-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, ERaxOeKdQxu34UZ1ojCwTekqp8Hvxz5mDOnLDAL9z5AqRXuU5U4GSGAH9dkMm6Zc 6YyhCzB48bVMQASs1zb7gA== 0000898430-01-503461.txt : 20020410 0000898430-01-503461.hdr.sgml : 20020410 ACCESSION NUMBER: 0000898430-01-503461 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 3 CONFORMED PERIOD OF REPORT: 20010930 FILED AS OF DATE: 20011114 FILER: COMPANY DATA: COMPANY CONFORMED NAME: PINNACLE ENTERTAINMENT INC CENTRAL INDEX KEY: 0000356213 STANDARD INDUSTRIAL CLASSIFICATION: SERVICES-MISCELLANEOUS AMUSEMENT & RECREATION [7990] IRS NUMBER: 953667491 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 001-13641 FILM NUMBER: 1785428 BUSINESS ADDRESS: STREET 1: 330 NORTH BRAND BOULEVARD STREET 2: SUITE 1110 CITY: GLENDALE STATE: CA ZIP: 91203-2308 BUSINESS PHONE: 8186625900 MAIL ADDRESS: STREET 1: 330 NORTH BRAND BOULEVARD STREET 2: SUITE 1110 CITY: GLENDALE STATE: CA ZIP: 91203-2308 FORMER COMPANY: FORMER CONFORMED NAME: HOLLYWOOD PARK INC/NEW/ DATE OF NAME CHANGE: 19920703 10-Q 1 d10q.txt FORM 10-Q Securities and Exchange Commission Washington, D.C. 20549 Form 10-Q [X] Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 For the quarterly period ended September 30, 2001 Commission file number 0-106-619 Pinnacle Entertainment, Inc. (Exact Name of Registrant as Specified in its Charter) Delaware (State or Other Jurisdiction of Incorporation or Organization) 95-3667491 (IRS Employer Identification No.) 330 North Brand Boulevard, Suite 1100, Glendale, California 91203 (Address of Principal Executive Offices) (Zip Code) (818) 662-5900 (Registrant's Telephone Number, Including Area Code) Indicate by check mark whether registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months, and (2) has been subject to such filing requirements for the past 90 days. YES [X] NO [_] The number of outstanding shares of the registrant's common stock, as of the close of business on November 7, 2001: 25,443,444. PINNACLE ENTERTAINMENT, INC. Table of Contents Part I Item 1. Financial information Consolidated Statements of Operations for the three and nine months ended September 30, 2001 and 2000......................................... 1 Consolidated Balance Sheets as of September 30, 2001 and December 31, 2000.................................................................. 2 Condensed Consolidated Statements of Cash Flows for the nine months ended September 30, 2001 and 2000............................................... 3 Condensed Notes to Consolidated Financial Statements....................... 4 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations Forward-Looking Statements and Risk Factors................................ 21 Factors Affecting Future Operating Results................. ............... 21 Results of Operations...................................................... 24 Liquidity, Capital Resources and Other Factors Influencing Future Results................................................................... 30 Item 3. Quantitative and Qualitative Disclosures About Market Risk.......... 31 Part II Item 1. Legal Proceedings................................................... 32 Item 5. Other Information................................................... 34 Item 6. Exhibits and Reports on Form 8-K.................................... 34 Other Financial Information......................................... 35 Signatures.......................................................... 37 Pinnacle Entertainment, Inc. Consolidated Statements of Operations
For the three months For the nine months ended September 30, ended September 30, ------------------------- ------------------------ 2001 2000 2001 2000 ----------- ---------- ---------- --------- (in thousands, except per share data - unaudited) Revenues: Gaming $114,763 $112,358 $337,008 $ 365,898 Food and beverage 8,746 7,993 23,839 25,229 Hotel and recreational vehicle park 4,513 3,697 11,641 10,043 Truck stop and service station 6,109 6,960 16,043 16,343 Other income 5,133 5,712 16,343 20,321 Racing 0 0 0 9,452 -------- -------- -------- --------- 139,264 136,720 404,874 447,286 -------- -------- -------- --------- Expenses: Gaming 65,908 62,346 195,444 199,746 Food and beverage 10,370 7,958 29,685 26,978 Hotel and recreational vehicle park 2,761 1,240 7,633 4,344 Truck stop and service station 5,599 6,484 14,910 15,187 Racing 0 0 0 4,133 General and administrative 29,898 23,839 92,451 81,798 Depreciation and amortization 13,093 10,414 37,316 34,669 Other operating expenses 4,164 2,330 10,633 8,383 Pre-opening costs, Belterra Casino Resort 0 7,853 610 13,309 Loss/(Gain) on sale of assets 81 (59,941) (500) (119,382) Terminated merger costs 0 2,878 (464) 5,003 -------- -------- -------- --------- 131,874 65,401 387,718 274,168 -------- -------- -------- --------- Operating income 7,390 71,319 17,156 173,118 Interest income (984) (3,375) (4,260) (9,747) Interest expense, net of capitalized interest 12,596 11,041 37,214 41,372 -------- -------- -------- --------- (Loss) income before income taxes (4,222) 63,653 (15,798) 141,493 Income tax (benefit) expense (5,225) 26,164 (9,393) 55,860 -------- -------- -------- --------- Net income (loss) before extraordinary items 1,003 37,489 (6,405) 85,633 Extraordinary items, net of tax 0 2,653 0 2,653 -------- -------- -------- --------- Net income (loss) after extraordinary items $ 1,003 $ 34,836 ($6,405) $ 82,980 ======== ======== ======== ========= ======================================================================================================================== Net income (loss) per common share - basic Net income (loss) before extraordinary item $ 0.04 $ 1.42 ($0.25) $ 3.25 Extraordinary item, net of income tax 0.00 (0.10) 0.00 (0.10) -------- -------- -------- --------- Net income (loss) per common share - basic $ 0.04 $ 1.32 ($0.25) $ 3.15 ======== ======== ======== ========= Net income (loss) per common share - diluted Net income (loss) before extraordinary item $ 0.04 $ 1.37 ($0.25) $ 3.13 Extraordinary item, net of income tax 0.00 (0.10) 0.00 (0.10) -------- -------- -------- --------- Net income (loss) per common share - diluted $ 0.04 $ 1.27 ($0.25) $ 3.03 ======== ======== ======== ========= Number of shares - basic 25,542 26,356 25,939 26,306 Number of shares - diluted 25,623 27,458 25,939 27,369
- ------- See accompanying condensed notes to the consolidated financial statements. 1 Pinnacle Entertainment, Inc. Consolidated Balance Sheets
September 30, December 31, 2001 2000 ------------- ------------ (unaudited) (in thousands, except share data) Assets Current Assets: Cash and cash equivalents $131,428 $172,868 Receivables, net 12,134 19,007 Income tax receivable 24,243 0 Prepaid expenses and other assets 21,223 18,425 Assets held for sale 12,160 12,164 Current portion of notes receivable 1,073 2,393 -------- --------- Total current assets 202,261 224,857 Notes receivable 0 6,604 Net property, plant and equipment 601,605 593,718 Goodwill, net of amortization 69,359 71,263 Gaming licenses, net of amortization 39,297 38,934 Debt issuance costs, net of amortization 13,194 15,847 Other assets 11,679 10,252 -------- -------- $937,395 $961,475 ======== ======== - -------------------------------------------------------------------------------------------------- Liabilities and Stockholders' Equity Current Liabilities: Accounts payable $ 15,752 $ 19,349 Accrued interest 6,373 17,997 Other accrued liabilities 23,930 31,594 Accrued compensation 15,858 16,668 Deferred income taxes 1,617 4,335 Current portion of notes payable 3,533 3,432 -------- -------- Total current liabilities 67,063 93,375 Notes payable, less current maturities 494,323 497,162 Deferred income taxes 30,164 9,762 Stockholders' Equity: Capital stock -- Preferred - $1.00 par value, authorized 250,000 shares; none issued and outstanding in 2001 and 2000 0 0 Common - $0.10 par value, authorized 40,000,000 shares; 25,461,444 and 26,434,302 shares issued and outstanding in 2001 and 2000 2,547 2,644 Capital in excess of par value 219,266 228,095 Retained earnings 124,032 130,437 -------- -------- Total stockholders' equity 345,845 361,176 -------- -------- $937,395 $961,475 ======== ========
- ---------- See accompanying condensed notes to the consolidated financial statements. 2 Pinnacle Entertainment, Inc. Condensed Consolidated Statements of Cash Flows
For the nine months ended September 30, ----------------------------------------- 2001 2000 ------------ ------------- (in thousands - unaudited) Cash flows from operating activities: Net (loss) income after extraordinary item ($6,405) $ 82,980 Adjustments to reconcile net (loss) income to net cash used in operating activities: Depreciation and amortization 37,316 34,669 Gain on sale of assets, net (500) (119,382) Other changes that provided (used) cash: Receivables, net 4,597 (3,550) Prepaid expenses and other assets (3,895) (7,189) Accounts payable (3,597) 2,937 Accrued interest (11,624) (19,229) Other accrued liabilities (7,664) (3,238) Federal and state income taxes (6,559) 4,303 All other, net 1,542 1,576 --------- --------- Net cash (used in) provided by operating activities 3,211 (26,123) --------- --------- Cash flows from investing activites: Additions to property, plant and equipment (41,060) (166,425) Capitalized interest included in property, plant and equipment (481) (6,607) Receipts from sale of property, plant and equipment 302 267,234 Principal collected on notes receivable 8,563 5,325 Proceeds from short term investments 0 123,428 --------- --------- Net cash (used in) provided by investing activities (32,676) 222,955 --------- --------- Cash flows from financing activites: Redemption of the Casino Magic 13% Notes 0 (112,875) Write-off of unamortized premium and debt costs associated with the Casino Magic 13% Notes, net 0 (3,340) Repurchase of common stock (9,717) 0 Payment on notes payable (2,738) (4,439) Common stock options excercised 480 1,906 --------- --------- Net cash used in financing activities (11,975) (118,748) --------- --------- (Decrease) Increase in cash and cash equivalents (41,440) 78,084 Cash and cash equivalents at beginning of the period 172,868 123,362 --------- --------- Cash and cash equivalents at the end of the period $ 131,428 $ 201,446 ========= =========
- -------- See accompanying condensed notes to consolidated financial statements. 3 Pinnacle Entertainment, Inc. Condensed Notes to Consolidated Financial Statements Note 1 - Summary of Significant Accounting Policies General Pinnacle Entertainment, Inc. (the "Company" or "Pinnacle Entertainment") is a diversified gaming company that owns and operates seven casinos (four with hotels) in Indiana, Nevada, Mississippi, Louisiana and Argentina and is pursing the development of a hotel and casino resort in Lake Charles, Louisiana. Pinnacle Entertainment owns and operates through a subsidiary, the Belterra Casino Resort, a hotel and cruising riverboat casino resort in Switzerland County, Indiana, in which the Company owned a 97% interest, until August 2001, at which time the remaining 3% held by a non-voting local partner was purchased by the Company (see Note 3). The Company also owns and operates, through its Boomtown, Inc. ("Boomtown") subsidiary, land-based gaming operations in Verdi, Nevada ("Boomtown Reno") and dockside riverboat gaming operations in Harvey, Louisiana ("Boomtown New Orleans"). On April 1, 2001, legislation became effective in Louisiana that requires cruising riverboat casinos in Southern Louisiana, including the Company's Boomtown New Orleans operations, to remain dockside at all times (see Note 4). The Company also owns and operates, through its Casino Magic Corp. ("Casino Magic") subsidiary, dockside gaming operations in Biloxi, Mississippi ("Casino Magic Biloxi"); dockside riverboat gaming operations in Bossier City, Louisiana ("Casino Magic Bossier City"); and two land-based casinos in Argentina ("Casino Magic Argentina"). The Company is also pursing the development of a hotel and dockside riverboat casino resort in connection with the 15th and final gaming license to be issued in Louisiana at a site in Lake Charles (see Note 5). Pinnacle Entertainment receives lease income from two card clubs - the Hollywood Park-Casino and Crystal Park Hotel and Casino. The Hollywood Park-Casino is leased from Churchill Downs California Company ("Churchill Downs"), a wholly- owned subsidiary of Churchill Downs Incorporated, and subleased to an unaffiliated third party operator. The Crystal Park Hotel and Casino ("Crystal Park") is owned by the Company and is leased to the same card club operator that leases and operates the Hollywood Park-Casino. Prior to August 8, 2000, the Company owned and operated dockside gaming facilities in Biloxi, Mississippi ("Boomtown Biloxi") and in Bay St. Louis, Mississippi ("Casino Magic Bay St. Louis"). On August 8, 2000, the Company completed the sale of these facilities to subsidiaries of Penn National Gaming, Inc. (see Note 8). 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 company owned by a private investor (see Note 8). The financial information included herein has been prepared in conformity with U.S. 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, 2000. This Quarterly Report on Form 10-Q does not include certain footnotes and financial presentations normally presented annually and should be read in conjunction with the Company's 2000 Annual Report on Form 10-K. The information furnished herein is unaudited; however, in the opinion of management, it reflects all normal and recurring adjustments necessary to present a fair statement of the financial results for the interim periods. It should be understood that accounting measurements at interim dates inherently involve greater reliance on estimates than at year-end. Principles of Consolidation The consolidated financial statements include the accounts of Pinnacle Entertainment and its subsidiaries. All significant inter- company accounts and transactions have been eliminated. The Company's current significant subsidiaries include Belterra Casino Resort, Boomtown, Inc. (and its Boomtown casinos) and Casino Magic Corp. (and its Casino Magic casinos). Gaming Licenses In 1994, Casino Magic acquired a twelve-year concession agreement to operate two casinos in Argentina, and capitalized the costs related to obtaining the concession agreement. Such costs are 4 being amortized, based on the straight-line method, over the extended life of the concession agreement. The exclusive concession contract with the Province of Neuquen, Argentina was originally scheduled to expire in December 2006, however in August 2001, the Company and the Province entered into an agreement whereby the concession contract will be extended for an additional fifteen years if Casino Magic Argentina invests in the development of a new casino facility and related amenities in accordance with the terms of the agreement. In connection with such extension, the Company reclassified a $2,276,000 receivable from the Province of Neuquen to Gaming Licenses on the Consolidated Balance Sheet as of September 30, 2001, as the Company agreed to not pursue the collection of such receivable as additional consideration for the fifteen-year extension. Such additional concession agreement cost will be amortized over the extended 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, based on the straight-line method, over twenty-five years. Accumulated amortization as of September 30, 2001 and December 31, 2000 was $8,023,000 and $6,821,000, respectively. In connection with the implementation of SFAS 142 (defined below), the Company is in the process of evaluating its various intangible assets, including the useful life of this gaming license , to determine if continued amortization is appropriate. As noted below, early adoption of the SFAS 142 is not permitted and therefore any such change in amortization will not be effective until January 1, 2002. Amortization expense was $401,000 for both the three months ended September 30, 2001 and 2000, and was $1,202,000 for both the nine months ended September 30, 2001 and 2000. Amortization of Debt Issuance Costs Debt issuance costs incurred in connection with long-term debt and bank financing are capitalized and amortized, based on the straight-line method which approximates the effective interest method, to interest expense during the period the debt or loan commitments are outstanding. Accumulated amortization as of September 30, 2001 and December 31, 2000 was $10,514,000 and $7,729,000, respectively. During the twelve months ended December 31, 2000, the Company wrote off $2,429,000 of unamortized debt issuance costs associated with the Casino Magic 13% Notes in connection with the redemption of such notes (see Note 12). Amortization of debt issuance costs included in interest expense was $947,000 and $824,000 for the three months ended September 30, 2001 and 2000, respectively, and $2,785,000 and $2,143,000 for the nine months ended September 30, 2001 and 2000, respectively. Goodwill Goodwill consists of the excess of the acquisition cost over the fair value of the net assets acquired in business combinations and is being amortized on a straight-line basis over 40 years. Accumulated amortization as of September 30, 2001 and December 31, 2000 was $13,151,000 and $11,017,000, respectively. In August 2000, in connection with the sale of the two casinos in Mississippi (see Note 8), the Company wrote off approximately $13,128,000 of unamortized goodwill associated with these properties. In June 2001, the Financial Accounting Standards Board issued Statements of Financial Accounting Standards No. 141 "Business Combinations" ("SFAS No. 141") and No. 142 "Goodwill and Other Intangible Assets" ("SFAS No. 142") which are effective July 1, 2001 and January 1, 2002, respectively, for the Company. SFAS 141 requires that the purchase method of accounting be used for all business combinations initiated after June 30, 2001. With the adoption of SFAS No. 142 on January 1, 2002 (earlier adoption is not permitted), goodwill will no longer be amortized over its estimated useful life. Rather, goodwill will be subject to at least an annual assessment for impairment by applying a fair-value-based- test. The Company is in the process of evaluating the financial statement impact of adoption of SFAS No. 142. Any transition related impairment charge as of January 1, 2002 will be classified as a cumulative effect of a change in accounting principle. In addition, under the new rules, any future acquired intangible asset will be separately recognized if the benefit of the intangible is obtained through contractual or other legal rights, or if the intangible asset can be sold, transferred, licensed, rented, or exchanged, regardless of the acquirer's intent to do so. Intangible assets with definitive lives will be amortized over their useful lives. 