-----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, BSRRY8bYcH0g0+/S0Hdc4UvwZxBUnCDyKbt2oO+gNofZaqk9LUAulQCbPnAeHL2Z RTQZmRl8Sx/R1fTbTfFhWA== 0000898430-02-003076.txt : 20020814 0000898430-02-003076.hdr.sgml : 20020814 20020814081753 ACCESSION NUMBER: 0000898430-02-003076 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 6 CONFORMED PERIOD OF REPORT: 20020630 FILED AS OF DATE: 20020814 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: 02731641 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.htm FORM 10-Q, FOR QUARTERLY PERIOD ENDED JUNE 30,2002 Prepared by R.R. Donnelley Financial -- Form 10-Q, For quarterly period ended June 30,2002
Table of Contents
 
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
 
 
FORM 10-Q
x
 
Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
 
For the quarterly period ended June 30, 2002
 
Commission file number 001-13641
 
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 August 12, 2002:    25,910,812.
 

Table of Contents
PINNACLE ENTERTAINMENT, INC.
 
 
Part I
 
Item 1.    Financial information
     
  
1
  
2
  
3
  
4
Item 2.    Management’s Discussion and Analysis of Financial Condition and Results of Operations
     
  
23
  
24
  
25
  
26
  
30
  
32
  
34
Part II
  
35
  
36
  
37
  
38
  
39

Table of Contents
PINNACLE ENTERTAINMENT, INC.
 
 
    
For the three months ended June 30,
     
For the six months ended June 30,
  
    
2002
     
2001
     
2002
     
2001
  
    
(in thousands, except per share data—unaudited)
  
Revenues:
                                    
Gaming
   
$
109,281
 
   
$
107,983
 
   
$
218,802
 
   
$
222,245
 
Food and beverage
   
 
7,625
 
   
 
7,730
 
   
 
14,636
 
   
 
15,093
 
Truck stop and service station
   
 
5,191
 
   
 
5,672
 
   
 
8,802
 
   
 
9,934
 
Hotel and recreational vehicle park
   
 
3,791
 
   
 
4,004
 
   
 
6,941
 
   
 
7,128
 
Other income
   
 
4,406
 
   
 
6,214
 
   
 
8,368
 
   
 
11,210
 
    
  
  
  
    
 
130,294
 
   
 
131,603
 
   
 
257,549
 
   
 
265,610
 
    
  
  
  
Expenses:
                                    
Gaming
   
 
64,240
 
   
 
63,274
 
   
 
129,418
 
   
 
129,536
 
Food and beverage
   
 
8,581
 
   
 
9,822
 
   
 
16,677
 
   
 
19,315
 
Truck stop and service station
   
 
4,771
 
   
 
5,293
 
   
 
8,093
 
   
 
9,311
 
Hotel and recreational vehicle park
   
 
2,314
 
   
 
2,206
 
   
 
4,515
 
   
 
4,872
 
Selling, general and administrative
   
 
26,093
 
   
 
33,581
 
   
 
52,691
 
   
 
62,553
 
Depreciation and amortization
   
 
11,301
 
   
 
12,135
 
   
 
22,463
 
   
 
24,223
 
Other
   
 
2,232
 
   
 
2,671
 
   
 
4,413
 
   
 
6,034
 
Indiana regulatory settlement and related costs
   
 
6,493
 
   
 
0
 
   
 
6,493
 
   
 
0
 
Re-branding costs, Bossier City
   
 
1,234
 
   
 
0
 
   
 
1,343
 
   
 
0
 
    
  
  
  
    
 
127,259
 
   
 
128,982
 
   
 
246,106
 
   
 
255,844
 
    
  
  
  
Operating income
   
 
3,035
 
   
 
2,621
 
   
 
11,443
 
   
 
9,766
 
Interest income
   
 
(532
)
   
 
(1,428
)
   
 
(1,166
)
   
 
(3,276
)
Interest expense, net of capitalized interest
   
 
12,319
 
   
 
12,311
 
   
 
24,952
 
   
 
24,618
 
    
  
  
  
Loss before income taxes and change in accounting principle
   
 
(8,752
)
   
 
(8,262
)
   
 
(12,343
)
   
 
(11,576
)
Income tax benefit
   
 
(2,337
)
   
 
(2,975
)
   
 
(3,630
)
   
 
(4,168
)
    
  
  
  
Net loss before change in accounting principle
   
 
(6,415
)
   
 
(5,287
)
   
 
(8,713
)
   
 
(7,408
)
Cumulative change in accounting principle, net of income tax benefit
   
 
0
 
   
 
0
 
   
 
56,704
 
   
 
0
 
    
  
  
  
Net loss
   
$
(6,415
)
   
$
(5,287
)
   
$
(65,417
)
   
$
(7,408
)
    
  
  
  
Net loss per common share—basic and diluted
                                    
Net loss before change in accounting principle—basic
   
$
(0.25
)
   
$
(0.20
)
   
$
(0.34
)
   
$
(0.28
)
Cumulative change in accounting principle—basic
   
 
0.00
 
   
 
0.00
 
   
 
(2.21
)
   
 
0.00
 
    
  
  
  
Net loss per common share—basic and diluted
   
$
(0.25
)
   
$
(0.20
)
   
$
(2.55
)
   
$
(0.28
)
    
  
  
  
Number of shares—basic and diluted
   
 
25,804
 
   
 
25,996
 
   
 
25,625
 
   
 
26,141
 
 
See accompanying condensed notes to the consolidated financial statements.

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Table of Contents
PINNACLE ENTERTAINMENT, INC.
 
 
      
June 30, 2002
       
December 31, 2001
  
      
(unaudited)
           
      
(in thousands, except share data)
  
ASSETS
                      
Current Assets:
                      
Cash and cash equivalents
     
$
129,714
 
     
$
153,187
 
Restricted cash
     
 
24,022
 
     
 
3,452
 
Receivables, net
     
 
10,085
 
     
 
9,194
 
Income tax receivable
     
 
6,387
 
     
 
10,587
 
Prepaid expenses and other assets
     
 
24,261
 
     
 
18,407
 
Deferred income taxes
     
 
4,712
 
     
 
4,712
 
Assets held for sale
     
 
18,285
 
     
 
18,285
 
Current portion of notes receivable
     
 
0
 
     
 
1,000
 
      
    
Total current assets
     
 
217,466
 
     
 
218,824
 
Property, plant and equipment, net
     
 
576,083
 
     
 
576,299
 
Goodwill
     
 
19,558
 
     
 
68,727
 
Gaming licenses, net of amortization
     
 
21,878
 
     
 
36,588
 
Debt issuance costs, net of amortization
     
 
10,403
 
     
 
12,334
 
Other assets
     
 
6,180
 
     
 
6,577
 
      
    
      
$
851,568
 
     
$
919,349
 
      
    
LIABILITIES AND STOCKHOLDERS' EQUITY
                      
Current Liabilities:
                      
Accounts payable
     
$
15,493
 
     
$
16,953
 
Accrued interest
     
 
17,358
 
     
 
17,423
 
Accrued compensation
     
 
16,316
 
     
 
13,737
 
Other accrued liabilities
     
 
36,682
 
     
 
31,887
 
Current portion of notes payable
     
 
2,797
 
     
 
3,654
 
      
    
Total current liabilities
     
 
88,646
 
     
 
83,654
 
Notes payable, less current maturities
     
 
492,189
 
     
 
493,493
 
Deferred income taxes
     
 
18,448
 
     
 
22,686
 
Stockholders' Equity:
                      
Capital stock—  
                      
Preferred—$1.00 par value, authorized 250,000 shares;
                      
none issued and outstanding in 2002 and 2001
     
 
0
 
     
 
0
 
Common—$0.10 par value, authorized 40,000,000 shares;
                      
25,910,812 and 25,443,444 shares issued and outstanding in 2002 and 2001
     
 
2,591
 
     
 
2,545
 
Capital in excess of par value
     
 
223,711
 
     
 
219,613
 
Accumulated other comprehensive loss
     
 
(10,388
)
     
 
(4,430
)
Retained earnings
     
 
36,371
 
     
 
101,788
 
      
    
Total stockholders' equity
     
 
252,285
 
     
 
319,516
 
      
    
      
$
851,568
 
     
$
919,349
 
      
    
 
See accompanying condensed notes to the consolidated financial statements.

