------------------
FOLD AND DETACH HERE