5 Goodwill amortization expense was $713,000 and $771,000 for the three months ended September 30, 2001 and 2000, respectively, and $2,135,000 and $2,378,000 for the nine months ended September 30, 2001 and 2000, respectively. Gaming Revenues and Promotional Allowances Gaming revenues at the Belterra, Boomtown and Casino Magic properties consist of the difference between gaming wins and losses. Revenues in the accompanying statements of operations exclude the retail value of food and beverage, hotel rooms and other items provided to patrons on a complimentary basis. The estimated cost of providing these promotional allowances (which is included in gaming expenses) was $13,011,000 and $10,881,000 for the three months ended September 30, 2001 and 2000, respectively and $37,997,000 and $34,192,000 for the nine months ended September 30, 2001 and 2000, respectively. Use of Estimates The preparation of consolidated financial statements in conformity with U.S. 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 the consolidated financial statements, and (iii) the reported amounts of revenues and expenses during the reporting period. The Company uses estimates in evaluating the recoverability of property, plant and equipment, deferred tax assets, other long-term assets, reserves associated with asset sales, and in determining litigation reserves and other obligations. Actual results could differ from those estimates. Property, Plant and Equipment Additions to property, plant and equipment are recorded at cost and projects in excess of $10,000,000 include capitalized interest. There was no capitalized interest for the three months ended September 30, 2001 and $3,665,000 for the three months ended September 30, 2000, and $481,000 and $6,608,000 for the nine months ended September 30, 2001 and 2000, respectively, attributed to the Belterra casino, hotel and golf course. Cash and Cash Equivalents Cash and cash equivalents consist of cash, certificates of deposit and short-term investments with original maturities of 90 days or less. There was no restricted cash at September 30, 2001 and December 31, 2000. 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 to the estimates of useful lives. This evaluation consists of comparing asset carrying values to the Company's projection of the undiscounted cash flows over the remaining lives of the assets, in accordance with Statement of Financial Accounting Standards No. 121 Accounting for the Impairment of Long-lived Assets and for Long-lived Assets to Be Disposed Of ("SFAS No. 121"). Based on its review, the Company believes that, as of September 30, 2001, there were no significant impairments of its long-lived assets or related intangible assets. 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 beginning after December 15, 1998. Statement of Position 98-5 required that start-up activities and organization costs be expensed as incurred. Derivative Instruments and Hedging Activities In June 1998, Statement of Financial Accounting Standards No. 133 Accounting for Derivative Instruments and Hedging Activities ("SFAS No. 133") was issued. SFAS No. 133 establishes accounting and reporting standards for derivative instruments, including certain derivative instruments embedded in other contracts, and for hedging activities. In June 1999, Statement of Financial Accounting Standards No. 137 Accounting for Derivative Instruments and Hedging Activities - Deferral of the Effective Date of FASB Statement No. 133 ("SFAS No. 137") was issued. SFAS No. 133, as amended by SFAS No. 137, is effective for all fiscal quarters of fiscal years beginning after June 15, 2000. The Company did not have any derivative or hedging instruments as of September 30, 2001 and December 31, 2000. 6 Accounting for Customer "Cash-back" Loyalty Programs In January 2001, the Emerging Issues Task Force ("EITF") reached consensus on Issue 3 addressed in Issue No. 00-22 Accounting for "Points" and Certain Other Time-Based Sales Incentive Offers, and Offers for Free Products or Services to Be Delivered in the Future. This EITF pronouncement requires that the cost of the cash back component of the Company's customer loyalty programs be treated as a reduction in revenues. The Company rewards customers with cash, based upon their level of play on certain casino games (primarily slot machines). These costs were previously recorded as a casino expense. The consensus reached on Issue 3 is effective beginning in fiscal quarters ending after February 15, 2001 and was adopted by the Company in the quarter ended March 31, 2001. In connection with the adoption of Issue 3, the Company reclassified (i.e., reduced gaming revenue and gaming expense) the cash back component of its customer loyalty programs in the amount of $4,310,000 and $14,192,000 related to the three and nine months ended September 30, 2000 to be consistent with the three and nine months ended September 30, 2001. 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 2000 amounts to be consistent with the 2001 financial statement presentation. Note 2 - Income Tax Matters At September 30, 2001, the Company recorded a net income tax receivable in the amount of $24,243,000 resulting from its 2000 U.S. Federal and state income tax returns, of which $23,655,000 was received on October 26, 2001. The Company anticipates receiving the remaining state income tax refunds in the fourth quarter of 2001, or early in 2002. In connection with the filing of the 2000 Federal and state income tax returns, the Company recorded certain adjustments to its current and deferred income tax asset and liability accounts as of September 30, 2001, including recording payments made related to 2001 estimated taxable income and future tax benefits resulting from timing differences. Also, during the third quarter of 2001, the Company settled certain U.S. Federal income tax matters that were under examination by the I.R.S. relating to Casino Magic and its subsidiaries prior to 1997, resulting in the recording of an income tax benefit of approximately $3,700,000 for the three and nine months ended September 30, 2001. Note 3 - Purchase of Minority Interest in Belterra Casino Resort Prior to August 2001, the Company owned a 97% interest in the Belterra Casino Resort, which opened in October 2000, with the remaining 3% held by a non-voting local partner. In November 2000, the Company entered into an agreement with the local partner whereby the local partner had the right to require the Company to purchase, for a purchase price determined in accordance with the agreement, its entire ownership interest in the Belterra Casino Resort at any time on or after January 1, 2001. A $100,000 deposit toward such ultimate purchase price was made by the Company to the partner at that time. In July 2001, the local partner exercised the right to require the Company to purchase the remaining 3% ownership held by the partner for approximately $1,600,000 as calculated in accordance with the Agreement. In August 2001, the remaining payment of approximately $1,500,000 was made to the partner and the Belterra Casino Resort is now wholly owned by the Company. 7 Note 4 - Louisiana Dockside Gaming Legislation In March 2001, the Louisiana state legislature passed a law requiring riverboat casinos to remain dockside at all times and increased the gaming taxes paid to the state of Louisiana from 18.5% to 21.5% of net gaming proceeds effective April 1, 2001 for the nine riverboats in the southern region of the state, including the Company's Boomtown New Orleans property. The gaming tax increase to 21.5% of net gaming proceeds will be phased in over an approximately two-year period for the riverboats operating in parishes bordering the Red River, including the Company's Casino Magic Bossier City property. Note 5 - Expansion and Development Casino Magic Bossier City In April 2001, in response to increased competition in the Shreveport/ Bossier City gaming market and increased gaming taxes (see Note 4), the Board of Directors of the Company approved the expansion and renovation of the Casino Magic Bossier City facility, including the replacement of the existing dockside riverboat casino with a new, larger and more luxurious dockside riverboat casino, the construction of a new 300-room hotel tower adjacent to the new dockside riverboat casino and the renovation and upgrade of other land-based amenities. Based upon the continued competitive market and the slower than anticipated growth of the Shreveport/ Bossier City gaming market, the Company will now phase in this expansion and renovation over a longer period of time than previously reported. In addition, the bank credit agreement, which was amended in November 2001 (see Note 12), limits additional spending at the Bossier City Facility to $25,000,000 for the first phase of this project, which includes remodeling and expanding the pavilion building and remodeling and reconfiguring the gaming area of the riverboat casino and is expected to begin in the fourth quarter of 2001 and be completed in late spring/ early summer of 2002. 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 "Board"). In July 2000, the Company was one of three groups that presented their proposed projects to the Board. On October 16, 2001, the Company was selected by the Board to receive the license. Issuance of the license will be subject to a number of conditions, which conditions are anticipated to be finalized by the Company and the Board on or prior to November 20, 2001. In addition to the conditions to be agreed to by the Board and the Company, issuance of the license will be subject to the approval of the voters of Calcasieu Parish where the Lake Charles project is located. It is anticipated the local referendum for the approval of the project will be held in mid-January 2002, however, there are no assurances such referendum will not be delayed beyond January 2002, and if held, that it will pass. The proposed project is the construction and operation of a dockside riverboat casino, hotel and golf course resort complex in Lake Charles, Louisiana. The Company anticipates building a facility similar in design and scope to that of Belterra Casino Resort and completing the project in late 2003 or early 2004. 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 (all of which have been exercised), at a cost of $62,500 per six-month renewal option. In June 2001, the District agreed to extend the option period for one additional six-month term at a cost of $62,500 for such additional period. In the event the local referendum noted above is not held prior to the expiration of the current option extension, the Company anticipates requesting an additional lease option extension from the District. These lease option payments are expensed over the option periods. If the lease option were exercised, the annual rental payment would be $815,000, with a maximum annual increase of 5%, commencing upon opening of the facility. The term of the lease would be for a total of up to 70 years, with an initial term of 10 years and six consecutive renewal options of 10 years each. The lease would require the Company to develop certain on- and off-site improvements at the location. All costs incurred by the Company related to obtaining this license have been expensed as incurred. 8 Note 6 - Stock Buyback In August 1998, the Company announced its intention to repurchase and retire up to 20%, or approximately 5,256,000 shares, of its then issued and outstanding common stock on the open market or in negotiated transactions. In February 2001, the Company announced its intention to continue to make purchases under this program. During the nine months ended September 30, 2001, the Company had repurchased 1,085,000 shares at a cost of approximately $9,700,000, and has purchased an additional 18,000 shares since September 30, 2001. Over the life of the program, the Company has repurchased 1,603,000 shares at a total cost of approximately $15,400,000. Effective with Amendment No. 6 to the Bank Credit Facility (see Note 12), the Company agreed to suspend additional stock repurchase activity until April 1, 2002. Under the Company's most restrictive debt covenants, approximately $3,000,000 is otherwise available to continue the stock buyback program. Note 7 - HP Yakama In 1998, the Company, 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 Yakima, Washington. The Tribal Corporation gave HP Yakama a promissory note for the $9,618,000, payable in 84 equal monthly installments at a 10% rate of interest. Pursuant to a seven year Master Lease between HP Yakama and the Confederated Tribes and Banks of the Yakama Indian Nation (the "Tribes"), HP Yakama must pay the Tribes monthly rent of $1,000. HP Yakama and the Tribal Corporation concurrently entered into a corresponding seven-year Sublease, under which the Tribal Corporation owes rent to HP Yakama. Such rent under the Sublease was initially set at 28% of Net Revenues (as defined in the relevant agreements), and decreased to 22% over the seven-year term of the lease. In June 2001, the Company received an early pay-off of the promissory note (which amount was approximately $6,300,000 at such time) and payment for the early termination of the Master Lease and Sublease for a cumulative amount of approximately $8,490,000. After deducting for cash participation receivables through June 30, 2001, and certain closing costs, the Company's pre-tax gain from the transaction (which was recorded in the second quarter of 2001) was approximately $639,000. Effective with this early termination of the promissory note and related lease agreement, the Company no longer receives interest income nor cash participation income for the sublease agreement. Note 8 - Assets Sold Casino Sales On August 8, 2000, the Company completed the sale of two of its casinos in Mississippi, Casino Magic Bay St. Louis and Boomtown Biloxi, to subsidiaries of Penn National Gaming, Inc. ("Penn National") for $195,000,000 in cash. Subsidiaries of Penn National purchased all of the operating assets and assumed certain liabilities of the Casino Magic Bay St. Louis and Boomtown Biloxi properties, including 590 acres of land at Casino Magic Bay St. Louis and leasehold rights at Boomtown Biloxi. Goodwill, net of accumulated amortization of $13,128,000, was written off in connection with the casino sales. The after- tax gain from these sales (which was recorded in the third quarter of 2000) was approximately $35,538,000. 9 Due to the sale of Casino Magic Bay St. Louis and Boomtown Biloxi in August 2000, there are no results of operations for the three or nine months ended September 30, 2001 for these facilities. The condensed results of operations before income taxes for Casino Magic Bay St. Louis and Boomtown Biloxi for the three and nine months ended September 30, 2000 were:
Three months ended Nine months ended September 30, 2000 September 30, 2000 ------------------ ------------------ (in thousands) Revenues (a) $ 15,786 $ 93,668 Expenses 13,254 76,417 -------------- --------------- Operating income 2,532 17,251 Interest expense, net of interest income 8 90 -------------- --------------- Income before income taxes $ 2,524 $ 17,161 ============== ===============
(a) Revenues for the nine months ended September 30, 2000 include proceeds from the settlement of a business interruption claim of approximately $1,204,000 related to hurricane damage and casino closure in September 1998. 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 company owned by a private investor for $53,000,000 in cash. The after-tax gain from this sale (which was recorded in the second quarter of 2000) was approximately $21,262,000. Due to the sale of Turf Paradise in June 2000, there are no results of operations for the three and nine months ended September 30, 2001 and three months ended September 30, 2000, for this facility. The condensed results of operations before income taxes for Turf Paradise for the nine months ended September 30, 2000 was:
Nine months ended September 30, 2000 ------------------ (in thousands) Revenues $ 10,665 Expenses 7,628 -------------- Operating income 3,037 Interest expense, net of interest income (49) -------------- Income before income taxes $ 3,086 ==============
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. The after-tax gain from this sale (which was recorded in the first quarter of 2000) was approximately $15,322,000. Note 9 - Assets Held For Sale Assets held for sale of $12,160,000 and $12,164,000 as of September 30, 2001 and December 31, 2000, respectively, consist of 97 acres of surplus land in Inglewood, California. In April 2000, the Company announced it had entered into an agreement with Casden Properties Inc. for the sale of the 97 acres for $63,050,000 in cash. On April 18, 2001, the Company announced that Casden Properties Inc. had elected to terminate the agreement. The Company continues to market the property to prospective buyers. Note 10 - Terminated Merger Agreement On April 17, 2000, the Company entered into a definitive agreement with PH Casino Resorts ("PHCR"), a newly formed subsidiary of Harveys Casino Resorts, and Pinnacle Acquisition Corporation ("Pinnacle Acq Corp"), a 10 newly formed subsidiary of PHCR, pursuant to which PHCR would have acquired by merger (the "Merger") all of the outstanding capital stock of Pinnacle Entertainment (the "Merger Agreement"). Consummation of the Merger was subject to numerous conditions, including PHCR obtaining the necessary financing for the transaction and regulatory approvals. On January 23, 2001, the Company announced that it had been notified by PHCR that PHCR did not intend to further extend the outside closing date (previously extended to January 31, 2001) of the Merger. Since all of the conditions to consummation of the Merger would not be met by such date, the Company, PHCR and Pinnacle Acq Corp mutually agreed that the Merger Agreement would be terminated. Note 11 - Property, Plant and Equipment Property, plant and equipment held at September 30, 2001 and December 31, 2000 consisted of the following:
September 30, December 31, 2001 (a) 2000 (a) ----------------- --------------- (unaudited) (in thousands) Land and land improvements $117,197 $ 96,249 Buildings 344,804 353,902 Equipment 192,320 183,523 Vessel and barges 113,921 105,829 Construction in progress 10,657 2,404 ----------------- --------------- 778,899 741,907 Less accumulated depreciation 177,294 148,189 ----------------- --------------- $601,605 $593,718 ================= ===============
(a) Excludes $12,160,000 and $12,164,000 of assets as of September 30, 2001 and December 31, 2000, respectively, related to assets classified as held for sale (see Note 9). Note 12 - Secured and Unsecured Notes Payable Notes payable at September 30, 2001 and December 31, 2000 consisted of the following:
September 30, December 31, 2001 (a) 2000 (a) ----------------- --------------- (unaudited) (in thousands) Secured notes payable, Bank Credit Facility $ 0 $ 0 Unsecured 9.25% Notes 350,000 350,000 Unsecured 9.5% Notes 125,000 125,000 Hollywood Park-Casino debt obligation 19,331 20,745 Other secured notes payable 2,632 3,259 Other unsecured notes payable 893 1,590 ----------------- --------------- 497,856 500,594 Less current maturities 3,533 3,432 ----------------- --------------- $494,323 $497,162 ================= ===============
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 to $200,000,000. Effective April 2, 2001, July 2, 2001 and October 1, 2001, the commitment amount of the Credit Facility was automatically reduced by $10,000,000 on each such date, such that, in connection with the scheduled commitment reductions, the commitment balance at October 1, 2001 was $170,000,000. In November 2001, the Company chose to further reduce the amount available under the facility to $110,000,000. Remaining scheduled commitment reductions are $6,667,000 on 11 March 31, 2003 and $16,667,000 on each June 30 and September 30, 2003. The Credit Facility also provides for letters of credit up to $30,000,000 and swing line loans of up to $10,000,000. As of September 30, 2001 and December 31, 2000, the Company had no outstanding borrowings under the Credit Facility. The Credit Facility has remained unused since February 1999. Interest rates on borrowings under the Credit Facility are determined by adding a margin, which is based upon the Company's debt to cash flow ratio (as defined in the Credit Facility), to either the LIBOR rate or Prime Rate (at the Company's option). The Company also pays a quarterly commitment fee on the unused balance of the Credit Facility. The Credit Facility allows for interest rate swap agreements or other interest rate protection agreements. Presently, the Company does not use such financial instruments. In November 2001, the Company and the bank syndicate executed Amendment No. 6, which, among other things, (i) amended various financial covenant ratios to be more consistent with current operations (therefore, reflective of the economic uncertainty enhanced by the tragedies of September 11, 2001), (ii) allowed for certain capital expenditures, including $25,000,000 related to Casino Magic Bossier City, (iii) suspended any additional stock repurchase activity until April 1, 2002 and, (iv) required the Company to utilize its cash (other than working capital and casino cash) prior to drawing on the facility. In July 2001, the Company and the bank syndicate executed Amendment No. 5, which, among other things, (i) amended various financial covenant ratios to be more consistent with operations (therefore reflective of the operations sold in 1999 and 2000, as well as the opening of the Belterra Casino Resort in October 2000), and (ii) allowed for the necessary capital spending for the Lake Charles opportunity (see Note 5). An additional amendment to the Bank Credit Facility will be necessary to obtain approval from the bank syndicate for capital projects not specifically provided for in either Amendment No. 5 or Amendment No. 6. Costs associated with Amendment No. 5 and 6 have been and will be deferred and amortized over the remaining life of the bank credit facility. 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 from which were used to pay the outstanding borrowings on the Credit Facility, to fund current capital expenditures, and for 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 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 premium-to-face values:
9.25% Notes redeemable: 9.5% Notes redeemable: ----------------------------------------- --------------------------------------- after February 14, at a premium of After July 31, at a premium of ----------------------------------------- --------------------------------------- 2003 104.625% 2002 104.750% 2004 103.083% 2003 102.375% 2005 101.542% 2004 101.188% 2006 100.000% 2005 100.000% 2007 maturity 2006 100.000% 2007 maturity
Both the 9.25% and the 9.5% Notes are unsecured obligations of the Company, guaranteed by all material restricted subsidiaries of the Company, as defined in the indentures. The subsidiaries which do not guaranty the debt include certain Casino Magic subsidiaries, principally the Casino Magic Argentina subsidiaries. The 12 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 (including the Company's common stock - see Note 6), 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. Redemption of Casino Magic 13% Notes and Extraordinary Item In August of 1996, Casino Magic of Louisiana, Corp. ("Casino Magic of Louisiana") 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 flows (as defined by the indenture). On August 15, 2000, the Company redeemed all $112,875,000 in aggregate principal amount of its then 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 satisfied all conditions required to discharge its obligations under the indenture. In connection with the redemption, in August 2000, the Company recorded an extraordinary loss of $2,653,000, net of federal and state income taxes, or $0.10 per basic and diluted share. The extraordinary loss represents the payment of the redemption premium and the write-off of deferred finance and premium costs, net of the related federal and state income tax benefit of $1,493,000. Following the redemption, Casino Magic of Louisiana became a guarantor of the 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 in September 1999, the Company recorded a long-term lease obligation of $23,000,000. Annual lease payments to Churchill Downs of $3,000,000 are applied as a reduction of principal and interest expense. The debt obligation is being amortized, based on a mortgage interest method, over 10 years (the initial lease term with Churchill Downs). Note 13 - 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 ("RICO"), as well as claims of common law fraud, unjust enrichment and negligent misrepresentation, and seeks damages in excess of $6 billion. On May 10, 1994, a second class action lawsuit was filed in the United States District Court, Middle District of Florida (the "Ahern Lawsuit"), naming as defendants the same defendants who were named in the Poulos Lawsuit and adding as defendants the owners of certain casino operations in Puerto Rico and the Bahamas, who were not named as defendants in the Poulos Lawsuit. The claims in the Ahern Lawsuit are identical to the claims in the Poulos Lawsuit. Because of the similarity of parties and claims, the Poulos Lawsuit and Ahern Lawsuit were consolidated into one case file (the "Poulos/Ahern Lawsuit") in the United States District Court, Middle District of Florida. On December 9, 1994 a motion by the defendants for change of venue was granted, transferring the case to the United States District Court for the District of Nevada, in Las Vegas. In an order dated April 17, 1996, the court granted motions to dismiss filed by Casino Magic and other defendants and dismissed the Complaint without prejudice. The plaintiffs then filed an amended Complaint on May 31, 1996 seeking damages against Casino Magic and other defendants in excess of $1 billion and punitive damages for violations of RICO and for state common law claims for fraud, unjust enrichment and negligent misrepresentation. At a December 13, 1996 status conference, the Poulos/Ahern Lawsuit was consolidated with two other class action lawsuits (one on behalf of a smaller, more defined class of plaintiffs and one against additional defendants) involving allegations substantially identical to those in the Poulos/Ahern Lawsuit (collectively, the 13 "Consolidated Lawsuits") and all pending motions in the Consolidated Lawsuits were deemed withdrawn without prejudice. The plaintiffs in the Consolidated Lawsuits filed a consolidated amended complaint on February 14, 1997, which the defendants moved to dismiss. On December 19, 1997, the court granted the defendants' motion to dismiss certain allegations in the RICO claim, but denied the motion as to the remainder of such claim; granted the defendants' motion to strike certain parts of the consolidated amended complaint; denied the defendants' remaining motions to dismiss and to stay or abstain; and permitted the plaintiffs to substitute one of the class representatives. On January 9, 1998, the plaintiffs filed a second consolidated amended complaint containing claims nearly identical to those in the previously dismissed complaints. The defendants answered, denying the substantive allegations of the second consolidated amended complaint. On March 19, 1998, the magistrate judge granted the defendants' motion to bifurcate discovery into "class" and "merits" phases. "Class" discovery was completed on July 17, 1998. The magistrate judge recommended denial of the plaintiffs' motion to compel further discovery from the defendants, and the court affirmed in part. "Merits" discovery is stayed until the court decides the motion for class certification filed by the plaintiffs on March 18, 1998, which motion the defendants opposed. In January 2001, the plaintiffs filed a supplement to their Motion for Class Certification. On March 29, 2001, defendants filed their response to plaintiffs' supplement to motion for class certification. The hearing on plaintiffs' Motion for Class Certification has been set for November 15, 2001. The claims are not covered under the Company's insurance policies. While the Company cannot predict the outcome of this litigation, management 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 Corp., and James Edward Ernst, its then Chief Executive Officer. In the complaint, as amended, the plaintiff claims, among other things, that the defendants (i) breached the terms of an agreement they had with the plaintiff; (ii) tortiously interfered with certain of the plaintiff's contracts and business relations; and (iii) breached covenants of good faith and fair dealing they allegedly owed to the plaintiff, and seeks compensatory damages in an amount to be proven at trial as well as punitive damages. On or about October 8, 1996, the defendants interposed an answer, denying the allegations contained in the Complaint. On June 26, 1998, defendants filed a motion for summary judgment, as well as a motion for partial summary judgment on damages issues. Thereafter, the plaintiff, in July of 1998, filed a motion to reopen discovery. The court granted the plaintiff's motion, in part, allowing the parties to conduct additional limited discovery. On November 30, 1999, the matter was transferred to the Circuit Court for the Second Judicial District for Harrison County, Mississippi. On October 19, 2001, the Court denied defendant's motion for summary judgment. On October 22, 2001, the Court granted defendant's motion for partial summary judgment, in part, requiring plaintiff to modify its method of calculating damages. On October 24, 2001, the defendants were granted a continuance in order to allow additional discovery to be conducted on plaintiff's revised damage claims. No new trial date has been set. The Company's insurer has essentially denied coverage of the claim against Mr. Ernst under the Company's directors and officer's insurance policy, but has reserved its right to review the matter as to tortious interference at or following trial. The Company believes that the insurer should not be permitted to deny coverage, although no assurances can be given that the insurer will change its position. While the Company cannot predict the outcome of this action, management believes the lawsuit will not have a material adverse effect on the financial condition or results of operations of the Company, 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. 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 (including the State of Louisiana, the manufacturer of the bus and the doctor who treated the driver of the bus and released him to return to work), were named in fifty-four (54) lawsuits, each seeking unspecified damages due to the deaths and injuries sustained in this accident. Most of the cases filed in the Louisiana state courts were removed and consolidated with the cases which were filed in the United States District Court for the Eastern District of 14 Louisiana. In August 2001, Casino Magic Corp. and Mardi Gras Casino Corp. settled the sole Louisiana state court case pending against these defendants. An order of dismissal with prejudice was entered on October 24, 2001. On or about September 14, 2001, an agreement was reached to settle all lawsuits pending in the United States District Court for the Eastern District of Louisiana. An order of dismissal without prejudice to the right to reopen the action to enforce the compromise if the settlement is not consummated within a reasonable time was entered on September 17, 2001. The settlements have been or will be paid by the Company's applicable insurance carriers. Casino Magic Corp.'s and Mardi Gras Casino Corp.'s agreement to settle does not constitute and should not be construed as an admission that these entities have any liability to or acted wrongfully in any way with respect to the plaintiffs or any other person. Skrmetta Lawsuit A suit was filed on August 14, 1998 in the Circuit Court of - ---------------- Harrison County, Mississippi by the ground lessor of property underlying the Boomtown Biloxi land based improvements in Biloxi, Mississippi (the "Project"). The lawsuit alleges that the plaintiff agreed to exchange the first two years' ground rentals for an equity position in the Project based upon defendants' purported assurances that a hotel would be constructed as a component of the Project. Plaintiff seeks recovery in excess of $4,000,000 plus punitive damages. At trial of the matter in March 2000, the judge granted the Company's motion to dismiss the case. On April 26, 2000, plaintiff appealed the court's dismissal to the Mississippi Supreme Court. The claim is not covered under the Company's insurance policies. While the Company cannot predict the outcome of this lawsuit, management does not expect that the lawsuit will have a materially adverse effect on the financial condition or results of operations of the Company. 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, an affiliate of Colony Capital, LLC. 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 claimed 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 believes that the plaintiff's claims were without merit. The parties executed a definitive agreement to settle the purported Hilliard class action litigation. The settlement was subject to court approval. As part of the settlement, the Company agreed to pay attorney's fees and costs to the plaintiff's counsel, subject to court approval. As of June 30, 2001, the Company had incurred estimated costs of approximately $2,000,000 in connection with the negotiation and settlement of this lawsuit, including monies paid to plaintiff's counsel for fees and costs. In view of the fact that the Merger Agreement had been terminated, the parties to the litigation filed a stipulated dismissal of the case with prejudice, incorporating the Company's agreement to pay attorney's fees and costs to the plaintiff's counsel as provided in the settlement agreement, though at a reduced level. The defendants' agreement to the settlement/ stipulated dismissal does not constitute, and should not be construed as, an admission that the defendants have any liability to or acted wrongfully in any way with respect to the plaintiff or any other person. Final judgment and order of dismissal with prejudice was entered on May 18, 2001. Casino Magic Bay St. Louis Wrongful Death Litigation On February 17, 2000, - ---------------------------------------------------- three Mardi Gras Casino Corp. (d/b/a Casino Magic Bay St. Louis) patrons, after leaving the casino property, were involved in a vehicular accident which resulted in the deaths 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 Mardi Gras Casino Corp. seeking compensatory damages in the amount of $2,000,000 and punitive damages, attorney fees, costs and expenses in the amount of $10,000,000. The suit alleged, among other things, that Mardi Gras Casino Corp. employees negligently served alcoholic beverages to the three individuals and the acts and omissions of the employees were the proximate cause of the accident. On September 24, 2001, the parties executed an agreement to settle the lawsuit. An order of dismissal with prejudice was entered on October 19, 2001. The settlement was paid by the Company's applicable insurance carrier. The defendant's agreement to 15 settle does not constitute and should not be construed as an admission that the defendant has any liability to or acted wrongfully in any way with respect to the plaintiffs or any other person. Astoria Entertainment Litigation In November 1998, Astoria Entertainment, Inc. - -------------------------------- filed a complaint in the United States District Court for the Eastern District of Louisiana. Astoria, an unsuccessful applicant for a license to operate a riverboat casino in Louisiana, attempted to assert a claim under the Racketeer Influenced and Corrupt Organizations ("RICO") statutes, seeking damages allegedly resulting from its failure to obtain a license. Astoria named several companies and individuals as defendants, including Hollywood Park, Inc. (the predecessor to Pinnacle Entertainment), Louisiana Gaming Enterprises, Inc. ("LGE"), and an employee of Boomtown, Inc. The Company believed the RICO claim against it had no merit and, indeed, Astoria voluntarily dismissed its RICO claim against Hollywood Park, LGE, and the Boomtown employee. On March 1, 2001, Astoria amended its complaint. Astoria's amended complaint added new legal claims, and named Boomtown, Inc. and LGE as defendants. Astoria claims that the defendants (i) conspired to corrupt the process for awarding licenses to operate riverboat casinos in Louisiana, (ii) succeeded in corrupting the process, (iii) violated federal and Louisiana antitrust laws, and (iv) violated the Louisiana Unfair Trade Practices Act. The amended complaint asserts that Astoria would have obtained a license to operate a riverboat casino in Louisiana, but for these alleged improper acts. On August 21, 2001, the court dismissed Astoria's federal claims with prejudice and its state claims without prejudice. On September 21, 2001, Astoria appealed those dismissals to the U.S. Court of Appeals for the Fifth Circuit. No decision on the appeal has been rendered. While the Company cannot predict the outcome of this action, the Company asserts that it has no liability in this matter, and it intends to vigorously defend the action. Casino Magic Biloxi Patron Shooting Litigation On January 13, 2001, three - ---------------------------------------------- Casino Magic Biloxi patrons were shot, in the casino, sustaining serious injuries as a result of a shooting incident involving another Casino Magic Biloxi patron, who then killed himself. Several other patrons sustained minor injuries while attempting to exit the casino. On August 1, 2001, two of the casino patrons shot during the January 13, 2001 incident filed a complaint in the Circuit Court of Harrison County, Mississippi, Second Judicial District. The complaint alleges that Biloxi Casino Corp. failed to exercise reasonable care to keep its patrons safe from foreseeable criminal acts of third persons and seeks unspecified compensatory and punitive damages. The Plaintiffs filed an amended complaint on August 17, 2001. The amended complaint added an allegation that Biloxi Casino Corp. violated a Mississippi statute by serving alcoholic beverages to the perpetrator who was allegedly visibly intoxicated and that Biloxi Casino Corp.'s violation of the statute was the proximate cause of or contributing cause to Plaintiffs' injuries. While the Company cannot predict the outcome of the litigation, the Company believes that Biloxi Casino Corp. is not liable for any damages arising from the incident and the Company, together with its applicable insurers, intends to vigorously defend this lawsuit. Other Proceedings 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. 16 Note 14 - Consolidating Condensed Financial Information The Company's subsidiaries (excluding Casino Magic Argentina, certain non- material subsidiaries and before August 2000 Casino Magic of Louisiana, Corp.) 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 nine months ended September 30, 2001 and 2000 and balance sheets as of September 30, 2001 and December 31, 2000 (in thousands - unaudited)