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PINNACLE ENTERTAINMENT, INC.
 
 
      
For the six months ended June 30,
  
      
2002
       
2001
  
      
(in thousands—unaudited)
  
Cash flows from operating activities:
                      
Net loss
     
$
(65,417
)
     
$
(7,408
)
Adjustments to reconcile net loss to net cash provided by (used in) operating activities:
                      
Depreciation and amortization
     
 
22,463
 
     
 
24,223
 
Gain on disposition of assets, net
     
 
0
 
     
 
(581
)
Cumulative change in accounting principle
     
 
56,704
 
     
 
0
 
Other changes that (used) provided cash:
                      
Receivables, net
     
 
891
 
     
 
3,844
 
Income tax receivable
     
 
4,200
 
     
 
0
 
Prepaid expenses and other assets
     
 
(5,457
)
     
 
(4,508
)
Accounts payable
     
 
(1,460
)
     
 
(6,357
)
Accrued interest
     
 
(65
)
     
 
(833
)
Accrued compensation
     
 
2,579
 
     
 
(1,119
)
Accrued liabilities
     
 
4,795
 
     
 
(8,699
)
All other, net
     
 
2,067
 
     
 
1,764
 
      
    
Net cash provided by operating activities
     
 
21,300
 
     
 
326
 
      
    
Cash flows from investing activities:
                      
Additions to property, plant and equipment
     
 
(23,196
)
     
 
(25,037
)
Capitalized interest
     
 
(256
)
     
 
(481
)
Principal collected on notes receivable
     
 
1,000
 
     
 
7,563
 
All other, net
     
 
47
 
     
 
87
 
      
    
Net cash used in investing activities
     
 
(22,405
)
     
 
(17,868
)
      
    
Cash flows from financing activities:
                      
Payment of notes payable
     
 
(2,161
)
     
 
(2,082
)
Common stock options exercised
     
 
4,043
 
     
 
480
 
Common stock repurchase and retirement
     
 
0
 
     
 
(6,849
)
      
    
Net cash provided by (used) in financing activities
     
 
1,882
 
     
 
(8,451
)
      
    
Effect of exchange rate changes on cash
     
 
(3,680
)
     
 
0
 
      
    
Decrease in cash and cash equivalents
     
 
(2,903
)
     
 
(25,993
)
Cash, cash equivalents and restricted cash at beginning of period
     
 
156,639
 
     
 
172,868
 
      
    
Cash, cash equivalents and restricted cash at end of period
     
$
153,736
 
     
$
146,875
 
      
    
 
See accompanying condensed notes to consolidated financial statements.

3

Table of Contents
PINNACLE ENTERTAINMENT, INC.
 
 
Note 1—Summary of Significant Accounting Policies
 
General    Pinnacle Entertainment, Inc. (the “Company” or “Pinnacle Entertainment”) owns and operates gaming entertainment facilities in several growing gaming markets. These include five properties in the United States, located in southeastern Indiana (“Belterra Casino Resort”); Reno, Nevada (“Boomtown Reno”); Bossier City and New Orleans, Louisiana (“Boomtown Bossier City” and “Boomtown New Orleans”, respectively); and Biloxi, Mississippi (“Casino Magic Biloxi”). In addition, the Company operates two casinos in Argentina (“Casino Magic Argentina”) and receives lease income from two card clubs and owns 97 acres of vacant land in southern California. The Company is also developing a luxury hotel and casino resort in Lake Charles, Louisiana.
 
Belterra is near Cincinnati, Ohio and Louisville, Kentucky. Bossier City offers the most convenient casinos to the Dallas/Fort Worth metropolitan area. The Lake Charles region offers the closest casinos to the cities of Houston, Austin and San Antonio.
 
The financial information included herein has been prepared in conformity with accounting principles generally accepted in the United States of America 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, 2001. 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 2001 Annual Report on Form 10-K.
 
The information furnished herein is unaudited. However, in management’s opinion, 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.
 
Goodwill and Other Intangible Assets    See Note 10 “—Goodwill and Other Intangible Assets.”
 
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 June 30, 2002 and December 31, 2001 was $13,400,000 and $11,472,000, respectively.
 
Amortization of debt issuance costs included in interest expense was $960,000 and $919,000 for the three months ended June 30, 2002 and 2001, respectively, and $1,927,000 and $1,838,000 for the six months ended June 30, 2002 and 2001, 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 $8,739,000 and $11,888,000 for the three months ended June 30, 2002 and 2001, respectively and $17,960,000 and $24,986,000 for the six months ended June 30, 2002 and 2001, respectively.
 
Foreign Currency Translation    Statement of Financial Accounting Standards No. 52 Foreign Currency Translation (“SFAS No. 52”) requires that all assets and liabilities of a company’s foreign subsidiaries be

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translated into U.S. dollars at the exchange rate in effect at the end of the period, and revenues and expenses be translated into U.S. dollars at the average exchange rates prevailing during the period. The resulting translation adjustments are reflected in a separate component of Stockholders’ Equity—Accumulated Other Comprehensive Loss. Prior to December 31, 2001, the Company had no such translation adjustments, as the Argentine peso, the local currency for the Casino Magic Argentina subsidiary, was pegged to the U.S. dollar. However, the Argentine government devalued its currency in early January 2002. Subsequently, the Argentine peso to U.S. dollar exchange rate has been very volatile and mostly declining, from a rate of 1.65:1.0 in early January 2002 to a rate of 3.78:1.0 as of June 30, 2002.
 
Accumulated Other Comprehensive Loss    Statement of Financial Accounting Standards No. 130 Reporting Comprehensive Income (“SFAS No. 130”) requires that a company disclose other comprehensive income and the components of such income. The objective of SFAS No. 130 is to report a measure of all changes in equity of an enterprise that result from transactions and other economic events of the period other than transactions with owners. “Other comprehensive income (loss)” is the sum of the following: net income (loss) and other comprehensive income (loss), which is defined as all other non-owner changes in equity.
 
Pursuant to the devaluation of the Argentine peso (see “—Foreign Currency Translation” above), the Company has recorded unrealized foreign currency translation losses as other comprehensive loss in the accompanying financial statements. Comprehensive loss was computed as follows:
 
    
For the three months
ended June 30,
     
For the six months
ended June 30,
  
    
2002
     
2001
     
2002
     
2001
  
    
(in thousands)
  
Net loss
   
$
(6,415
)
   
$
(5,287
)
   
$
(65,417
)
   
$
(7,408
)
Other comprehensive loss:
                                    
Foreign currency translation loss
   
 
(815
)
   
 
0
 
   
 
(5,958
)
   
 
0
 
    
  
  
  
Comprehensive loss
   
$
(7,230
)
   
$
(5,287
)
   
$
(71,375
)
   
$
(7,408
)
    
  
  
  
 
Use of Estimates    The preparation of consolidated financial statements in conformity with accounting principles generally accepted in the United States of America 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 cash in Argentina, property, plant and equipment, other long-term assets, deferred tax assets, reserves associated with asset sales and the Indiana regulatory settlement (see Note 3), 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 include capitalized interest. Capitalized interest is based on project costs at an imputed rate and was $210,000 and $256,000 for the three months ended June 30, 2002 and 2001, respectively, and $256,000 and $481,000 for the six months ended June 30, 2002 and 2001, respectively.
 
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.
 
Restricted Cash    Restricted cash at June 30, 2002 consists of $22,500,000 set aside related to the Lake Charles project, $1,100,000 related to an insurance cash-collateralized letter of credit and $422,000 related to cash of Casino Magic Argentina maintained in Argentina.
 
As discussed below (see Note 8), under the Company’s agreement with the Louisiana Gaming Control Board on its Lake Charles project, in April 2002, $22,500,000 of excess cash was set aside in a separate account

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owned by the Company to help fund the project. If the Company withdraws the funds from the account other than for construction of the Lake Charles facility, then the Louisiana Gaming Control Board may choose to not issue a gaming license to the Company for that facility.
 
As is customary for self-insured insurance programs, in connection with the Company’s excess workers compensation insurance, the insurance carrier required Pinnacle Entertainment to issue a stand-by letter of credit in the amount of $1,100,000 at June 30, 2002, naming the carrier as the beneficiary. As such, the Company elected to collateralize such letter of credit with cash and therefore has reflected the $1,100,000 of cash as “Restricted Cash”.
 
In connection with the restricted cash in Argentina, as discussed in “Foreign Currency Translation” above, Argentina continues to experience political and economic disruption that began in the latter part of 2001, including devaluation of its currency and governmental restrictions on transferring funds out of the country. As such, until the restriction on transferring funds has been lifted, cash of Casino Magic Argentina maintained in Argentina will be classified as Restricted Cash on the Consolidated Balance Sheet. In addition, due to the inability to transfer cash out of the country, in the first quarter of 2002 the Company established a reserve of approximately $1,860,000 against its investments in Argentina. This reserve is a reduction of Restricted Cash in the accompanying Consolidated Balance Sheet as of June 30, 2002.
 
Pre-Opening Costs    It is the Company’s policy to expense pre-opening costs as incurred, in accordance with Statement of Position 98-5 Reporting on the Costs of Start-Up Activities.
 
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 on their level of play on certain casino games. These costs were previously recorded as a casino expense. The consensus reached on Issue 3 was effective beginning in fiscal quarters ending after February 15, 2001 and was adopted by the Company in the quarter ended March 31, 2001.
 
Long-lived Assets    The Company periodically reviews the propriety of the carrying amount of long-lived assets and the related intangible assets as well as the related amortization period to determine whether current events or circumstances warrant adjustments to the carrying value and/or the estimates of useful lives. This evaluation consists of comparing asset carrying values to the 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”).
 
Accounting for the Impairment or Disposal of Long-lived Assets    In August 2001, Statement of Financial Accounting Standards No. 144 Accounting for the Impairment or Disposal of Long-lived Assets (“SFAS No. 144”) was issued. SFAS No. 144 addresses financial accounting and reporting for the impairment or disposal of long lived assets. The Company believes that the adoption of SFAS No. 144 will not have a material impact on its financial position or results of operations.
 
Statement of Financial Accounting Standards No. 145 (“SFAS No. 145”)    In April 2002, the FASB issued SFAS No. 145, Rescission of FASB Statements No. 4, 44, and 64, Amendment of FASB Statement No. 13, and Technical Corrections. The most significant provisions of this statement relate to the rescission of Statement No. 4, Reporting Gains and Losses from Extinguishment of Debt and it also amends other existing authoritative pronouncements to make various technical corrections, clarify meanings, or describe their applicability under changed conditions. Under this new statement, any gain or loss on extinguishment of debt that was classified as an extraordinary item in prior periods presented that does not meet certain defined criteria must be reclassified. The Company expects to adopt this statement on January 1, 2003 and expects to reclassify the $2,653,000 extraordinary loss recorded in fiscal year 2000 on debt extinguishments from extraordinary items to operating activities.

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Statement of Financial Accounting Standards No. 146 (“SFAS No. 146”)    In June 2002, the Financial Accounting Standards Board (“FASB”) issued SFAS No. 146, “Accounting for Costs Associated with Exit or Disposal Activities.” SFAS 146 addresses financial accounting and reporting for costs associated with exit or disposal activities and nullifies Emerging Issues Task Force Issue No. 94-3 “Liability Recognition for Certain Employee Termination Benefits and Other Costs to Exit an Activity (including Certain Costs Incurred in a Restructuring)”. SFAS No. 146 requires that a liability for a cost associated with an exit or disposal activity be recognized when the liability is incurred. A fundamental conclusion reached by the FASB in this statement is that an entity’s commitment to a plan, by itself, does not create a present obligation to others that meets the definition of a liability. SFAS No. 146 also establishes that fair value is the objective for initial measurement of the liability. The provisions of this statement are effective for exit or disposal activities that are initiated after December 31, 2002, with early adoption encouraged. The Company has not yet determined the impact of SFAS No. 146 on its financial position and results of operations, if any.
 
Earnings per Share    Basic earnings (loss) per share are based on net income (loss) 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 (those options with exercise prices at or below weighted average market price for the periods presented) outstanding at the beginning of the year or at the date of the issuance, unless the assumed exercises are antidilutive.
 
Reclassifications    Certain reclassifications have been made to the 2001 amounts to be consistent with the 2002 financial statement presentation.
 
Note 2—Management Restructuring
 
Daniel R. Lee was elected Chairman of the Board of Directors and named Chief Executive Officer (CEO) of Pinnacle Entertainment, Inc. effective April 10, 2002, subject to normal and customary state licensing requirements. Mr. Lee replaced R.D. Hubbard as Chairman of the Board, as Mr. Hubbard resigned from such position, and replaced Paul R. Alanis as CEO, as Mr. Alanis resigned as CEO and director. In addition, on April 26, 2002, Mr. Hubbard resigned as a director, and on April 29, 2002, Mr. Robert T. Manfuso resigned as a director.
 
The Company entered into a four-year employment agreement with Mr. Lee. Pursuant to such agreement, Mr. Lee’s compensation includes grants of options to purchase an aggregate of 865,801 shares of the Company’s common stock at an exercise price of $8.45 (the per share fair market value of the common stock on the day of the grants), which vest over four years. Of these grants, 515,000 were made subject to shareholder approval, which approval was granted at the Company’s annual shareholder meeting held June 18, 2002.
 
The Company’s share price was higher on the date that some of Mr. Lee’s options were approved by shareholders than it was on the date that Mr. Lee was named Chief Executive Officer. His employment agreement stipulated that the exercise price of his options would be the stock price on the start date of his employment. Under current accounting principles, for the 515,000 options approved by the shareholders, this results in a non-cash charge for the differential to be amortized over the option vesting period. Such charge was $31,000 during the second quarter and is expected to be approximately $38,000 in future quarters.
 
Note 3—Indiana Gaming Commission Settlement
 
During the quarter ended June 2002, the Company incurred estimated regulatory, legal and other settlement costs of $6,493,000 in connection with the previously announced Indiana Gaming Commission investigation into events surrounding, and claims underlying, lawsuits filed by two former employees.

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Table of Contents
 
On August 5, 2002, the Company entered into a settlement agreement with the Indiana Gaming Commission. It agreed, among other things, to pay a fine of $2,260,000; suspend gaming operations at Belterra Casino Resort for a 3-day period beginning at 6:00 p.m. on October 6, 2002 to 12:01 p.m. on October 9, 2002; pay wages, tips, taxes and community development fees that are estimated would have been paid during the three-day closure period; build a new 300 guest-room tower at Belterra Casino Resort by July 2004; and establish a new compliance committee of the Company’s Board of Directors.
 
The Company also placed $5,000,000 into an escrow account to ensure the completion of the new guest-room tower by July 2004, at which time the funds will be returned to the Company (see Note 8). In the event the Company does not complete the tower by July 2004 (subject to extension for events beyond the Company’s control upon approval by the Indiana Gaming Commission), the $5,000,000 escrowed funds will be paid to the gaming commission.
 
The charge taken in the second quarter reflects the fine, estimated operating losses for the closure period in October 2002, investigation costs, estimated severance and settlement with former officers and estimated legal and other related costs. The Company anticipates there may be additional but much smaller legal and other expenses in the future. Such estimates may be subject to revisions upon final disposition of these matters.
 