(b) (a) Wholly Wholly Owned Consolidating Pinnacle Pinnacle Owned Non- and Entertainment, Entertainment, Guarantor Guarantor Eliminating Inc. Inc. Subsidiaries Subsidiaries Entries Consolidated -------------- ------------ ------------ ------------- -------------- Balance Sheet - ------------- As of September 30, 2001 Current assets $129,498 $ 63,594 $ 9,169 $ 0 $202,261 Property, plant and equipment, net 22,198 575,867 3,540 0 601,605 Other non-current assets 21,714 63,427 7,257 41,131 133,529 Investment in subsidiaries 590,479 9,628 0 (600,107) 0 Inter-company 130,601 20,142 0 (150,743) 0 -------- -------- ------- ---------- -------- $894,490 $732,658 $19,966 ($709,719) $937,395 ======== ======== ======= ========== ======== Current liabilities 17,050 49,052 $ 961 $ 0 $ 67,063 Notes payable, long term 492,578 1,745 0 0 494,323 Other non-current liabilities 39,017 0 3,353 (12,206) 30,164 Inter-company 0 144,719 6,024 (150,743) 0 Equity 345,845 537,142 9,628 (546,770) 345,845 -------- -------- ------- ---------- -------- $894,490 $732,658 $19,966 ($709,719) $937,395 ======== ======== ======= ========== ======== Statement of Operations - ----------------------- For the three months ended September 30, 2001 Revenues: Gaming $ 0 $109,618 $ 5,145 $ 0 $114,763 Food and beverage 0 8,329 417 0 8,746 Equity in subsidiaries 10,541 1,514 0 (12,055) 0 Other 1,500 14,218 37 0 15,755 -------- -------- ------- ---------- -------- 12,041 133,679 5,599 (12,055) 139,264 -------- -------- ------- ---------- -------- Expenses: Gaming 0 64,881 1,027 0 65,908 Food and beverage 0 10,059 311 0 10,370 Administrative and other 4,010 36,404 2,089 0 42,503 Depreciation and amortization 667 11,803 344 279 13,093 -------- -------- ------- ---------- -------- 4,677 123,147 3,771 279 131,874 -------- -------- ------- ---------- -------- Operating income (loss) 7,364 10,532 1,828 (12,334) 7,390 Interest expense, (income) net 11,707 (9) (86) 0 11,612 -------- -------- ------- ---------- -------- Income (loss) before minority interests and taxes (4,343) 10,541 1,914 (12,334) (4,222) Income tax (benefit) expense (5,625) 0 400 0 (5,225) -------- -------- ------- ---------- -------- Net income (loss) $ 1,282 $ 10,541 $ 1,514 $ (12,334) $ 1,003 ======== ======== ======= ========== ========
17 Pinnacle Entertainment, Inc. Consolidating Condensed Financial Information For the three and nine months ended September 30, 2001 and 2000 and balance sheets as of September 30, 2001 and December 31, 2000 (in thousands - unaudited)
(b) (a) Wholly Wholly Owned Consolidating Pinnacle Pinnacle Owned Non- and Entertainment, Entertainment, Guarantor Guarantor Eliminating Inc. Inc. Subsidiaries Subsidiaries Entries Consolidated -------------- ------------ ------------ ------------- -------------- Statement of Operations - ----------------------- For the nine months ended September 30, 2001 Revenues: Gaming $ 0 $322,081 $14,927 $ 0 $337,008 Food and beverage 0 22,691 1,148 0 23,839 Equity in subsidiaries 27,325 4,226 0 (31,551) 0 Other 4,500 39,426 101 0 44,027 -------- -------- ------- -------- -------- 31,825 388,424 16,176 (31,551) 404,874 -------- -------- ------- -------- -------- Expenses: Gaming 0 191,705 3,739 0 195,444 Food and beverage 0 28,821 864 0 29,685 Administrative and other 11,988 108,108 5,177 0 125,273 Depreciation and amortization 2,019 33,413 1,047 837 37,316 -------- -------- ------- -------- -------- 14,007 362,047 10,827 837 387,718 -------- -------- ------- -------- -------- Operating income (loss) 17,818 26,377 5,349 (32,388) 17,156 Interest expense, (income) net 34,121 (948) (219) 0 32,954 -------- -------- ------- -------- -------- Income (loss) before taxes (16,303) 27,325 5,568 (32,388) (15,798) Income tax (benefit) expense (10,735) 0 1,342 0 (9,393) -------- -------- ------- -------- -------- Net income (loss) $ (5,568) $ 27,325 $ 4,226 $(32,388) $ (6,405) ======== ======== ======= ======== ======== Statement of Cash Flows - ----------------------- For the nine months ended September 30, 2001 Net cash provided by (used in) operating activities $(32,930) $ 31,536 $ 3,768 $ 837 $ 3,211 Net cash provided by (used in) investing activities (102) (30,688) (1,886) 0 (32,676) Net cash provided by (used in) financing activities (11,348) (627) 0 0 (11,975)
18 Pinnacle Entertainment, Inc. Consolidating Condensed Financial Information For the three and nine months ended September 30, 2001 and 2000 and balance sheets as of September 30, 2001 and December 31, 2000 (in thousands--unaudited)
(b) (a) Wholly Wholly Owned Consolidating Pinnacle Pinnacle Owned Non- And Entertainment Entertainment, Guarantor Guarantor Eliminating Inc. Inc. Subsidiaries Subsidiaries Entries Consolidated -------------- ------------ ------------ ------------- -------------- Statement of Operations - ----------------------- For the three months ended September 30, 2000 Revenues: Gaming $0 $112,191 $5,502 $0 $117,693 Racing 0 0 0 0 0 Food and beverage 0 7,550 443 0 7,993 Equity in subsidiaries 16,572 1,634 0 (18,206) 0 Other 1,500 14,833 36 0 16,369 -------------- ------------ ------------ ------------- -------------- 18,072 136,208 5,981 (18,206) 142,055 -------------- ------------ ------------ ------------- -------------- Expenses: Gaming 0 66,291 1,390 0 67,681 Racing 0 0 0 0 0 Food and beverage 0 7,602 356 0 7,958 Administrative and other 7,141 36,017 1,466 0 44,624 Gain on disposition of assets (59,941) 0 0 0 (59,141) Depreciation and amortization 700 8,958 387 369 10,414 -------------- ------------ ------------ ------------- -------------- (52,100) 118,868 3,599 369 70,736 -------------- ------------ ------------ ------------- -------------- Operating income (loss) 70,172 17,340 2,382 (18,575) 71,379 Interest expense (income), net 9,612 (1,855) (61) 0 7,666 -------------- ------------ ------------ ------------- -------------- Income (loss) before minority interests, taxes and extraordinary item 60,560 19,225 2,443 (18,575) 63,653 Minority interests 0 0 0 0 0 Income tax expense 25,355 0 809 0 26,164 -------------- ------------ ------------ ------------- -------------- Net income (loss) before extraordinary item 35,205 19,225 1,634 (18,575) 37,489 Extraordinary item, net of taxes 0 2,653 0 0 2,653 -------------- ------------ ------------ ------------- -------------- Net income (loss) after extraordinary item $35,205 $16,572 $1,634 $(18,575) $34,836 ============== ============ ============= ============= ==============
19 Pinnacle Entertainment, Inc. Consolidating Condensed Financial Information For the three and nine months ended September 30, 2001 and 2000 and balance sheets as of September 30, 2001 and December 31, 2000 (in thousands--unaudited)
(b) (a) Wholly Wholly Owned Consolidating Pinnacle Pinnacle Owned Non- And Entertainment Entertainment, Guarantor Guarantor Eliminating Inc. Inc. Subsidiaries Subsidiaries Entries Consolidated -------------- ------------ ------------ ------------- -------------- Statement of Operations - ----------------------- For the nine months ended September 30, 2000 Revenues: Gaming $0 $367,566 $15,722 $0 $383,288 Racing 9,452 0 0 0 9,452 Food and beverage 1,056 22,959 1,214 0 25,229 Equity in subsidiaries 59,841 4,208 0 (64,049) 0 Other 4,657 41,951 99 0 46,707 -------------- ------------ ------------ ------------- -------------- 75,006 436,684 17,035 (64,049) 464,676 -------------- ------------ ------------ ------------- -------------- Expenses: Gaming 0 212,702 4,434 0 217,136 Racing 4,133 0 0 0 4,133 Food and beverage 892 25,027 1,059 0 26,978 Administrative and other 19,954 103,560 4,510 0 128,024 (Gain) loss on disposition of assets (119,718) 336 0 0 (119,382) Depreciation and amortization 2,645 29,728 1,189 1,107 34,669 -------------- ------------ ------------ ------------- -------------- (92,094) 371,353 11,192 1,107 291,558 -------------- ------------ ------------ ------------- -------------- Operating income (loss) 167,100 65,331 5,843 (65,156) 173,118 Interest expense (income), net 28,979 2,837 (191) 0 31,625 -------------- ------------ ------------ ------------- -------------- Income (loss) before minority interests, taxes and extraordinary item 138,121 62,494 6,034 (65,156) 141,493 Minority interests 0 0 0 0 0 Income tax expense 54,034 0 1,826 0 55,860 -------------- ------------ ------------ ------------- -------------- Net income (loss) before extraordinary item 84,087 62,494 4,208 (65,156) 85,633 Extraordinary item, net of taxes 0 2,653 0 0 2,653 -------------- ------------ ------------ ------------- -------------- Net income (loss) after extraordinary item $84,087 $59,841 $4,208 $(65,156) $82,980 ============== ============ ============ ============= ============== Statement of Cash Flows - ----------------------- For the nine months ended September 30, 2000 Net cash provided (used in) operating activities $(307,970) $278,247 $2,214 $1,386 $(26,123) Net cash provided by (used in) investing activities 403,557 (179,795) (807) 0 222,955 Net cash provided by (used in) financing activities (6,194) (12,554) 0 0 (118,748) Balance Sheet - ------------- As of December 31, 2000 Current assets $146,941 $ 67,931 $ 9,985 $ 0 $224,857 Property, plant and equipment, net 23,969 567,714 2,035 0 593,718 Other non-current assets 24,309 70,927 5,693 41,971 142,900 Investment in subsidiaries 560,204 6,539 0 (566,743) 0 Inter-company 162,213 100,074 0 (262,287) 0 -------------- ------------ ------------ ------------- -------------- $917,636 $813,185 $17,713 $(787,059) $961,475 ============== ============ ============ ============= ============== Current liabilities $ 43,115 $ 50,683 $ (423) $ 0 $ 93,375 Notes payable, long term 494,729 2,433 0 0 497,162 Other non-current liabilities 18,615 (2,447) 5,800 (12,206) 9,762 Inter-company 0 256,490 5,797 (262,287) 0 Equity 361,177 506,026 6,539 (512,566) 361,176 -------------- ------------ ------------ ------------- -------------- $917,636 $813,185 $17,713 $(787,059) $961,475 ============== ============ ============ ============= ==============
(a) The following subsidiaries are treated as guarantors of both the 9.5% Notes and 9.25% Notes for all periods presented: Turf Paradise, Inc. (through June 13, 2000), Belterra Resorts, LLC, Boomtown, Inc., Boomtown Hotel & Casino, Inc., Bay View Yacht Club, Inc. (through August 8, 2000), Louisiana - I Gaming, Louisiana Gaming Enterprises, Inc., Boomtown Hoosier, Inc. HP Casino, Inc. 20 HP Yakama, Inc., HP Consulting, Inc. , HP/Compton, Inc., Casino Magic Corp., Mardi Gras Casino Corp. (through August 8, 2000), Biloxi Casino Corp., Bay St. Louis Casino Corp., Casino Magic Finance Corp., Casino Magic American Corp., and Casino One Corporation. Crystal Park Hotel and Casino Development Company, LLC and Mississippi - I Gaming L.P. (through August 8, 2000). Jefferson Casino Corporation and Casino Magic of Louisiana, Corp. were treated as wholly owned guarantors as of September 30, 2000 upon the redemption of the Casino Magic 13% Notes in August 2000 (see Note 12). (b) Prior to the redemption of the Casino Magic 13% Notes on August 15, 2000, (see Note 12), Jefferson Casino Corporation and Casino Magic of Louisiana, Corp. were wholly owned non-guarantors of the 9.5% and 9.25% Notes. Upon redemption of the Casino Magic 13% Notes, Jefferson Casino Corporation and Casino Magic of Louisiana, Corp. became guarantors of the 9.5% and 9.25% Notes (see note (a) above). Prior to October 1999, Casino Magic Neuquen S.A. and its subsidiary Casino Magic Support Services were non-wholly owned non-guarantors to the 9.5% and 9.25% Notes. 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% and 9.25% Notes. Item 2. Management's Discussion and Analysis of Financial Condition and Results - ------------------------------------------------------------------------------- of Operations - ------------- Forward-Looking Statements and Risk Factors Except for the historical information contained herein, the matters addressed in this Quarterly Report on Form 10-Q may constitute "forward-looking statements" within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities and Exchange Act of 1934, as amended. Such forward-looking statements are subject to a variety of risks and uncertainties that could cause actual results to differ materially from those anticipated by the Company's management. Factors that may cause actual performance of the Company to differ materially from that contemplated by such forward-looking statements include, among others: further deterioration of the economy due to on going terrorist and war activities in the U.S. and elsewhere; approval of the local referendum for the Lake Charles project in Calcasieu Parish, Louisiana; settlement of the conditions for issuance of the license in Louisiana between the Louisiana Gaming Control Board and the Company; completing the Lake Charles project on time and on budget; the effect of future weather conditions and other natural events; the performance of the Belterra Casino Resort, which has a limited operating history and is in a new market for the Company; the failure to sell the surplus land in Inglewood, California (see Note 9 to the Condensed Notes to Consolidated Financial Statements); the failure to complete (on time or otherwise) or successfully operate planned expansion and development projects, (see Note 5 to the Condensed Notes to Consolidated Financial Statements); the failure to obtain adequate financing to meet strategic goals, including financing for the Lake Charles project; 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, particularly at Boomtown New Orleans, Casino Magic Biloxi and Casino Magic Bossier City; the failure to meet Pinnacle Entertainment, Inc.'s debt service obligations; the failure of recent dockside gaming legislation in Louisiana to result in incremental revenue in excess of increased gaming taxes; currency risks at the Company's Argentina operations; change in gaming legislation in Indiana; and other adverse changes in the gaming markets in which Pinnacle Entertainment, Inc. operates (particularly in the southeastern United States). The Private Securities Litigation Reform Act of 1995 (the "Act") provides certain "safe harbor" provisions for forward-looking statements. All forward-looking statements made in this Quarterly Report on Form 10-Q are made pursuant to the Act. For more information on the potential factors which could affect the Company's financial results, please review the Company's filings with the Securities and Exchange Commission, including the Company's Annual Report on Form 10-K for the year ended December 31, 2000. Factors Affecting Future Operating Results Tragedies of September 11, 2001 The terrorist attacks occurring on September 11, 2001, have impacted a majority of the Company's operations, as consumers have reduced their discretionary spending due to the attacks and overall long-term economic uncertainty. Such reduced leisure spending levels adversely impacted the Company's operations in September and continue to impact the operations into the fourth quarter of 2001. At this time, it is difficult for the Company to accurately predict when leisure spending will return to pre-terrorist attack levels. Until such time, operations at the Company's locations will continue to be impacted by this dramatic slow-down in consumer spending. 