Note 4—Dockside Gaming Legislation
 
Indiana    The Company converted its Belterra Casino Resort to dockside operation on August 1, 2002, which was the first date permitted by Indiana law. The Indiana dockside riverboats will be taxed in accordance with a new graduated tax structure. Based on Belterra’s revenues for the past 12 months, the new graduated tax structure would have resulted in overall taxes similar to the prior tax rate structure.
 
Louisiana    Effective April 1, 2001, the gaming taxes paid to the state of Louisiana increased from 18.5% to 21.5% of net gaming proceeds for the riverboats in southern Louisiana, including the Boomtown New Orleans property. For the northern Louisiana riverboat casinos operating in parishes bordering the Red River, including the Boomtown Bossier City property, the gaming tax increase to 21.5% of net gaming proceeds will be phased in over approximately two years. The phase-in includes a one percentage point increase on each of April 1, 2001, 2002, and 2003.
 
Note 5—Segment Information
 
The Company reports information under two segments—Gaming and Card Club Leases. The Gaming segment is comprised of the Company’s dockside, riverboat and land-based casinos, including Boomtown New Orleans, Casino Magic Biloxi, Boomtown Bossier City, Belterra Casino Resort, Boomtown Reno and Casino Magic Argentina, as well as the 97 acres of vacant land in Inglewood, California. The Company views each casino property as an operating segment and all such operating segments have been aggregated into one reporting segment. Each casino property derives its revenues from services such as casino, food and beverage and hotel operations. The Card Club Leases segment is comprised of two card clubs located in southern California which the Company leases to a third party operator.

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Table of Contents
 
The following table reconciles the Company’s segment activity to its consolidated results of operations and financial position for the three and six months ended June 30, 2002 and 2001 and as of June 30, 2002 and December 31, 2001.
 
    
For the three months
ended June 30,
     
For the six months
ended June 30,
  
    
2002
     
2001
     
2002
     
2001
  
    
(in thousands)
  
Revenues and expenses
                                    
Gaming Segment
                                    
Revenues
   
$
128,734
 
   
$
129,803
 
   
$
254,429
 
   
$
262,010
 
Expenses
   
 
126,663
 
   
 
127,978
 
   
 
244,847
 
   
 
253,729
 
    
  
  
  
Net operating income—gaming
   
$
2,071
 
   
$
1,825
 
   
$
9,582
 
   
$
8,281
 
    
  
  
  
Card Club Leases Segment
                                    
Revenues
   
$
1,560
 
   
$
1,800
 
   
$
3,120
 
   
$
3,600
 
Expenses
   
 
596
 
   
 
1,004
 
   
 
1,259
 
   
 
2,115
 
    
  
  
  
Net operating income—card club leases
   
$
964
 
   
$
796
 
   
$
1,861
 
   
$
1,485
 
    
  
  
  
Total Reporting Segments
                                    
Revenues
   
$
130,294
 
   
$
131,603
 
   
$
257,549
 
   
$
265,610
 
Expenses
   
 
127,259
 
   
 
128,982
 
   
 
246,106
 
   
 
255,844
 
    
  
  
  
Net operating income—total reportable segments
   
$
3,035
 
   
$
2,621
 
   
$
11,443
 
   
$
9,766
 
    
  
  
  
Reconciliation to Consolidated Net Income
                                    
Total net operating income for reportable segments
   
$
3,035
 
   
$
2,621
 
   
$
11,443
 
   
$
9,766
 
Unallocated income and expenses
                                    
Interest income
   
 
(532
)
   
 
(1,428
)
   
 
(1,166
)
   
 
(3,276
)
Interest expense, net of capitalized interest
   
 
12,319
 
   
 
12,311
 
   
 
24,952
 
   
 
24,618
 
    
  
  
  
Loss before income taxes and change in accounting
   
 
(8,752
)
   
 
(8,262
)
   
 
(12,343
)
   
 
(11,576
)
Income tax benefit
   
 
(2,337
)
   
 
(2,975
)
   
 
(3,630
)
   
 
(4,168
)
    
  
  
  
Net loss before change in accounting
   
 
(6,415
)
   
 
(5,287
)
   
 
(8,713
)
   
 
(7,408
)
Cumulative change in accounting principle
   
 
0
 
   
 
0
 
   
 
56,704
 
   
 
0
 
    
  
  
  
Net loss
   
$
(6,415
)
   
$
(5,287
)
   
$
(65,417
)
   
$
(7,408
)
    
  
  
  
Capital Expenditures—gaming segment(a)
   
$
13,116
 
   
$
14,955
 
   
$
23,196
 
   
$
25,037
 
    
  
  
  
 
    
June 30, 2002
   
December 31, 2001
    
(in thousands)
Assets
              
Gaming Segment—Total assets
   
$
822,521
   
$
889,361
Card Club Leases—Total assets
   
 
29,047
   
 
29,988
    
  
Total Reportable Segments Total assets
   
$
851,568
   
$
919,349
    
  
(a)
 
Capital expenditures for the three and six months ended June 30, 2002 and 2001 for the Company are substantially related to the gaming segment.

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Table of Contents
 
Note 6—Property, Plant and Equipment
 
Property, plant and equipment held at June 30, 2002 and December 31, 2001 consisted of the following:
 
    
June 30, 2002(a)
   
December 31, 2001(a)
    
(in thousands)
Land and land improvements
   
$
106,384
   
$
106,643
Buildings
   
 
331,123
   
 
327,864
Equipment
   
 
205,416
   
 
196,708
Vessels and barge
   
 
115,200
   
 
112,029
Construction in progress
   
 
17,307
   
 
12,129
    
  
    
 
775,430
   
 
755,373
Less accumulated depreciation
   
 
199,347
   
 
179,074
    
  
    
$
576,083
   
$
576,299
    
  
(a)
 
Excludes $18,285,000 of assets held for sale as of June 30, 2002 and December 31, 2001 (see Note 7).
 
Note 7—Assets Held For Sale
 
Assets held for sale at June 30, 2002 and December 31, 2001 consist primarily of 97 acres of surplus land in Inglewood, California and the Crystal Park Casino in Compton, California. The 97 acres is included in the Gaming segment, while the card club is included in the Card Club Leases segment (see Note 5).
 
On June 17, 2002, the Company announced it had entered into an agreement with a developer for the sale of 60 of the 97 acres of real property it currently owns in Inglewood. The purchase price is $36,000,000, or $600,000 per acre. The Company expects that the sale, which is subject to the developer obtaining the necessary entitlements to develop the land, will close in 2003. The Company continues to pursue sale opportunities for the other 37 acres of vacant land. The approximate book value of the 97 acres of real property as of both June 30, 2002 and December 31, 2001 was $12,160,000.
 
During the fourth quarter of 2001, under provisions of SFAS No. 121, the Company determined it would not be able to recover the net book value of the Crystal Park Casino on an undiscounted cash flow basis, as it agreed to reduce the rent payable to the Company to $20,000 per month from $100,000 a month effective October 1, 2001. In addition, as the Company began seeking a buyer of Crystal Park Casino, the Company classified the $6,000,000 of estimated net realizable value of this asset as “Assets held for sale” as of June 30, 2002 and December 31, 2001 on the Consolidated Balance Sheets. The Company is actively trying to sell the property.
 
Note 8—Expansion and Development
 
Bossier City In July 2002, the Company substantially completed the “major” portion of the public areas of its $25,000,000 renovation and expansion project in Bossier City. This included remodeling the dockside riverboat casino and adjoining building, building a new buffet, Mexican restaurant and bar, as well as re-branding the facility from “Casino Magic” to “Boomtown”. Construction is continuing in the hotel lobby and the new steakhouse, which is expected to be completed in the fourth quarter.
 