21 Goodwill Amortization In June 2001, the Financial Accounting Standards Board issued Statements of Financial Accounting Standards No. 141 "Business Combinations" ("SFAS No. 141") and No. 142 "Goodwill and Other Intangible Assets" ("SFAS No. 142") which are effective July 1, 2001 and January 1, 2002, respectively, for the Company. SFAS 141 requires that the purchase method of accounting be used for all business combinations initiated after June 30, 2001. With the adoption of SFAS No. 142 on January 1, 2002 (earlier adoption is not permitted), goodwill will no longer be amortized over its estimated useful life. Rather, goodwill will be subject to at least an annual assessment for impairment by applying a fair-value-based-test. The Company is in the process of evaluating the financial statement impact of adoption of SFAS No. 142. Any transition related impairment charge as of January 1, 2002 would be classified as a cumulative effect of a change in accounting principle. In addition, under the new rules, any future acquired intangible asset will be separately recognized if the benefit of the intangible is obtained through contractual or other legal rights, or if the intangible asset can be sold, transferred, licensed, rented, or exchanged, regardless of the acquirer's intent to do so. Intangible assets with definitive lives will be amortized over their useful lives. Belterra Casino Resort On October 27, 2000, the Company opened to the public the Belterra Casino Resort located on 315 acres adjacent to the Ohio River in Switzerland County, Indiana, which is approximately 45 miles southwest of downtown Cincinnati, Ohio. The Belterra Casino Resort features a 15-story, 308- room hotel, a cruising riverboat casino (the "Miss Belterra") with approximately 1,800 gaming positions, an 18-hole Tom Fazio-designed championship golf course, which opened in July 2001, six restaurants, a 1,500-seat entertainment venue, a spa, retail areas and other amenities. Prior to August 2001, the Company owned a 97% interest in the Belterra Casino Resort, with the remaining 3% held by a non-voting local partner. In November 2000, the Company entered into an agreement with the local partner whereby the local partner had the right to require the Company to purchase, for a purchase price determined in accordance with the agreement, its entire ownership interest in the Belterra Casino Resort at any time on or after January 1, 2001. A $100,000 deposit toward such ultimate purchase price was made by the Company to the partner at that time. In July 2001, the local partner exercised the right to require the Company to purchase the remaining 3% ownership held by the partner for approximately $1,600,000 as calculated in accordance with the agreement. In August 2001, the remaining payment of approximately $1,500,000 was made to the partner and the Belterra Casino Resort is now wholly owned by the Company. Legislation Regarding Dockside Gaming in Louisiana In March 2001, the state legislature passed a law requiring riverboat casinos to remain dockside at all times and increased the gaming taxes paid to the state of Louisiana from 18.5% to 21.5% of net gaming proceeds effective April 1, 2001 for the nine riverboats in the southern region of the state, including the Company's Boomtown New Orleans property. The gaming tax increase to 21.5% of net gaming proceeds will be phased in over an approximately two-year period for the riverboats operating in parishes bordering the Red River, including the Company's Casino Magic Bossier City property. The Company believes this change in the law will benefit its Boomtown New Orleans operations in the long-term, as increased revenues are expected from casino patrons who will no longer be required to arrange their plans to coincide with a cruising schedule. However, increased revenues at Boomtown New Orleans from the benefit of permanent dockside gaming during the initial six months of the new legislation were not sufficient to cover the additional 3.0% gaming tax. To take advantage of the benefits of dockside gaming, the Company renovated the third floor of its dockside riverboat casino during the second quarter of 2001, including adding 325 slot machines (while still conforming to the state of Louisiana's 30,000 square foot gaming limitation). In addition, during the third quarter, the Company substantially completed renovations and improvements of its land-based facility. The Company also believes the new legislation would benefit the proposed Lake Charles project (see below), as it would enable the Company to build a riverboat casino that would remain dockside at all times and thus compete more effectively with existing operators. 22 Finally, during the six months ended September 30, 2001, the Company believes the increased gaming taxes had a negative impact at Casino Magic Bossier City, as gaming was already being conducted on a dockside riverboat casino prior to the new legislation. 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 "Board"). In July 2000, the Company was one of three groups that presented their proposed projects to the Board. On October 16, 2001, the Company was selected by the Board to receive the license. Issuance of the license will be subject to a number of conditions, which conditions are expected to be finalized by the Company and the Board on or prior to November 20, 2001. In addition to the conditions to be agreed to by the Board and the Company, issuance of the license will be subject to the approval of the voters of Calcasieu Parish where the Lake Charles project is located. It is anticipated the local referendum for the approval of the project will be held in mid-January 2002, however, there are no assurances such referendum will not be delayed beyond January 2002, and if held, that it will pass. The proposed project is the construction and operation of a dockside riverboat casino, hotel and golf course resort complex in Lake Charles, Louisiana. The Company anticipates building a facility similar in design and scope to that of Belterra Casino Resort and completing the project in late 2003 or early 2004. 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 (all of which have been exercised), at a cost of $62,500 per six-month renewal option. In June 2001, the District agreed to extend the option period for one additional six-month term at a cost of $62,500 for such additional period. In the event the local referendum noted above is not held prior to the expiration of the current option extension, the Company anticipates requesting an additional lease option extension from the District. These lease option payments are expensed over the option periods. If the lease option were exercised, the annual rental payment would be $815,000, with a maximum annual increase of 5%, commencing upon opening of the facility. The term of the lease would be for a total of up to 70 years, with an initial term of 10 years and six consecutive renewal options of 10 years each. The lease would require the Company to develop certain on- and off-site improvements at the location. All costs incurred by the Company related to obtaining this license have been expensed as incurred. HP Yakama In 1998, the Company, 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 Yakima, Washington. The Tribal Corporation gave HP Yakama a promissory note for the $9,618,000, payable in 84 equal monthly installments at a 10% rate of interest. Pursuant to a seven year Master Lease between HP Yakama and the Confederated Tribes and Banks of the Yakama Indian Nation (the "Tribes"), HP Yakama must pay the Tribes monthly rent of $1,000. HP Yakama and the Tribal Corporation concurrently entered into a corresponding seven-year Sublease, under which the Tribal Corporation owes rent to HP Yakama. Such rent under the Sublease was initially set at 28% of Net Revenues (as defined in the relevant agreements), and decreased to 22% over the seven-year term of the lease. In June 2001, the Company received an early pay-off of the promissory note (which amount was approximately $6,300,000 at such time) and payment for the early termination of the Master Lease and Sublease for a cumulative amount of approximately $8,490,000. After deducting for cash participation receivables through June 30, 2001, and certain closing costs, the Company's pre-tax gain from the transaction (which was recorded in the second quarter of 2001) was approximately $639,000. Effective with the early termination of the promissory note and related lease agreement, the Company no longer receives interest income nor cash participation income from the sublease agreement. Assets Held for Sale Assets held for sale of $12,160,000 and $12,164,000 as of September 30, 2001 and December 31, 2000, respectively, consist of 97 acres of surplus land in Inglewood, California. In April 2000, the Company announced it had entered into an agreement with Casden Properties Inc. for the sale of the 97 23 acres for $63,050,000 in cash. On April 18, 2001, the Company announced that Casden Properties Inc. had elected to terminate the agreement. The Company continues to market the property to prospective buyers. 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 and Crystal Park Hotel and Casino, are leased to, and operated by, an unrelated third party. In May 2001, the California Senate passed a bill, the effect of which would be to permit the Company to operate the Hollywood Park-Casino in Inglewood, California, which was subsequently passed by the California State Assembly. The bill was vetoed by the Governor of California in October 2001. Therefore, the Company anticipates leasing the Hollywood Park-Casino to the current operator for the foreseeable future. Results of Operations Accounting for Customer "Cash-back" Loyalty Programs In January 2001, the Emerging Issues Task Force ("EITF") reached consensus on Issue 3 addressed in Issue No. 00-22 Accounting for "Points" and Certain Other Time-Based Sales Incentive Offers, and Offers for Free Products or Services to Be Delivered in the Future. This EITF pronouncement requires that the cost of the cash back component of the Company's customer loyalty programs be treated as a reduction in revenues. The Company rewards customers with cash, based upon their level of play on certain casino games (primarily slot machines). These costs were previously recorded as a casino expense. The consensus reached on Issue 3 is effective beginning in fiscal quarters ending after February 15, 2001 and was adopted by the Company in the quarter ended March 31, 2001. In connection with the adoption of Issue 3, the Company reclassified (i.e., reduced gaming revenue and gaming expenses) the cash back component of its customer loyalty programs in the amount of $4,310,000 and $14,192,000 related to the three months and nine months ended September 30, 2000 to be consistent with the three and nine months ended September 30, 2001. Terminated Merger Agreement On April 17, 2000, the Company entered into a definitive agreement with PH Casino Resorts ("PHCR"), a newly formed subsidiary of Harveys Casino Resorts, and Pinnacle Acquisition Corporation ("Pinnacle Acq Corp"), a newly formed subsidiary of PHCR, pursuant to which PHCR would have acquired by merger (the "Merger") all of the outstanding capital stock of Pinnacle Entertainment (the "Merger Agreement"). Consummation of the Merger was subject to numerous conditions, including PHCR obtaining the necessary financing for the transaction and regulatory approvals, as well as other conditions. On January 23, 2001, the Company announced that it had been notified by PHCR that PHCR did not intend to extend further the outside closing date (previously extended to January 31, 2001) of the Merger. Since all of the conditions to consummation of the Merger would not be met by such date, the Company, PHCR and Pinnacle Acq Corp mutually agreed that the Merger Agreement would be terminated. The Company does not expect to incur additional costs relating to the terminated Merger Agreement. Redemption of Casino Magic 13% Notes and Extraordinary Item On August 15, 2000, the Company redeemed all $112,875,000 in aggregate principal amount of its then 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 Bossier City satisfied all conditions required to discharge its obligations under the indenture. In connection with the redemption, the Company recorded an extraordinary loss, net of federal and state income taxes, of $2,653,000. The extraordinary loss represents the payment of the redemption premium and the write-off of deferred finance and premium costs, net of the related federal and state income tax benefits (see Note 12 to the Condensed Notes to Consolidated Financial Statements). Assets Sold On August 8, 2000, the Company completed the sale of Casino Magic Bay St. Louis and Boomtown Biloxi (the "Two Mississippi Casinos") and on June 13, 2000, the Company completed the sale of Turf Paradise (see Note 8 to the Condensed Notes to Consolidate Financial Statements). The results of 24 operations of the Two Mississippi Casinos and Turf Paradise are included in the results of operations only until such respective dates. Future revenue, operating results and interest expense will be materially different due to the sale of the Two Mississippi Casinos and Turf Paradise, the redemption of the Casino Magic 13% Notes, the opening of the Belterra Casino Resort and the early termination of the HP Yakama promissory note and related lease agreements. Three months ended September 30, 2001 compared to the three months ended ------------------------------------------------------------------------ September 30, 2000 ------------------ Revenues Total revenues for the three months ended September 30, 2001 increased - -------- by $2,544,000, or 1.9%, as compared to the three months ended September 30, 2000. Contribution to revenues in the three months ended September 30, 2000 from the Two Mississippi Casinos sold in August 2000 (see Note 8 to the Condensed Notes to Consolidated Financial Statements) was $15,786,000. When excluding such revenue for the three months ended September 30, 2000, total revenues in the three months ended September 30, 2001 increased by $18,330,000, or 15.2%, when compared to the three months ended September 30, 2000 due primarily to the revenue at the Belterra Casino Resort, which was not open in the 2000 year three month period. Gaming revenues increased by $2,405,000, or 2.1%. Contributing to gaming revenues in the third quarter of 2000 was $13,777,000 from the Two Mississippi Casinos sold in August 2000. When excluding the results of the Two Mississippi Casinos from the three-month results ended September 30, 2000, gaming revenues increased by $16,182,000, or 16.4%. Gaming revenues increased at Belterra Casino Resort by $24,789,000 and at Boomtown New Orleans by $2,211,000, while gaming revenues declined at Boomtown Reno by $1,305,000, at Casino Magic Biloxi by $1,713,000 and at Casino Magic Bossier City by $7,443,000. The increase in gaming revenues at Belterra Casino Resort is due to the opening of the property in October 2000 and therefore no results of operations in the three months ended September 30, 2000. Such third quarter 2001 results were negatively impacted from the events of September 11, 2001, as all Indiana casinos were required to close down on the evening of September 11 at the request of the Indiana Gaming Commission. The casino did not reopen until the following morning. The increase in gaming revenues at Boomtown New Orleans is primarily attributed to improved market share over the third quarter of 2000 and the additional slot machines, which in turn increased slot coin-in and the resultant slot revenue for the three months ended September 30, 2001, compared to the prior year. The decline at Boomtown Reno is primarily due to substantially lower guest counts for the property in September after the tragedies of September 11. Due to the events of September 11, the annual Reno air-show, which was to be held September 14th and 15th and attracts over 200,000 people to the Reno area, was cancelled. The reduced gaming revenue at Casino Magic Biloxi reflects the continued competitive pressures in the Gulf Coast gaming market and the impact to the market from the events of September 11. In the month of September alone, guest counts (number of visitors to the property) were down for the Casino Magic Biloxi property by over 28% when compared to prior year September. Such reduced guest counts translated into reduced levels of gaming play (defined as slot coin-in and table game drop) and therefore reduced gaming revenues. Similar to Casino Magic Biloxi, the decrease in Casino Magic Bossier City gaming revenue can be attributed to severe competition, the events of September 11 and construction disruption from the installation of new slot machines that began in the second quarter of 2001 and continued into late July 2001. As noted in prior periods, a new casino hotel opened in the Shreveport/ Bossier City market in December 2000 and a new hotel opened in the market in January 2001. As a result, market share (measured by casino revenue) for the quarter is down approximately 36% compared with the third quarter of 2000. When combined with the tragedies of September 11 and construction disruption, guest counts for the Casino Magic Bossier City facility are down approximately 15% for the third quarter 2001 versus the third quarter 2000. Food and beverage revenues increased by $753,000, or 9.4%. Contributing to food and beverage revenues in the third quarter of 2000 was $1,156,000 due to the timing of the sale of the Two Mississippi Casinos. When excluding the results of the sold operations from the three-month results ended September 30, 2000, food and beverage revenue increased $1,909,000, or 27.9%. Food and beverage revenue for Belterra Casino 25 Resort increased by $2,297,000, which increase is due to the opening of the property in October 2000, while food and beverage revenue was down by $306,000 at Casino Magic Biloxi, which decrease is due to the lower guest counts noted above, and the related reduced food and beverage sales. Hotel and recreational vehicle park revenues increased by $816,000, or 22.1%. Contributing to hotel and recreational vehicle park revenues in the third quarter of 2000 was $220,000 due to the timing of the sale of Casino Magic Bay St. Louis in August 2000. When excluding the results of Casino Magic Bay St. Louis from the three-month results ended September 30, 2000, hotel and recreational vehicle park revenues increased $1,036,000, or 29.8%. A majority of the increase, in the amount of $1,085,000, is attributed to the opening of the Belterra Casino Resort in October 2000. Truck stop and service station revenue decreased by $851,000, or 12.2%, primarily due to reduced amounts of gallons sold following to the events of September 11, and lower fuel prices in the third quarter of 2001 compared to the third quarter of 2000 at the Boomtown Reno truck stop and service station. Other income decreased by $579,000, or 10.1%, including $633,000 due to the timing of the sale of the Two Mississippi Casinos. When excluding the