In connection with the re-branding phase of the project, the Company incurred re-branding expenses of $1,234,000 and $1,343,000 for the three and six months ended June 30, 2002, respectively. These costs include such things as special advertising programs, costs associated with the grand re-opening and expenses for new uniforms and other items with the new “Boomtown” logo. The Company expects to incur additional re-branding costs in the third quarter of approximately $1,000,000.

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Table of Contents
 
Lake Charles    During the quarter ended June 30, 2002, the Company increased the scope and projected cost of its Lake Charles Project (a dockside riverboat casino in Lake Charles, Louisiana) to $325,000,000, including capitalized interest and pre-opening costs, from its earlier estimates. The Company expects to begin construction in early 2003 and complete construction in 2004. The resort will now feature approximately 1,000 deluxe guest-rooms, an integrated casino, a golf course and numerous food and beverage, entertainment and retail amenities. It will be located on 225 acres that the Company has an option to lease for up to 70 years. At June 30, 2002, the Company had capitalized $633,000 for architectural and related design costs.
 
In October 2001, the Company was selected by the Louisiana Gaming Control Board (“Gaming Control Board”) to receive the fifteenth and final gaming license to be issued by the Gaming Control Board. Issuance of the license is subject to a number of remaining conditions, including, but not limited to, building a facility consistent with presentations made to the Gaming Control Board, meeting various construction milestone dates and satisfying the financing requirements to complete the project (the “Lake Charles Conditions”). Financing requirements of the Lake Charles Conditions include setting aside $22,500,000 in a separate account owned by the Company, which was satisfied in April 2002, and demonstrating sufficient financial resources for the full project once construction commences in early 2003. The Company has begun discussions with its banks to amend and restate its Credit Facility to finance, among other things, the construction of the Lake Charles Project (see Note 11).
 
The Company anticipates exercising its option in August 2002 to lease from the Lake Charles Harbor and Terminal District some 225 acres of unimproved land upon which the proposed project will be constructed. Effectiveness of the lease agreement will be subject to the satisfaction of various conditions, including obtaining all of the necessary permits and approvals to construct the project. The lease calls for annual payments of $815,000, commencing upon opening of the resort complex, with a maximum annual increase thereafter of 5%. Although the lease payments are not payable until commencement of operations, a portion of the future rent will be accrued during the construction period. Upon effectiveness, the lease will have an initial term of ten years with six renewal options of ten years each. The lease will require the Company to develop certain improvements at or near the site.
 
Belterra Casino Resort    The Company intends to add a new 300 guest-room hotel tower at its Belterra Casino Resort property at a cost of approximately $30,000,000. The Company expects to begin construction in early 2003 and complete construction in 2004. The new hotel tower will accommodate the excess demand that cannot be accommodated in the existing 308 guest-room tower and increase utilization of the property’s casino and other existing facilities. In connection with the Company’s August 2002 settlement agreement with the Indiana Gaming Commission, the Company placed $5,000,000 into an escrow account to ensure the completion of the new tower by July 2004, at which time the funds will be returned to the Company (see Note 3).
 
Note 9—Note Receivable and Related Agreements
 
In 1998, the Company entered into a seven-year loan agreement with a Native American tribe for $9,618,000, which proceeds were used to construct the Legends Casino in Yakima, Washington. Concurrently, the Company entered into various lease agreements with such tribe, which lease agreements, among other things, provided for cash flow participation from the operations of the casino facility.
 
In June 2001, the tribe repaid the outstanding loan amounts (which were approximately $6,300,000 at such time), and terminated the related lease agreements, 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 repayment and early termination of the related lease agreements, the Company no longer receives interest income or cash flow participation income.

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Table of Contents
 
Note 10—Goodwill and Other Intangible Assets
 
Goodwill    Goodwill consists of the excess of the acquisition cost over the fair value of the net assets acquired in business combinations and, prior to January 1, 2002, was being amortized on a straight-line basis over 40 years, except for the goodwill related to the acquisition of the 49% minority partner in Casino Magic Argentina, which was being amortized over the extended life of the concession agreement (see “—Gaming Licenses” below). Pursuant to the implementation of SFAS No. 142 (discussed below), there was no goodwill amortization in the three or six months ended June 30, 2002. Goodwill amortization expense for the three and six months ended June 30, 2001 was $712,000 and $1,422,000, respectively. Goodwill as of June 30, 2002 is $19,558,000 and relates to Boomtown Reno and Boomtown New Orleans.
 
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 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 agreed not to pursue the collection of a $2,276,000 receivable from the Province of Neuquen. Therefore, in August 2001, the Company reclassified such receivable to a cost of its “Gaming Licenses” on the Consolidated Balance Sheets to be amortized over the extended life of the concession agreement. The Company has not made any change to the planned capital improvements at this time, but is studying the situation in light of the uncertain economic, political and currency situation of Argentina. In the event the Company decides to not proceed with the capital improvements, the amortization period for the concession agreement will be reduced to be consistent with a December 2006 expiration date. The unamortized gaming license costs related to Casino Magic Argentina as of June 30, 2002 and December 31, 2001 was $2,013,000 and $4,949,000 (which amounts reflect the translation adjustment for Casino Magic Argentina assets and liabilities pursuant to SFAS No. 52—see Note 1 “—Foreign Currency Translation” above), respectively, and amortization expense was $82,000 and $237,000 for the three months ended June 30, 2002 and 2001, respectively, and $212,000 and $474,000 for the three and six months ended June 30, 2002 and 2001, respectively.
 
In 1996, Casino Magic acquired a Louisiana gaming license to conduct the gaming operations of Boomtown Bossier City (formerly known as “Casino Magic Bossier City”—see Note 8 above). Casino Magic allocated a portion of the purchase price to the gaming license and, through December 31, 2001, was amortizing the cost based on the straight-line method. Based on the classification of the gaming license as a non-amortizing intangible asset and pursuant to the implementation of SFAS 142 (discussed below), there was no gaming license amortization expense related to the Boomtown Bossier City license in the three and six months ended June 30, 2002. Amortization expense for the three and six months ended June 30, 2001 was $400,000 and $801,000, respectively. The remaining net book value of the Boomtown Bossier City gaming license as of June 30, 2002 is $19,865,000.
 
Implementation of SFAS Nos. 141 and 142    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 were effective July 1, 2001 and January 1, 2002, respectively, for the Company. SFAS 141 requires, among other things, that the purchase method of accounting be used for all business combinations initiated after June 30, 2001. SFAS No. 142 requires, among other things, that goodwill and other non-amortizing intangible assets no longer be amortized over their useful lives, but rather be subject to at least an annual assessment for impairment by applying a fair-value-based test.
 
The Company implemented SFAS No. 142 effective January 1, 2002. During the three months ended March 31, 2002, the Company recorded an intangible asset impairment charge of $56,704,000, including a goodwill impairment charge of $49,169,000 related to Casino Magic Biloxi, Boomtown Bossier City and Casino

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Table of Contents
Magic Argentina and gaming license impairment charge of $7,535,000 (net of an income tax benefit of $4,239,000) in the quarter ended March 31, 2002. In accordance with SFAS No. 142, such transition-related impairment charge was classified as a cumulative effect of a change in accounting principle, net of the income tax benefit.
 
The gaming license impairment charge was determined under the “relief from royalty” principle. This principle indicates that a license should not have a carrying value on the balance sheets if the licensee did not have to pay a significant fee to the licensing authority for the initial license and that law and common practice does not have significant fees for anticipated license renewals. While the Company does pay significant gaming taxes, it does not pay specific significant license fees except for the investigative and similar costs. The carrying amount of such licenses prior to the recent impairment charge resulted from an acquisition of the facility and was therefore similar to goodwill in nature.
 