results of the sold operations from the three-month results ended September 30, 2000, other income increased by $54,000, or 1.1%. The increase in other revenue is due to other revenue from Belterra Casino Resort of $732,000, offset by the reduction in other revenue from the casino in Yakima, Washington of $647,000, as the note receivable was paid off in June 2001 and therefore no participation revenue in the third quarter of 2001 (see Note 7 of Condensed Notes to Consolidated Financial Statements). Expenses Total expenses for the three months ended September 30, 2001 increased - -------- by $66,473,000, from $65,401,000 for the three months ended September 30, 2000 to $131,874,000 for the three months ended September 30, 2001. Included in the results of operations for the three months ended September 30, 2000 is a gain on the sale of the Two Mississippi Casinos (see Note 8 to the Condensed Notes to Consolidated Financial Statements) of $59,941,000, as well as expenses of the Two Mississippi Casinos sold of $13,254,000. Excluding the gain on sale of the Two Mississippi Casinos and the results of operations from such properties sold in 2000, total expenses for the three months ended September 30, 2001 increased by $19,786,000, or 17.7%, as compared to the three months ended September 30, 2000. Gaming expenses increased by $3,562,000, or 5.7%. Contributing to gaming expenses in the third quarter of 2000 was $7,920,000 due to the timing of the sale of the Two Mississippi Casinos in August 2000. When excluding the results of the Two Mississippi Casinos from the results of operations for the three months ended September 30, 2000, gaming expenses increased by $11,482,000, or 21.1%. Gaming expenses increased $13,724,000 at Belterra Casino Resort, and $1,176,000 at Boomtown New Orleans, offset by decreases at Boomtown Reno of $567,000, at Casino Magic Biloxi of $637,000 and at Casino Magic Bossier City of $1,851,000. The increase in gaming expenses at Belterra Casino Resort is due to the property opening in October 2000, and therefore no results of operations in the three months ended September 30, 2000. The increase in gaming expenses at Boomtown New Orleans is consistent with the increased gaming revenues and increased gaming taxes discussed above. The decrease in gaming expenses at the other casino properties are primarily due to the reduced revenue levels, offset by higher marketing costs at the Company's properties in the Gulf Coast and in Shreveport/ Bossier City, resulting from competitive pressures. Food and beverage expenses increased by $2,412,000 or 30.3%. Contributing to food and beverage expenses in the third quarter of 2000 was $1,013,000 due to the timing of the sale of the Two Mississippi Casinos in August 2000. When excluding the results of the sold operations from the results of operations for the three months ended September 30, 2000, food and beverage expenses increased $3,425,000, or 49.3%. Food and beverage expenses increased at Belterra Casino Resort by $4,339,000, offset by reduced costs at the other casino properties in line with the reduced food and beverage revenues. 26 Hotel and recreational vehicle park expenses increased by $1,521,000, from $1,240,000 for the three months ended September 30, 2000 to $2,761,000 for the three months ended September 30, 2001. The majority of the quarterly increase is due to Belterra Casino Resort in the amount of $1,477,000 for the quarter. Truck stop and service station expenses at Boomtown Reno decreased by $885,000, or 13.6%, due primarily to fewer gallons of gasoline and diesel fuel purchased and lower fuel costs. General and administrative expenses increased by $6,059,000, or 25.4%. Contributing to general and administrative expenses in the third quarter of 2000 was $2,982,000 due to the timing of the sale of the Two Mississippi Casinos in August 2000. When excluding the results of the sold operations from the results of operations for the three months ended September 30, 2000, general and administrative expenses increased $9,307,000, or 44.6%, of which $8,597,000 is attributed to Belterra Casino Resort. Significant marketing costs were incurred at Belterra to introduce the new property and to increase the property's marketing database. Depreciation and amortization increased by $2,679,000, or 25.7%, due to the additional depreciation expense from Belterra Casino Resort, which opened in October 2000, offset by depreciation expense related to the sale of the Two Mississippi Casinos in 2000. Other operating expenses increased $1,834,000, or 78.7%, including $383,000 due to the timing of the sale of the Two Mississippi Casinos in 2000. When excluding the results of the sold operations from the results of operations for the three months ended September 30, 2000, other operating expenses increased $2,217,000, or 113.9%, including $1,669,000 related to the Belterra Casino Resort. There were no pre-opening costs in the third quarter of September 2001 as all construction for the Tom Fazio-designed championship golf course at Belterra Casino Resort was completed in the second quarter of 2001. Pre-opening expenses for the three months ended September 30, 2000 all related to pre-opening activities at Belterra Casino Resort. The loss on disposition of assets of $81,000 in the three months ended September 30, 2001 is due primarily to additional reserves associated with assets sales in 1999 and 2000, substantially offset by write-offs of certain liability reserves associated with such 1999 and 2000 asset sales. The gain on disposition of assets of $59,941,000 in the third quarter of 2000 is due to the sale of the Two Mississippi Casinos in August (see Note 8 to the Condensed Notes to Consolidated Financial Statements). Merger costs of $2,878,000 for the three months ended September 30, 2000 relate to the terminated merger with PHCR (see Note 10 to the Condensed Notes to Consolidated Financial Statements). Interest income decreased by $2,391,000, or 70.8%, primarily due to lower investable funds and lower interest rates during the third quarter of 2001 compared to the same period of 2000. Interest expense, net of capitalized interest, increased by $1,555,000, or 14.1%, due primarily to capitalized interest of $3,665,000 in the third quarter of 2000 related all to the Belterra Casino Resort construction activity. Due to the pre-tax losses in the three months ended September 30, 2001, as well as the settlement with the Internal Revenue Service of certain tax matters in the third quarter 2001 (see Note 2 to the Condensed Notes to Consolidated Financial Statements), the Company recorded an income tax benefit of $5,225,000, compared to an income tax expense of $26,164,000 for the three months ended September 30, 2000 (which 2000 amount includes taxes associated with the Mississippi Casino sale in August 2000 - see Note 8 to the Condensed Notes to Consolidated Financial Statements). The extraordinary loss of $2,653,000 recorded in the third quarter of 2000 related to the early redemption of the Casino Magic 13% Notes (see Note 12 to the Condensed Notes to Consolidated Financial Statements). 27 Nine months ended September 30, 2001 compared to the nine months ended ---------------------------------------------------------------------- September 30, 2000 ------------------ Revenues Total revenues for the nine months ended September 30, 2001 decreased - -------- by $42,412,000, or 9.5%, as compared to the nine months ended September 30, 2000. Contribution to revenues in the nine months ended September 30, 2000 from the Two Mississippi Casinos and Turf Paradise properties sold in 2000 was $104,333,000. When excluding such revenue for the nine months ended September 30, 2000, total revenues in the nine months ended September 30, 2001 increased by $61,921,000, or 18.1%, when compared to the nine months ended September 30, 2000 due primarily to the revenue at the Belterra Casino Resort, which was not opened in the 2000 year nine month period. Gaming revenues decreased $28,890,000, or 7.9%, including $81,305,000 due to the timing of the sale of the Two Mississippi Casinos in August 2000. When excluding the results of the Two Mississippi Casinos from the nine-month results ended September 30, 2000, gaming revenues increased by $52,415,000, or 18.4%. Gaming revenues increased at Belterra Casino Resort by $70,564,000 and at Boomtown New Orleans by $4,088,000, while gaming revenues declined at Boomtown Reno by $2,043,000 and at Casino Magic Bossier City by $18,392,000. The increase in gaming revenues at Belterra Casino Resort is due to the opening of the property in October 2000 and therefore no results of operations in the nine months ended September 30, 2000. The increase in gaming revenues at Boomtown New Orleans is primarily attributed to increased coin-in and resultant slot revenue in the nine months ended September 30, 2001, compared to the prior year. The decrease in gaming revenue at Boomtown Reno is primarily attributed to the reduced results in the third quarter 2001 noted above. The decrease in Casino Magic Bossier City gaming revenue was due primarily to the lower guest counts which led to lower table game drop and coin-in (volume of play in the casino) attributable to increased competition from the opening of a new casino hotel in December 2000 and the opening of a new hotel tower at another competitor in January 2001, the severe winter rainfall in late February and March, which flooded the first level of the property's multi-level parking garage and remodeling of the third deck of the casino into July 2001. The first level of the parking structure was not useable for approximately 45 days during the second quarter of 2001. In addition, on June 11, 2001 the casino began relocating slot machines and renovating the third deck, which resulted in disruption to this part of the casino and such remodeling was not completed until late-July. Food and beverage revenues decreased by $1,390,000, or 5.5%, including $7,242,000 due to the timing of the sale of the Two Mississippi Casinos and Turf Paradise. When excluding the results of the sold operations from the nine-month results ended September 30, 2000, food and beverage revenue increased $5,852,000, or 32.5%. Food and beverage revenues increased at Belterra Casino Resort by $6,339,000, offset by reduced revenues at the other casino properties due to the lower guest counts the various properties are experiencing. Hotel and recreational vehicle park revenues increased by $1,598,000, or 15.9%. Contributing to hotel and recreational vehicle park revenues in the third quarter of 2000 was $1,273,000 due to the timing of the sale of Casino Magic Bay St. Louis in August 2000. When excluding the results of Casino Magic Bay St. Louis from the nine-month results ended September 30, 2000, hotel and recreational vehicle park revenues increased $2,871,000, or 32.7%. A majority of the increase, $2,803,000, is attributed to the opening of the Belterra Casino Resort in October 2000. Truck stop and service station revenue decreased by $300,000, or 1.8%, primarily due to fewer gallons of gasoline and diesel fuel sold in the nine-month period of 2001 compared to the same period of 2000. Other income decreased by $3,978,000, or 19.6%, including $5,061,000 due to the timing of the sale of the Two Mississippi Casinos and Turf Paradise. When excluding the results of the sold operations from the nine-month results ended September 30, 2000, other income increased by $1,083,000, or 7.1%. The increase in other revenue was due primarily to the other income from Belterra Casino Resort of $1,386,000. Racing revenues declined by $9,452,000, or 100.0%, entirely due to the sale of Turf Paradise in June 2000. 28 Expenses Total expenses for the nine months ended September 30, 2001 increased - -------- by $113,550,000, or 41.4%, as compared to the nine months ended September 30, 2000. Included in the results of operations for the nine months ended September 30, 2000 is a gain on the sale of the Two Mississippi Casinos, Turf Paradise and land in Inglewood, California (see Note 8 to the Condensed Notes to Consolidated Financial Statements) of $119,382,000, as well as expenses of the Two Mississippi Casinos and Turf Paradise of $84,045,000. Excluding the gain on disposition of assets and the related results of operations from properties sold in 2000, total expenses for the nine months ended September 30, 2001 increased by $78,213,000, or 25.3%, as compared to the nine months ended September 30, 2000. Gaming expenses decreased by $4,302,000, or 2.2%, including $43,981,000 due to the timing of the sale of the Two Mississippi Casinos in August 2000. When excluding the results of the Two Mississippi Casinos from the results of operations for the nine months ended September 30, 2000, gaming expenses increased by $39,679,000, or 25.5%. Gaming expenses increased $38,711,000 at Belterra Casino Resort, and $3,309,000 at Boomtown New Orleans partially offset by decreases at the Company's other casinos. The increase in gaming expenses at Belterra Casino Resort is due to the property opening in October 2000, and therefore no results of operations in the nine months ended September 30, 2000. The increase in gaming expenses at Boomtown New Orleans is consistent with the increased gaming revenues, increased gaming taxes (see Note 4 to the Condensed Notes to Consolidated Financial Statements) and increased marketing expenses. Food and beverage expenses increased by $2,707,000, or 10.0%. Contributing to food and beverage expenses in the nine months ended September 30, 2000 was $7,690,000 due to the timing of the sale of the Two Mississippi Casinos and Turf Paradise. When excluding the results of the sold operations from the results of operations for the nine months ended September 30, 2000, food and beverage expenses increased $10,397,000, or 53.9%. Food and beverage expenses increased at Belterra Casino Resort by $11,943,000 due to the opening of the property in October 2000, and partially offset by decreases at the Company's other casinos. Hotel and recreational vehicle park expenses increased by $3,289,000, or 75.7%, including $710,000 due to the timing of the sale of Casino Magic Bay St. Louis. When excluding the results of Casino Magic Bay St. Louis from the results of operations for the nine months ended September 30, 2000, hotel and recreational vehicle park expenses increased by $3,999,000, or 110.0%, the majority of which is attributed to Belterra Casino Resort, which opened in October 2000. Truck stop and service station expenses at Boomtown Reno decreased by $277,000, or 1.8%, due primarily to fewer gallons of gasoline and diesel fuel purchased in the period, as well as reduced fuel costs. Racing expenses decreased by $4,133,000, or 100.0%, entirely due to the sale of Turf Paradise in June 2000. General and administrative expenses increased by $10,653,000, or 13.0%. Contributing to general and administrative expenses in the nine months ended September 30, 2000 was $19,440,000 due to the timing of the sale of the Two Mississippi Casinos and Turf Paradise. When excluding the results of the sold operations from the results of operations for nine months ended September 30, 2000, general and administrative expenses increased $30,093,000, or 48.3%, of which, $24,620,000, is attributed to Belterra Casino Resort and $3,726,000 was attributed to Casino Magic Bossier City. Significant marketing costs were incurred at Belterra to introduce the new property and to increase the property's marketing database. During the second quarter of 2001, Casino Magic Bossier City took a charge of approximately $2.6 million for certain reserves and write-downs related to inventory, accounts receivable and other working capital valuation matters. Depreciation and amortization increased by $2,647,000, or 7.6%, primarily due additional depreciation expense from Belterra Casino Resort, which opened in October 2000, offset by reduced depreciation expense from the sale of the Two Mississippi Casinos and Turf Paradise in 2000. Other operating expenses increased $2,250,000, or 26.8%, including $2,501,000 due to the timing of the sale of the Two Mississippi Casinos and Turf Paradise in 2000. When excluding the results of the sold operations 29 from the results of operations for the nine months ended September 30, 2000, other operating expenses increased $4,751,000, or 80.8%, including $4,494,000 related to the Belterra Casino Resort. Pre-opening expenses decreased by $12,699,000, or 95.4%, for the nine months ended September 30, 2001 from the same period in 2000. Pre-opening costs in 2001 for the Belterra Casino Resort were due to the continuing construction of the Tom Fazio-designed championship golf course, which opened in July 2001. The gain on disposition of assets of $500,000 for the nine months ended September 30, 2001 includes the gain from the early pay-off of the HP Yakama promissory note of $639,000 (see Note 7 to the Condensed Notes to Consolidated Financial Statements), offset by the loss on disposition of other assets in the period. The gain on disposition of assets of $119,382,000 in the first nine months of 2000 is due to the sale of the Two Mississippi Casinos in August 2000, Turf Paradise Race Track in June 2000 and the land sales in March 2000 (see Note 8 to the Condensed Notes to Consolidated Financial Statements). Merger costs of $5,003,000 in the first nine months of 2000 relate to the terminated merger with PHCR (see Note 10 to the Condensed Notes to Consolidated Financial Statements). Purported class action lawsuits related to the terminated merger were settled in the second quarter of 2001 resulting in a reversal of accrued expenses of $464,000 for these lawsuits (see Note 10 to the Condensed Notes to Consolidated Financial Statements). Interest income decreased by $5,487,000, or 56.3%, primarily due to lower investable funds and lower interest rates during the nine months ended September 30, 2001 compared to the same period of 2000. Interest expense, net of capitalized interest decreased by $4,158,000, or 10.1%, due primarily to the redemption of the Casino Magic 13% Notes in August 2000 (see Note 12 to the Condensed Notes to Consolidated Financial Statements). Due to the pre-tax losses in the nine months ended September 30, 2001, as well as the settlement of certain tax matters in the third quarter 2001, the Company recorded an income tax benefit of $9,393,000, compared to an income tax expense of $55,860,000 for the nine months ended September 30, 2000 (which 2000 amount includes taxes associated with