The goodwill impairment results from the calculation of the fair value of property. The property’s fair value was determined by averaging the values indicated by the market and income approaches. The market approach utilizes an analysis of publicly traded companies considered comparable to the Company with regard to service, performance and markets. The income approach requires a projection of future discounted earning capacity of the Company. The property’s fair value was allocated to the property’s tangible and intangible assets, net of working capital, until the fair value was completely allocated. The recorded impairment is the resulting difference between the carrying value of the property (including intangible assets) and its fair value, net of working capital.
 
Under these 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.
 
The following summarizes the goodwill and gaming licenses activity between December 31, 2001 and June 30, 2002:
 
    
Balance as of December 31, 2001
   
Less Impairment Losses(a)
     
Less Foreign Currency Adjustment and Amortization Expense(b)
     
Balance as of June 30, 2002
    
(in thousands)
Goodwill
   
$
68,727
   
$
(49,169
)
   
$
0
 
   
$
19,558
    
  
  
  
Gaming Licenses:
                                
Boomtown Bossier City non-amortizing gaming license
   
$
31,639
   
$
(11,774
)
   
$
0
 
   
$
19,865
Casino Magic Argentina amortizing gaming license
   
 
4,949
   
 
0
 
   
 
(2,936
)
   
 
2,013
    
  
  
  
Cumulative gaming licenses
   
$
36,588
   
$
(11,774
)
   
$
(2,936
)
   
$
21,878
    
  
  
  
(a)
 
The Boomtown Bossier City gaming license impairment loss of $11,774,000 is before any income tax benefit from such loss. Net of the income tax benefit of $4,239,000, the cumulative impairment charges due to the implementation of SFAS 142 are $56,704,000.
(b)
 
Reflects the foreign currency translation adjustment of approximately $2,724,000 and additional accumulated amortization of $212,000 related to the Casino Magic Argentina gaming license.
 
Estimated future amortization expense for each of the years ended December 31, 2002 to 2006 for the Casino Magic Argentina gaming license, applying prevailing average peso to dollar exchange rate for the six months ended June 30, 2002 of approximately 2.67 pesos to the dollar to each of the years, is approximately $210,000. Such amount is subject to change based on fluctuations in the exchange rate between the Argentine peso and the U.S. dollar.

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Table of Contents
 
The following table sets forth the pro forma effect of the adoption of SFAS No. 142:
 
    
For the three months ended June 30,
     
For the six months ended June 30,
  
    
2002
     
2001
     
2002
     
2001
  
    
(unaudited—in thousands, except per share data)
  
Pro forma adjusted net loss
                                    
Loss before change in accounting principle
   
$
(6,415
)
   
$
(5,287
)
   
$
(8,713
)
   
$
(7,408
)
    
  
  
  
Reported net loss
   
$
(6,415
)
   
$
(5,287
)
   
$
(65,417
)
   
$
(7,408
)
Goodwill amortization expense, net of income taxes
   
 
0
 
   
 
456
 
   
 
0
 
   
 
910
 
Boomtown Bossier City gaming license amortization expense, net of income taxes
   
 
0
 
   
 
256
 
   
 
0
 
   
 
513
 
    
  
  
  
Pro forma adjusted net loss
   
$
(6,415
)
   
$
(4,575
)
   
$
(65,417
)
   
$
(5,985
)
    
  
  
  
Per share pro forma adjusted net loss—basic and diluted
                                    
Per share loss before change in accounting principle
   
$
(0.25
)
   
$
(0.20
)
   
$
(0.34
)
   
$
(0.28
)
    
  
  
  
Per share reported net loss
   
$
(0.25
)
   
$
(0.20
)
   
$
(2.55
)
   
$
(0.28
)
Per share goodwill amortization expense, net of income Taxes
   
 
0.00
 
   
 
0.02
 
   
 
0.00
 
   
 
0.03
 
Per share Boomtown Bossier City gaming license amortization expense, net of income taxes
   
 
0.00
 
   
 
0.01
 
   
 
0.00
 
   
 
0.02
 
    
  
  
  
Per share pro forma adjusted net loss
   
$
(0.25
)
   
$
(0.17
)
   
$
(2.55
)
   
$
(0.23
)
    
  
  
  
Number of shares—basic and diluted
   
 
25,804
 
   
 
25,996
 
   
 
25,625
 
   
 
26,141
 
 
Note 11—Secured and Unsecured Notes Payable
 
Notes payable at June 30, 2002 and December 31, 2001:
 
    
June 30, 2002
   
December 31, 2001
    
(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
   
 
17,883
   
 
18,847
Other notes payable
   
 
2,103
   
 
3,300
    
  
    
 
494,986
   
 
497,147
Less current maturities
   
 
2,797
   
 
3,654
    
  
    
$
492,189
   
$
493,493
    
  
 
Secured Notes Payable, Bank Credit Facility The Company currently maintains a reducing revolving bank credit facility with a syndicate of banks in the amount of $110,000,000, which facility expires in December 2003 and has scheduled commitment reductions of $6,667,000 on March 31, 2003 and $16,667,000 on each of June 30 and September 30, 2003 (the “Credit Facility”). The Credit Facility also provides for letters of credit up to $30,000,000 and swing line loans of up to $10,000,000 and contains certain conditions that must be satisfied in order to borrow under the Credit Facility. The Company has begun discussions with its banks to amend and restate the Credit Facility in order to finance the construction of the Lake Charles Project and the guest-room addition at Belterra Casino Resort (see Note 8).

14

Table of Contents
 
As of June 30, 2002 and December 31, 2001, the Company had no outstanding borrowings under the Credit Facility. The Credit Facility has remained unused since February 1999. The Company does not anticipate making any borrowings under the Credit Facility in 2002.
 
As of June 30, 2002 and December 31, 2001, the Company had outstanding letters of credit of $1,100,000 and $700,000, respectively, in connection with its self-insured excess workers compensation insurance. Such letters of credit were collateralized by cash (see Note 1 “—Restricted Cash”). In July 2002, in connection with the Company’s annual renewal of the excess workers compensation insurance program, the Company increased the outstanding letters of credit to $2,600,000 and concurrently increased the cash collateral in support of the facility to such amount.
 
In 2001, Pinnacle Entertainment, Inc. and the bank syndicate executed amendments to the Credit Facility that, among other things: (i) amended various financial covenant ratios, (ii) allowed for certain capital expenditures, including the Lake Charles project (up to the original project amount of $225,000,000—see Note 8) and Boomtown Bossier City expansion and renovation project (see Note 8), (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. As noted above, the Company has begun discussions with its banks to amend and restate the Credit Facility to allow for, among other things, the expanded Lake Charles Project and the guest-room addition at Belterra Casino Resort.
 
Unsecured 9.25% and 9.5% Notes    In February 1999, the Company issued $350,000,000 of 9.25% Senior Subordinated Notes due 2007 (the “9.25% Notes”), and in August 1997, issued $125,000,000 of 9.5% Senior Subordinated Notes due 2007 (the “9.5% Notes”). In January 1999, the Company modified selected covenants associated with the 9.5% Notes. All costs associated with the issuance of the 9.25% Notes, 9.5% Notes and the modifications to the 9.5% Notes were capitalized and are being amortized over the terms of the notes.
 
The 9.25% and 9.5% Notes are redeemable, at the Company’s option, 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 Pinnacle Entertainment, Inc., guaranteed by all material restricted subsidiaries of it, as defined in the indentures. The Casino Magic Argentina subsidiaries do not guarantee the debt. The indentures governing the 9.25% and 9.5% Notes, as well as the Credit Facility, contain certain covenants limiting the ability of the Company and its restricted subsidiaries to incur additional indebtedness, issue preferred stock, pay dividends or make certain distributions, repurchase equity interests or subordinated indebtedness, create certain liens, enter into certain transactions with affiliates, sell assets, issue or sell equity interests in its subsidiaries, or enter into certain mergers and consolidations.
 