the asset dispositions in 2000 - see Note 8 to the Condensed Notes to Consolidated Financial Statements). The extraordinary loss of $2,653,000 recorded in the nine months ended September 30, 2000 related to the early redemption of the Casino Magic 13% Notes (see Note 12 to the Condensed Notes to Consolidated Financial Statements). Liquidity, Capital Resources and Other Factors Influencing Future Results At September 30, 2001, the Company had cash and cash equivalents, all of which had original maturities of less than ninety days, of $131,428,000 compared to $172,868,000 at December 31, 2000. In October 2001, the Company received a cash income tax refund of $23,655,000 (see Note 2 to the Condensed Notes to Consolidated Financial Statements). The Condensed Consolidated Statements of Cash Flows detailing changes in the cash balances is on page 3. Operating activities generated net cash of $3,211,000 in the nine months ended September 30, 2001 compared with net cash uses of $26,123,000 in the nine months of 2000. In the nine-month period ending September 30, 2001, the net cash flow from operations was generated from earnings before interest, taxes, depreciation, amortization and non-recurring items ("EBITDA") of approximately $54,118,000, offset by uses of cash for interest payments on the 9.5% and 9.25% Notes of approximately $44,250,000, the reduction in accounts payable of $3,597,000 and cash provided from receivables, prepaid assets and other assets of $702,000. In the same nine-month period last year, the cash used in operations was $26,123,000, which included additional EBITDA from operations sold in 2000 (see Note 8 to the Condensed Notes to Consolidated Financial Statements), offset by cash interest payments (the 9.5% Notes, 9.25% Notes and Casino Magic 30 Bossier City 13% Notes - see Note 12 to the Condensed Notes to Consolidated Financial Statements), income taxes in 2000 and 1999 on asset dispositions, pre- opening costs attributed to Belterra Casino Resort (which opened in October 2000) and terminated merger costs (see Note 10 to the Condensed Notes to Consolidated Financial Statements). Net cash used by investing activities of $32,676,000 in the nine months ended September 30, 2001 is primarily attributed to the addition of property, plant and equipment of $41,060,000. The additions during the nine months ended September 30, 2001 include completion of the Tom Fazio-championship golf course at Belterra Casino Resort (which opened in July 2001), construction costs associated with the build out of the high-end Asian Room, new slot machines and remodeling of the pavilion building at Boomtown New Orleans, initial payments for the purchase of player tracking systems at two of the Company properties and the purchase of approximately 14 acres of leased land at Crystal Park Casino. Net cash provided by investing activities of $222,955,000 in the nine months ended September 30, 2000 includes proceeds of $123,428,000 from the maturity of short term investments and the receipt of $267,234,000 from the sale of property, plant and equipment (such receipts primarily from the various asset sales in 2000 - see Note 8 to the Condensed Notes to Consolidated Financial Statements), offset by the use of cash of $166,425,000 for the additions of property, plant and equipment (the primary additions attributed to the Belterra Casino Resort, which opened in October 2000). The net cash used in financing activities of $11,975,000 in the nine months ended September 30, 2001 is due primarily to the payment of $9,717,000 for the purchase of the Company's common stock (see Note 6 to the Condensed Notes to Consolidated Financial Statements). The net cash used in financing activities in the first nine months of 2000 of $118,748,000 is primarily due to the redemption of the Casino Magic Bossier City 13% Notes in August 2000 (see Note 12 to the Condensed Notes to Consolidated Financial Statements). The Company believes that its available cash, cash equivalents, cash to be generated by assets held for sale and cash flow from operations will be sufficient to finance operations and capital requirements for at least the next twelve months, including amounts necessary for the Casino Magic Bossier City and Lake Charles projects (see Note 5 to the Condensed Notes to Consolidated Financial Statements). The Company has substantial cash resources and in November 2001, amended its unused bank credit facility to allow the necessary capital spending to build the Lake Charles project. The Company believes available cash, cash to be generated by asset sales, cash flow from operations and availability under the bank credit facility is sufficient to build the Lake Charles facility. As part of the bank agreement, the Company is contractually obligated to utilize cash other than working capital and casino cash before drawing on the bank line of credit. In addition, the Company may use a portion of existing resources to (i) reduce its outstanding debt obligations prior to their scheduled maturities, (ii) make capital improvements at other 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 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. Item 3. Quantitative and Qualitative Disclosures About Market Risk - ------------------------------------------------------------------ At September 30, 2001, the Company did not hold any investments in market-risk- sensitive instruments of the type described in Item 305 of Regulation S-K. 31 Part II Other Information Item 1. Legal Proceedings - ------------------------- Astoria Entertainment Litigation In November 1998, Astoria Entertainment, Inc. - -------------------------------- filed a complaint in the United States District Court for the Eastern District of Louisiana. Astoria, an unsuccessful applicant for a license to operate a riverboat casino in Louisiana, attempted to assert a claim under the Racketeer Influenced and Corrupt Organizations ("RICO") statutes, seeking damages allegedly resulting from its failure to obtain a license. Astoria named several companies and individuals as defendants, including Hollywood Park, Inc. (the predecessor to Pinnacle Entertainment), Louisiana Gaming Enterprises, Inc. ("LGE"), and an employee of Boomtown, Inc. The Company believed the RICO claim against it had no merit and, indeed, Astoria voluntarily dismissed its RICO claim against Hollywood Park, LGE, and the Boomtown employee. On March 1, 2001, Astoria amended its complaint. Astoria's amended complaint added new legal claims, and named Boomtown, Inc. and LGE as defendants. Astoria claims that the defendants (i) conspired to corrupt the process for awarding licenses to operate riverboat casinos in Louisiana, (ii) succeeded in corrupting the process, (iii) violated federal and Louisiana antitrust laws, and (iv) violated the Louisiana Unfair Trade Practices Act. The amended complaint asserts that Astoria would have obtained a license to operate a riverboat casino in Louisiana, but for these alleged improper acts. On August 21, 2001, the court dismissed Astoria's federal claims with prejudice and its state claims without prejudice. On September 21, 2001, Astoria appealed those dismissals to the U.S. Court of Appeals for the Fifth Circuit. No decision on the appeal has been rendered. While the Company cannot predict the outcome of this action, the Company asserts that it has no liability in this matter, and it intends to vigorously defend the action. Actions by Greek Authorities For a discussion of the background of the Greek - ---------------------------- matters, see the description of litigation under the heading "Actions by Greek Authorities" in Part 1, Item 3. Legal Proceedings of the Company's Annual Report on Form 10-K for the year ended December 31, 2000. During the first quarter of 2001, the Greek taxing authorities appealed the December 11, 2000 decision by the Administrative Court of Thessaloniki overturning the assessment of the fine against PCC. No hearing date on such appeal has been set. On March 30, 2001, appeals on behalf of Marlin Torguson and Robert Callaway were filed. The hearing before the three-member Court of Misdemeanors of Thessaloniki has been set for January 15, 2002. Casino America Litigation On or about September 6, 1996, Casino America, Inc. - ------------------------- commenced litigation in the Chancery Court of Harrison County, Mississippi, Second Judicial District, against Casino Magic Corp., and James Edward Ernst, its then Chief Executive Officer. In the complaint, as amended, the plaintiff claims, among other things, that the defendants (i) breached the terms of an agreement they had with the plaintiff; (ii) tortiously interfered with certain of the plaintiff's contracts and business relations; and (iii) breached covenants of good faith and fair dealing they allegedly owed to the plaintiff, and seeks compensatory damages in an amount to be proven at trial as well as punitive damages. On or about October 8, 1996, the defendants interposed an answer, denying the allegations contained in the Complaint. On June 26, 1998, defendants filed a motion for summary judgment, as well as a motion for partial summary judgment on damages issues. Thereafter, the plaintiff, in July of 1998, filed a motion to reopen discovery. The court granted the plaintiff's motion, in part, allowing the parties to conduct additional limited discovery. On November 30, 1999, the matter was transferred to the Circuit Court for the Second Judicial District for Harrison County, Mississippi. On October 19, 2001, the Court denied defendant's motion for summary judgment. On October 22, 2001, the Court granted defendant's motion for partial summary judgment, in part, requiring plaintiff to modify its method of calculating damages. On October 24, 2001, the defendants were granted a continuance in order to allow additional discovery to be conducted on plaintiff's revised damage claims. No new trial date has been set. The Company's insurer has essentially denied coverage of the claim against Mr. Ernst under the Company's directors and officer's insurance policy, but has reserved its right to review the matter as to tortious 32 interference at or following trial. The Company believes that the insurer should not be permitted to deny coverage, although no assurances can be given that the insurer will change its position. While the Company cannot predict the outcome of this action, management believes the lawsuit will not have a material adverse effect on the financial condition or results of operations of the Company, 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. 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 (including the State of Louisiana, the manufacturer of the bus and the doctor who treated the driver of the bus and released him to return to work), were named in fifty-four (54) lawsuits, each seeking unspecified damages due to the deaths and injuries sustained in this accident. Most of the cases filed in the Louisiana state courts were removed and consolidated with the cases which were filed in the United States District Court for the Eastern District of Louisiana. In August 2001, Casino Magic Corp. and Mardi Gras Casino Corp. settled the sole Louisiana state court case pending against these defendants. An order of dismissal with prejudice was entered on October 24, 2001. On or about September 14, 2001, an agreement was reached to settle all lawsuits pending in the United States District Court for the Eastern District of Louisiana. An order of dismissal without prejudice to the right to reopen the action to enforce the compromise if the settlement is not consummated within a reasonable time was entered on September 17, 2001. The settlements have been or will be paid by the Company's applicable insurance carriers. Casino Magic Corp.'s and Mardi Gras Casino Corp.'s agreement to settle does not constitute and should not be construed as an admission that these entities have any liability to or acted wrongfully in any way with respect to the plaintiffs or any other person. Casino Magic Bay St. Louis Wrongful Death Litigation On February 17, 2000, - ---------------------------------------------------- three Mardi Gras Casino Corp. (d/b/a Casino Magic Bay St. Louis) patrons, after leaving the casino property, were involved in a vehicular accident which resulted in the deaths 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 Mardi Gras Casino Corp. seeking compensatory damages in the amount of $2,000,000 and punitive damages, attorney fees, costs and expenses in the amount of $10,000,000. The suit alleged, among other things, that Mardi Gras Casino Corp. employees negligently served alcoholic beverages to the three individuals and the acts and omissions of the employees were the proximate cause of the accident. On September 24, 2001, the parties executed an agreement to settle the lawsuit. An order of dismissal with prejudice was entered on October 19, 2001. The settlement was paid by the Company's applicable insurance carrier. The defendant's agreement to settle does not constitute and should not be construed as an admission that the defendant has any liability to or acted wrongfully in any way with respect to the plaintiffs or any other person. Casino Magic Biloxi Patron Shooting Litigation On January 13, 2001, three - ---------------------------------------------- Casino Magic Biloxi patrons were shot, in the casino, sustaining serious injuries as a result of a shooting incident involving another Casino Magic Biloxi patron, who then killed himself. Several other patrons sustained minor injuries while attempting to exit the casino. On August 1, 2001, two of the casino patrons shot during the January 13, 2001 incident filed a complaint in the Circuit Court of Harrison County, Mississippi, Second Judicial District. The complaint alleges that Biloxi Casino Corp. failed to exercise reasonable care to keep its patrons safe from foreseeable criminal acts of third persons and seeks unspecified compensatory and punitive damages. The Plaintiffs filed an amended complaint on August 17, 2001. The amended complaint added an allegation that Biloxi Casino Corp. violated a Mississippi statute by serving alcoholic beverages to the perpetrator who was allegedly visibly intoxicated and that Biloxi Casino Corp.'s violation of the statute was the proximate cause of or contributing cause to Plaintiffs' injuries. While the Company cannot predict the outcome of the litigation, the Company believes that Biloxi Casino Corp. is not liable for any damages arising from the incident and the Company, together with its applicable insurers, intends to vigorously defend this lawsuit. Poulos Lawsuit For a discussion of the background of this lawsuit, see the - -------------- description of litigation under the heading "Poulos Lawsuit" in Note 13 to the Consolidated Financial Statements. 33 On March 19, 1998, the magistrate judge granted the defendants' motion to bifurcate discovery into "class" and "merits" phases. "Class" discovery was completed on July 17, 1998. The magistrate judge recommended denial of the plaintiffs' motion to compel further discovery from the defendants, and the court affirmed in part. "Merits" discovery is stayed until the court decides the motion for class certification filed by the plaintiffs on March 18, 1998, which motion the defendants opposed. In January 2001, the plaintiffs filed a supplement to their Motion for Class Certification. On March 29, 2001, defendants filed their response to plaintiffs' supplement to motion for class certification. The hearing on plaintiffs' Motion for Class Certification has been set for November 15, 2001. Item 5. Other Information - ------------------------- On July 11, 2001, the Company announced the resignation of J. Michael Allen as Chief Operating Officer of the Company. Paul Alanis, Chief Executive Officer and President of the Company assumed the responsibilities of Chief Operating Officer. Pursuant to the terms of Mr. Allen's employment agreement, the Company will continue to pay to Mr. Allen his salary through the expiration of such contract on December 31, 2001. On September 5, 2001, the Company announced the hiring of Wade W. Hundley to the position of Chief Operating Officer. Item 6. Exhibits and Reports on Form 8-K - ---------------------------------------- (a) Exhibits
Exhibit Number Description of Exhibit - ---------- ---------------------- 10.1 * Amendment No. 6, dated November 7, 2001, to Amended and Restated Reducing Revolving Loan Agreement and Waiver, dated October 14, 1998, among Pinnacle Entertainment, 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, N.A. (as Administrative Agent). 11.0 * Statement re Computation of Per Share Earnings. _____ * Filed herewith
(b) Reports on Form 8-K: None 34 Other financial information: - ---------------------------- PINNACLE ENTERTAINMENT, INC. Selected Financial Data by Property (in thousands, except per share data - unaudited)
For the three months For the nine months ended September 30, ended September 30, ------------------------------ ------------------------------ 2001 2000 2001 2000 ------------- ---------- ----------- ----------- (in thousands, except per share data - unaudited) Revenues: Belterra Casino & Resort $ 28,903 $ 0 $ 81,092 $ 0 Boomtown Reno 26,868 28,817 70,813 72,187 Boomtown New Orleans 27,005 24,960 77,586 73,861 Casino Magic Biloxi 21,735 23,774 65,998 68,048 Casino Magic Bossier City 27,354 34,955 85,313 104,878 Casino Magic Argentina 5,599 5,981 16,176 17,035 Card clubs and other 1,800 2,447 7,896 6,944 Pinnacle Entertainment, Inc. - Corporate 0 0 0 0 ----------- ----------- ---------- -------- 139,264 120,934 404,874 342,953 Operations sold or disposed Boomtown Biloxi 0 7,038 0 39,770 Casino Magic Bay St. Louis 0 8,748 0 53,898 Turf Paradise Race Track 0 0 0 10,665 ----------- ----------- ---------- -------- 139,264 136,720 404,874 447,286 ----------- ----------- ---------- -------- Expenses: Belterra Casino & Resort 29,806 0 83,814 0 Boomtown Reno 19,933 21,040 55,423 55,611 Boomtown New Orleans 19,974 18,556 56,828 53,542 Casino Magic Biloxi 17,721 18,523 53,374 52,746 Casino Magic Bossier City 23,616 26,068 78,253 76,491 Casino Magic Argentina 3,427 3,212 9,780 10,003 Card clubs and other 66 96 269 293 Pinnacle Entertainment, Inc. - Corporate 4,157 4,280 13,015 13,428 ----------- ----------- ---------- -------- 118,700 91,775 350,756 262,114 Operations sold or disposed Boomtown Biloxi 0 5,172 0 31,545 Casino Magic Bay St. Louis 0 7,250 0 39,802 Turf Paradise Race Track 0 0 0 7,108 ----------- ----------- ---------- -------- 118,700 104,197 350,756 340,569 ----------- ----------- ---------- -------- Non-recuring (expenses) income: Gain on disposition of assets, net (81) 59,941 500 119,382 Pre-opening costs, Belterra Casino Resort 0 (7,853) (610) (13,309) Terminated merger costs 0 (2,878) 464 (5,003) ----------- ----------- ---------- -------- (81) 49,210 354 101,070 ----------- ----------- ---------- -------- Subtotal $ 20,483 $ 81,733 $ 54,472 $207,787