Hollywood Park-Casino Debt Obligation    In 1999, the Company leased for ten years the Hollywood Park-Casino, located in Inglewood, California. This long-term lease was recorded as a capital lease obligation and the annual lease payments of $3,000,000 are applied as a reduction of principal and as interest expense. The debt obligation is being amortized, based on a mortgage interest method, over the initial lease term of ten years. The Company sub-leases the card club casino to a third party operator for $6,000,000 annually on a renewable year-to-year lease.

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Table of Contents
 
Note 12—Stock Buyback
 
Under the Company’s most restrictive debt covenants, approximately $4,600,000 is available to continue the stock buyback program as of June 30, 2002. No stock purchases have been made in 2002.
 
Note 13—Litigation
 
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”), a wholly-owned subsidiary of the Company, 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. On October 3, 2001, Boomtown, Inc. and LGE filed a cross-appeal on the grounds that the state claims should have been dismissed with prejudice. Astoria subsequently voluntarily dismissed its appeal. Boomtown, Inc. and LGE’s appeal is currently pending before the court. In May 2002, Astoria refiled its state claims in the Civil District Court for the Parish of Orleans, Louisiana. While the Company cannot predict the outcome of this litigation, management intends to vigorously defend this action.
 
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.

16

Table of Contents
 
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 “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 was held November 15, 2001. At a March 27, 2002 status conference, the Court lifted the stay on discovery allowing the parties to conduct limited discovery on the manufacturers and casinos where the named plaintiffs played. During the status conference, the presiding judge also indicated that he was withdrawing from the case and that the case will be reassigned to one of the three new judges in the District of Nevada. Such reassignment has not yet occurred. On June 21, 2002, the Court denied Plaintiffs’ Motion for Class Certification. On July 11, 2002, the Plaintiffs filed a Petition for Permission to Appeal the Court’s denial of the Plaintiffs’ Motion for Class Certification.
 
The claims are not covered under the Company’s insurance policies. While the Company cannot predict the outcome of this litigation, management intends to vigorously defend this action.
 
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. Trial has been set for November 12, 2002. The Company’s insurer has essentially denied coverage of the claim against Mr. Ernst under the Company’s directors and officers 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 intends to vigorously defend this action.

17

Table of Contents
 
Casino Magic Biloxi Patron Shooting Incident.    On January 13, 2001, three Casino Magic Biloxi patrons were shot, 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. On March 20, 2002, the third shooting victim filed a complaint in the Circuit Court of Harrison County, Mississippi, Second Judicial District. The allegations in the complaint are substantially similar to those contained in the August 1, 2001 lawsuit. While the Company cannot predict the outcome of the litigation, the Company, together with its applicable insurers, intends to vigorously defend this lawsuit.
 
Actions by Greek Authorities.    In 1995, a subsidiary of Casino Magic Corp., which the Company refers to as “CME,” performed management services for Porto Carras Casino, S.A., which the Company refers to as “PCC,” a joint venture in which CME had a minority interest. Effective December 31, 1995, CME, with the approval of PCC, assigned its interests and obligations under the PCC management agreement to a Greek subsidiary, Casino Magic Hellas S.A., which the Company refers to as “Hellas.” Hellas issued invoices to PCC for management fees which accrued during 1995, but had not been billed by CME.
 
In September 1996, local Greek tax authorities in Thessaloniki assessed a penalty of approximately $3.5 million against Hellas, and an equal amount against PCC, arising out of the presentation and payment of the invoices. The Thessaloniki tax authorities asserted that the Hellas invoices were fictitious, representing an effort to reduce the taxable income of PCC.
 
PCC and Hellas each appealed their respective assessments. The assessment of the fine against PCC was overturned by the Administrative Court of Thessaloniki on December 11, 2000. The court determined that the actions taken by Hellas and PCC were not fictitious but constituted a legitimate business transaction and accordingly overturned the assessment of the fine.
 
Hellas’s appeal was dismissed for technical procedural failures and has not been reinstated; presumably, however, the rationale of the court in the PCC fine matter would apply equally to Hellas, assuming the court’s decision is upheld on appeal (see below).
 
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.
 
All of PCC’s stock was sold to an unrelated company in December of 1996, and the buyer assumed all of PCC’s liabilities. Under Greek law, shareholders are not liable for the liabilities of a Greek company in which they hold shares, even if the entity is later liquidated or dissolved, and assessments such as the PCC and Hellas fines generally are treated as liabilities of the company. Therefore, management does not expect that this matter will have a materially adverse effect on the Company’s financial condition or results of operations.
 
In June 2000, Greek authorities issued a warrant to appear at a September 29, 2000 criminal proceeding to Marlin Torguson (a member of the Company’s board of directors and Chairman of the Board of CME in 1995) and Robert Callaway (the Company’s former Associate General Counsel and, prior to its acquisition by the Company, CME’s General Counsel). They were charged under Greek law, and convicted in absentia, as being culpable criminally for corporate misconduct based solely on their status as alleged executive board members of

18

Table of Contents
PCC. The Company is advised that they are not, and have never been, managing (active) executive directors of PCC. Accordingly, the Company believes that they were improperly named in the proceedings. The defendants have a right of appeal for a de novo trial under Greek law.
 
On March 30, 2001, appeals on behalf of Mr. Torguson and Mr. Callaway were filed. A hearing before the three-member Court of Misdemeanors of Thessaloniki has been set for October 24, 2002.
 
The Company has been advised that the resolution of the related civil penalties may sometimes resolve criminal issues in Greece. The Company is actively working to resolve the civil and criminal actions related to this matter.
 
Other.    The Company is party to a number of other pending legal proceedings, though management does not expect that the outcome of such proceedings, either individually or in the aggregate, will have a material effect on the Company’s financial results.

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Table of Contents
 
Note 14—Consolidating Condensed Financial Information
 
The Company’s subsidiaries (excluding Casino Magic Argentina and certain non-material subsidiaries) have fully and unconditionally guaranteed the payment of all obligations under the 9.25% Notes and the 9.5% Notes. Separate financial statements and other disclosures regarding the subsidiary guarantors are not included herein because management has determined that such information is not material to investors. In lieu thereof, the Company includes the following:
 
Pinnacle Entertainment, Inc.
Consolidating Condensed Financial Information
For the three and six months ended June 30, 2002 and 2001 and
balance sheets as of June 30, 2002 and December 31, 2001
(in thousands—unaudited)
 
      
Pinnacle Entertainment, Inc.
     
(a)
Wholly Owned Guarantor Subsidiaries
       
(b)
Wholly Owned Non-Guarantor Subsidiaries
     
Consolidating and Eliminating Entries
       
Pinnacle Entertainment, Inc. Consolidated
  
Balance Sheet
                                                   
As of June 30, 2002
                                                   
Current assets
     
$
142,435
 
   
$
72,414
 
     
$
2,617
 
   
$
0
 
     
$
217,466
 
Property, plant and equipment, net
     
 
21,277
 
   
 
553,990
 
     
 
816
 
   
 
0
 
     
 
576,083
 
Other non-current assets
     
 
10,403
 
   
 
34,753
 
     
 
2,013
 
   
 
10,850
 
     
 
58,019
 
Investment in subsidiaries
     
 
498,291
 
   
 
(2,334
)
     
 
0
 
   
 
(495,957
)
     
 
0
 
Inter-company
     
 
136,969
 
   
 
35,821
 
     
 
0
 
   
 
(172,790
)
     
 
0
 
      
  
    
  
    
      
$
809,375
 
   
$
694,644
 
     
$
5,446
 
   
$
(657,897
)
     
$
851,568
 
      
  
    
  
    
Current liabilities
     
$
35,516
 
   
$
50,457
 
     
$
2,673
 
   
$
0
 
     
$
88,646
 
Notes payable, long term
     
 
490,920
 
   
 
1,269
 
     
 
0
 
   
 
0
 
     
 
492,189
 
Other non-current liabilities
     
 
30,654
 
   
 
0
 
     
 
0
 
   
 
(12,206
)
     
 
18,448
 
Inter-company
     
 
0
 
   
 
167,684
 
     
 