35 PINNACLE ENTERTAINMENT, INC. Selected Financial Data by Property (in thousands, except per share data - unaudited)
For the three months For the nine months ended September 30, ended September 30, ---------------------------- ----------------------- 2001 2000 2001 2000 ----------- ---------- --------- --------- (in thousands, except per share data - unaudited) Subtotal from prior page $ 20,483 $ 81,733 $ 54,472 $207,787 Depreciation and amortization: Belterra Casino Resort 3,840 40 9,905 121 Boomtown Reno 1,941 1,926 5,878 5,736 Boomtown New Orleans 1,580 1,523 4,440 4,445 Casino Magic Biloxi 1,640 1,673 4,975 5,367 Casino Magic Bossier City 2,210 2,109 6,466 6,313 Casino Magic Argentina 344 387 1,047 1,189 Card clubs and other 968 974 2,889 2,960 Pinnacle Entertainment, Inc. - Corporate 570 950 1,716 2,948 ---------- ----------- --------- -------- 13,093 9,582 37,316 29,079 Operations sold or disposed Boomtown Biloxi 0 386 0 2,227 Casino Magic Bay St. Louis 0 446 0 2,843 Turf Paradise Race Track 0 0 0 520 ---------- ----------- --------- -------- 13,093 10,414 37,316 34,669 ---------- ----------- --------- -------- Operating income 7,390 71,319 17,156 173,118 Interest income 984 3,375 4,260 9,747 Interest expense, net of capitalized interest (12,596) (11,041) (37,214) (41,372) ---------- ----------- --------- -------- (Loss) income before income taxes (4,222) 63,653 (15,798) 141,493 Income tax (benefit) expense (5,225) 26,164 (9,393) 55,860 ---------- ----------- --------- -------- Net income (loss) before extraordinary item 1,003 37,489 (6,405) 85,633 Extraordinary item, net of income tax 0 2,653 0 2,653 ---------- ----------- --------- -------- Net income (loss) after extraordinary item $ 1,003 $ 34,836 ($6,405) $ 82,980 ========== =========== ========= ======== Net income (loss) per common share - basic: Net income (loss) before extraordinary item - basic $ 0.04 $ 1.42 ($0.25) $ 3.25 Extraordinary item, net of income tax - basic 0.00 (0.10) 0.00 (0.10) ---------- ----------- --------- -------- Net income (loss) after extraordinary item - basic $ 0.04 $ 1.32 ($0.25) $ 3.15 ========== =========== ========= ======== Net income (loss) per common share - diluted: Net income (loss) before extraordinary item - diluted $ 0.04 $ 1.37 ($0.25) $ 3.13 Extraordinary item, net of income tax - diluted 0.00 (0.10) 0.00 (0.10) ---------- ----------- --------- -------- Net income (loss) after extraordinary item - diluted $ 0.04 $ 1.27 ($0.25) $ 3.03 ========== =========== ========= ======== Number of shares: Basic 25,542 26,356 25,939 26,306 Diluted 25,623 27,458 25,939 27,369
36 Signatures Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. Pinnacle Entertainment, Inc. (Registrant) By: /s/ Paul R. Alanis Dated: November 9, 2001 ------------------------------------------------ Paul R. Alanis President, Chief Executive and Operating Officer (Principal Executive Officer) By: /s/ Bruce C. Hinckley Dated: November 9, 2001 ------------------------------------------------ Bruce C. Hinckley Senior Vice President and Chief Financial Officer (Principal Financial and Accounting Officer) 37 EX-10.1 3 dex101.txt AMENDMENT NO. 6 TO REDUCING REVOLVING LOAN AGMT EXHIBIT 10.1 AMENDMENT NO. 6 TO AMENDED AND RESTATED REDUCING REVOLVING LOAN AGREEMENT AND WAIVER This Amendment No. 6 to Amended and Restated Reducing Revolving Loan Agreement and Waiver (this "Amendment") is entered into with reference to the Amended and Reducing Revolving Loan Agreement dated as of October 14, 1998 among Pinnacle Entertainment, Inc. (acting under its former name, Hollywood Park, Inc. and referred to herein as "Borrower"), the Banks and Co-Agents referred to therein, and Bank of America, N.A., as Administrative Agent (as heretofore amended, the "Loan Agreement"). Capitalized terms used but not defined herein are used with the meanings set forth for those terms and in the Loan Agreement. Borrower and the Administrative Agent, acting with the consent of the Requisite Banks pursuant to Section 11.2 of the Loan Agreement, agree as follows: 1. Additional and Amended Definitions: Section 1.1 of the Loan Agreement ---------------------------------- is hereby amended to add the following defined terms thereto: "Average Net Available Cash" means, as of the last date of each Fiscal -------------------------- Quarter, the average daily amount of the Net Available Cash for the Fiscal Quarter ending on that date. "Net Available Cash" means, as of each date of determination, (a) the ------------------ balance of the consolidated Cash and Cash Equivalents of Borrower and its Restricted Subsidiaries as of that date, minus cage cash maintained at ----- their respective properties in an aggregate amount not to exceed $45,000,000. and to amend the following defined term to read in full as follows: "Net Funded Debt Ratio" means, as of each date of determination, the ratio --------------------- which results from subtracting the Average Net Available Cash from the numerator of the Funded Debt Ratio as of that date. 2. Voluntary Reduction of the Commitment. Concurrently with the ------------------------------------- execution of this Amendment, Borrower hereby reduces the Commitment from $170,000,000 to $110,000,000 in accordance with the provisions of Section 2.5 of the Loan Agreement, and the Banks hereby waive the three Business Day notice period contemplated by that Section in connection with such reduction. 3. New Section 2.14 Condition for Loans and Letters of Credit. The Loan ---------------------------------------------------------- Agreement is hereby amended to add a new Section 2.14 to read in full as follows: "2.14 Condition for Loans and Letters of Credit. Notwithstanding anything ----------------------------------------- to the contrary contained in this Agreement, following November 7, 2001, the Borrower shall have no right to request an Advance or the issuance of a Letter of Credit and no Advance will be made or Letter of Credit issued unless, as of the date of such request, (a) Net Available Cash is zero or less than zero, (b) Borrower has received all required governmental consents to, and shall have executed and delivered to the Administrative -1- Agent in form and substance acceptable to the Administrative Agent, Collateral Documents granting a Lien in substantially all of its real and personal Property, wherever located, subject only to Permitted Liens, and (c) Borrower has delivered to the Administrative Agent, the final executed prime construction contract for the proposed Lake Charles Louisiana Project demonstrating a guaranteed maximum price for those portions of such project customarily covered by prime construction contracts." 4. Suspension of Share Repurchase Basket. Borrower hereby agrees that, ------------------------------------- notwithstanding any other provision of the Loan Documents to the contrary, it shall not make or declare any Distribution consisting of the retirement, repurchase, redemption or other acquisition of its equity securities during the period between the effective date of this Amendment and April 1, 2002. 5. Capital Expenditures - Section 6.14. Section 6.14 of the Loan ----------------------------------- Agreement is amended to add the following sentence at the end thereof: "Notwithstanding any other provision of this Section, during the Restricted Period Borrower shall not, and shall not permit any of the Restricted Subsidiaries to, make any Capital Expenditure other than (i) Maintenance Capital Expenditures, and (ii) Capital Expenditures made following September 30, 2001 with respect to (A) Boomtown Reno in an aggregate amount not to exceed $1,000,000, (B) Boomtown New Orleans in an aggregate amount not to exceed $2,800,000, (C) Casino Magic Bossier City, in an aggregate amount not to exceed $25,000,000, (D) a player tracking system for Borrower and its Subsidiaries in an aggregate amount not to exceed $4,500,000, and (E) the Lake Charles, Louisiana project, in an aggregate amount not to exceed $225,000,000." 6. Amendment to Interest Coverage Ratio - Section 6.11. Section 6.11 of --------------------------------------------------- the Loan Agreement is hereby amended so that the following are the required ratios as of the dates set forth below (with the ratios amended hereby shown in bold text for the convenience of the reader): Fiscal Quarter or Period Minimum Interest Coverage Ratio ------------------------ ------------------------------- September 30, 200l 1.10:1.00 December 31, 200l through 1.05:l.00 March 31, 2002 June 30,2002 through December 31, 2002 1.25:1.00 March 31,2003 and June 30, 2003 1.50:1.00 Thereafter 2.00:1.00 7. Amendment to Net Funded Debt Ratio - Section 6.13. Section 6.13 of the -------------------------------------------------- Loan Agreement is hereby amended so that the following are the required ratios as of the dates set forth below (with the ratios amended hereby shown in bold text for the convenience of the reader): -2- Fiscal Quarter or Period Maximum Net Funded Debt Ratio ------------------------ ----------------------------- September 30, 2001 5:45:1.00 December 31, 2001 6:50:1.00 March 31, 2002 6:85:1.00 June 30, 2002 through June 30, 2003 5.35:1.00 Thereafter 4.50:1.00 8. New Subsection 8.3(e). Section 8.3 of the Loan Agreement is amended to --------------------- add a subsection (e) to read as follows: "(e) The Administrative Agent shall have received a Request for Loan or Request for Letter of Credit certifying that Net Available Cash, as of the date of the Request for Loan or the Request for Letter of Credit, is zero or less than zero." In connection with the amendment described in this Section, Exhibits K and L to the Loan Agreement, being the forms of the Request for Loan and Request for Letter of Credit, are hereby amended to be in the forms attached as Exhibits K and L to this Amendment. 9. Waiver of Net Funded Debt Ratio as of September 30, 2001. Compliance -------------------------------------------------------- with Section 6.13 of the Loan Agreement is hereby waived in respect of the Fiscal Quarter ended September 30, 200l. 10. Waiver of Interest Coverage Ratio as of September 30, 2001. Compliance ---------------------------------------------------------- with Section 6.11 of the Loan Agreement is hereby waived in respect of the Fiscal Quarter ended September 30, 2001. 11. Representations and Warranties. Borrower represents and warrants that ------------------------------ as of the date hereof and giving effect to this Amendment, no Default or Event of Default exists. 12. No Other Waivers. The waivers contained in Section 9 and Section 10 ---------------- of this Amendment are expressly limited to the facts and circumstances referred to therein and shall not operate as a waiver of or a consent to non-compliance with any other section of the Loan Agreement or any of the other Loan Documents. The waivers contained in Section 9 and Section 10 are only effective for the specific instances, for the specific purposes and for the specific period for which given. It is acknowledged that in order to comply with Sections 6.11 and 6.13 (as amended and to the extent waived hereby following March 31, 2002), Borrower shall need to improve operating performance or take other operational measures which are not currently determined, and which have not been incorporated into and are not a part of Borrower's current projections of its operating performance. -3- 13. Conditions Precedent. The effectiveness of this Amendment is -------------------- conditioned upon the receipt by the Administrative Agent of the following, each properly executed by a Responsible Official of each party thereto and dated as of the date hereof: (a) Counterparts of this Amendment executed by all parties hereto; (b) Written consent of the Requisite Banks as required under Section 11.2 of the Loan Agreement in the form of Exhibit A to this Amendment; (c) Written consent of the Subsidiary Guarantors in the form of Exhibit B to this Amendment; and (d) A fee, for the account of each Bank which has approved this Amendment on or prior to 3:00 p.m. (California local time), November 7, 2001, in an amount equal to 20 basis points times its Pro Rata Share of the Commitment (as reduced hereby). 14. Confirmation. In all respects, the terms of the Loan Agreement (as ------------ amended hereby) are hereby confirmed. [Remainder of this page intentionally left blank - Signature Pages to follow] -4- IN WITNESS WHEREOF, Borrower and the Administrative Agent have executed this Amendment as of November 7, 2001 by their duly authorized representatives. PINNACLE ENTERTAINMENT, INC. By: /s/ BRUCE C. HINKLEY ----------------------------- Bruce C. Hinkley, Chief Financial Officer BANK OF AMERICA, N.A. as Administrative Agent By: /s/ JANICE HAMMOND ------------------------------ Janice Hammond, Vice President -5- Exhibit A To Amendment No. 6 to Amended and Restated Reducing Revolving Loan Agreement and Waiver CONSENT OF BANK Reference is hereby made to the Amended and Restated Reducing Revolving Loan Agreement dated as of October 14, 1998 (as heretofore amended, the "Loan Agreement") among Pinnacle Entertainment, Inc. (then known as "Hollywood Park, Inc." and herein, "Borrower"), the Banks party thereto, Societe Generale and Bank of Scotland, as Managing Agents, First National Bank of Commerce, as Co- Agent, and Bank of America, N.A. (then known as "Bank of America National Trust and Savings Association"), as Administrative Agent. The undersigned Bank hereby consents to the execution and delivery of Amendment No. 6 to Amended and Restated Reducing Loan Agreement and Waiver by the Administrative Agent on its behalf, substantially in the form of the most recent draft thereof presented to the undersigned Bank. Dated as of November 7, 2001. ---------------------------- [Name of Bank] By: --------------------------- Title: -6- Exhibit B To Amendment No. 6 to Amended and Restated Reducing Revolving Loan Agreement and Waiver CONSENT OF SUBSIDIARY GUARANTORS Reference is hereby made to the Amended and Restated Reducing Revolving Loan Agreement dated as of October 14, 1998 (as heretofore amended, the "Loan Agreement") among Pinnacle Entertainment, Inc. (then known as "Hollywood Park, Inc." and herein, "Borrower"), the Banks party thereto, Societe Generale and Bank of Scotland, as Managing Agents, First National Bank of Commerce, as Co- Agent, and Bank of America, N.A. (then known as "Bank of America National Trust and Savings Association"), as Administrative Agent. Each of the undersigned Subsidiary Guarantors hereby consent to Amendment No. 6 to Amended and Restated Reducing Revolving Loan Agreement and Waiver in the form executed by Borrower and confirms that the Subsidiary Guaranty (General) and the Subsidiary Guaranty (Crystal Park), as applicable, and all Collateral Documents to which it is a party remain in full force and effect. HP YAKAMA, INC. HP/COMPTON, INC. BOOMTOWN, INC. CRYSTAL PARK HOTEL AND CASINO DEVELOPMENT COMPANY LLC By: HP/COMPTON, INC., its manager BOOMTOWN HOTEL & CASINO, INC. LOUISIANA-1 GAMING, L.P., a Louisiana partnership in commendant, By: LOUISIANA GAMING ENTERPRISES, INC., its general partner LOUISIANA GAMING ENTERPRISES, INC. BELTERRA RESORT INDIANA, LLC (formerly known as Indiana Ventures LLC). By: PINNACLE ENTERTAINMENT, INC., as managing member CASINO MAGIC CORP. BILOXI CASINO CORP. CASINO ONE CORPORATION JEFFERSON CASINO CORPORATION CASINO MAGIC OF LOUISIANA CORP. CASINO MAGIC MANAGEMENT SERVICES CORP. By: ---------------------------------------- Bruce C. Hinckley, Authorized Signatory for each of the foregoing -7- EX-11.0 4 dex110.txt STATEMENT RE COMPUTATION OF PER SHARE EARNINGS Exhibit 11 - ---------- Pinnacle Entertainment, Inc. Computation of Per Share Earnings
For the three months ended September 30, ------------------------------------------------------------- Basic Diluted (a) ------------------------- ----------------------- 2001 2000 2001 2000 --------- --------- --------- --------- (in thousands, except per share data - unaudited) Average number of common shares outstanding 25,542 26,356 25,542 26,356 Average common shares due to assumed conversion of stock options 0 0 81 1,102 -------- -------- ---------- ---------- Total shares 25,542 26,356 25,623 27,458 ======== ======== ========== ========== Net income before extraordinary item $ 1,003 $ 37,489 $ 1,003 $ 37,489 Extraordinary item, net of income taxes 0 2,653 0 2,653 -------- -------- ---------- ---------- Net (loss) income $ 1,003 $ 34,836 $ 1,003 $ 34,836 ======== ======== ========== ========== Net income before extraordinary item per share $ 0.04 $ 1.42 $ 0.04 $ 1.37 Extraordinary item per share, net of income taxes 0.00 (0.10) 0.00 (0.10) -------- -------- ---------- ---------- Net (loss) income per share $ 0.04 $ 1.32 $ 0.04 $ 1.27 ======== ======== ========== ==========
For the three months ended September 30, ------------------------------------------------------------- Basic Diluted (a) ------------------------- ----------------------- 2001 2000 2001 2000 --------- --------- --------- --------- (in thousands, except per share data - unaudited) Average number of common shares outstanding 25,939 26,306 25,939 26,306 Average common shares due to assumed conversion of stock options 0 0 104 1,063 -------- -------- ---------- ---------- Total shares 25,939 26,306 26,043 27,369 ======== ======== ========== ========== Net (loss) income before extraordinary item ($6,405) $ 85,633 ($6,405) $ 85,633 Extraordinary item, net of income taxes 0 2,653 0 2,653 -------- -------- ---------- ---------- Net (loss) income after extraordiarny item ($6,405) $ 82,980 ($6,405) $ 82,980 ======== ======== ========== ========== Net (loss) income before extraordinary item per share ($0.25) $ 3.25 ($0.25) $ 3.13 Extraordinary item per share, net of income taxes 0.00 (0.10) 0.00 (0.10) -------- -------- ---------- ---------- Net (loss) income after extraordianry item per share ($0.25) $ 3.15 ($0.25) $ 3.02 ======== ======== ========== ==========
- ---------------- (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. -----END PRIVACY-ENHANCED MESSAGE-----