5,106
 
   
 
(172,790
)
     
 
0
 
Equity
     
 
252,285
 
   
 
475,234
 
     
 
(2,333
)
   
 
(472,901
)
     
 
252,285
 
      
  
    
  
    
      
$
809,375
 
   
$
694,644
 
     
$
5,446
 
   
$
(657,897
)
     
$
851,568
 
      
  
    
  
    
Statement of Operations
                                                   
For the three months ended June 30, 2002
                                        
Revenues:
                                                   
Gaming
     
$
0
 
   
$
107,833
 
     
$
1,448
 
   
$
0
 
     
$
109,281
 
Food and beverage
     
 
0
 
   
 
7,511
 
     
 
114
 
   
 
0
 
     
 
7,625
 
Equity in subsidiaries
     
 
18,689
 
   
 
789
 
     
 
0
 
   
 
(19,478
)
     
 
0
 
Other
     
 
1,500
 
   
 
11,877
 
     
 
11
 
   
 
0
 
     
 
13,388
 
      
  
    
  
    
      
 
20,189
 
   
 
128,010
 
     
 
1,573
 
   
 
(19,478
)
     
 
130,294
 
      
  
    
  
    
Expenses:
                                                   
Gaming
     
 
0
 
   
 
63,818
 
     
 
422
 
   
 
0
 
     
 
64,240
 
Food and beverage
     
 
0
 
   
 
8,461
 
     
 
120
 
   
 
0
 
     
 
8,581
 
Administrative and other
     
 
10,346
 
   
 
32,612
 
     
 
179
 
   
 
0
 
     
 
43,137
 
Depreciation and amortization
     
 
536
 
   
 
10,654
 
     
 
111
 
   
 
0
 
     
 
11,301
 
      
  
    
  
    
      
 
10,882
 
   
 
115,545
 
     
 
832
 
   
 
0
 
     
 
127,259
 
      
  
    
  
    
Operating income (loss)
     
 
9,307
 
   
 
12,465
 
     
 
741
 
   
 
(19,478
)
     
 
3,035
 
Interest expense, (income) net
     
 
12,076
 
   
 
(287
)
     
 
(2
)
   
 
0
 
     
 
11,787
 
      
  
    
  
    
Income (loss) before inter-company activity and taxes
     
 
(2,769
)
   
 
12,752
 
     
 
743
 
   
 
(19,478
)
     
 
(8,752
)
Management fee & inter-company interest expense income
     
 
(4,771
)
   
 
4,771
 
     
 
0
 
   
 
0
 
     
 
0
 
Income tax (benefit) expense
     
 
(2,291
)
   
 
0
 
     
 
(46
)
   
 
0
 
     
 
(2,337
)
      
  
    
  
    
Net income (loss)
     
$
4,293
 
   
$
7,981
 
     
$
789
 
   
$
(19,478
)
     
$
(6,415
)
      
  
    
  
    

20

Table of Contents
      
Pinnacle Entertainment, Inc.
     
(a)
Wholly Owned Guarantor Subsidiaries
       
(b)
Wholly Owned Non-Guarantor Subsidiaries
     
Consolidating and Eliminating Entries
       
Pinnacle Entertainment, Inc. Consolidated
  
Statement of Operations (continued)
                                                   
For the six months ended June 30, 2002
                                        
Revenues:
                                                   
Gaming
     
$
0
 
   
$
215,471
 
     
$
3,331
 
   
$
0
 
     
$
218,802
 
Food and beverage
     
 
0
 
   
 
14,369
 
     
 
267
 
   
 
0
 
     
 
14,636
 
Equity in subsidiaries
     
 
2,626
 
   
 
1,211
 
     
 
0
 
   
 
(3,837
)
     
 
0
 
Other
     
 
3,000
 
   
 
21,086
 
     
 
25
 
   
 
0
 
     
 
24,111
 
      
  
    
  
    
      
 
5,626
 
   
 
252,137
 
     
 
3,623
 
   
 
(3,837
)
     
 
257,549
 
      
  
    
  
    
Expenses:
                                                   
Gaming
     
 
0
 
   
 
128,414
 
     
 
1,004
 
   
 
0
 
     
 
129,418
 
Food and beverage
     
 
0
 
   
 
16,418
 
     
 
259
 
   
 
0
 
     
 
16,677
 
Administrative and other
     
 
14,885
 
   
 
62,533
 
     
 
130
 
   
 
0
 
     
 
77,548
 
Depreciation and amortization
     
 
1,140
 
   
 
21,036
 
     
 
287
 
   
 
0
 
     
 
22,463
 
      
  
    
  
    
      
 
16,025
 
   
 
228,401
 
     
 
1,680
 
   
 
0
 
     
 
246,106
 
      
  
    
  
    
Operating income (loss)
     
 
(10,399
)
   
 
23,736
 
     
 
1,943
 
   
 
(3,837
)
     
 
11,443
 
Interest expense, (income) net
     
 
24,070
 
   
 
(277
)
     
 
(7
)
   
 
0
 
     
 
23,786
 
      
  
    
  
    
Income (loss) before inter-company activity, change in accounting principle and taxes
     
 
(34,469
)
   
 
24,013
 
     
 
1,950
 
   
 
(3,837
)
     
 
(12,343
)
Management fee & inter-company interest expense income
     
 
(9,614
)
   
 
9,614
 
     
 
0
 
   
 
0
 
     
 
0
 
Income tax (benefit) expense
     
 
(4,369
)
   
 
0
 
     
 
739
 
   
 
0
 
     
 
(3,630
)
      
  
    
  
    
Net income (loss) before change in accounting principle
     
 
(20,486
)
   
 
14,399
 
     
 
1,211
 
   
 
(3,837
)
     
 
(8,713
)
Cumulative change in accounting principle
     
 
44,931
 
   
 
11,773
 
     
 
0
 
   
 
0
 
     
 
56,704
 
      
  
    
  
    
Net income (loss)
     
$
(65,417
)
   
$
2,626
 
     
$
1,211
 
   
$
(3,837
)
     
$
(65,417
)
      
  
    
  
    
For the three months ended June 30, 2001
                                        
Revenues:
                                                   
Gaming
     
$
0
 
   
$
103,010
 
     
$
4,973
 
   
$
0
 
     
$
107,983
 
Food and beverage
     
 
0
 
   
 
7,353
 
     
 
377
 
   
 
0
 
     
 
7,730
 
Equity in subsidiaries
     
 
5,828
 
   
 
1,558
 
     
 
0
 
   
 
(7,386
)
     
 
0
 
Other
     
 
1,500
 
   
 
14,356
 
     
 
34
 
   
 
0
 
     
 
15,890
 
      
  
    
  
    
      
 
7,328
 
   
 
126,277
 
     
 
5,384
 
   
 
(7,386
)
     
 
131,603
 
Expenses:
                                                   
Gaming
     
 
0
 
   
 
61,872
 
     
 
1,402
 
   
 
0
 
     
 
63,274
 
Food and beverage
     
 
0
 
   
 
9,544
 
     
 
278
 
   
 
0
 
     
 
9,822
 
Administrative and other
     
 
3,584
 
   
 
38,678
 
     
 
1,489
 
   
 
0
 
     
 
43,751
 
Depreciation and amortization
     
 
669
 
   
 
10,843
 
     
 
344
 
   
 
279
 
     
 
12,135
 
      
  
    
  
    
      
 
4,253
 
   
 
120,937
 
     
 
3,513
 
   
 
279
 
     
 
128,982
 
      
  
    
  
    
Operating income (loss)
     
 
3,075
 
   
 
5,340
 
     
 
1,871
 
   
 
(7,665
)
     
 
2,621
 
Interest expense, net
     
 
11,435
 
   
 
(488
)
     
 
(64
)
   
 
0
 
     
 
10,883
 
      
  
    
  
    
Income (loss) before taxes
     
 
(8,360
)
   
 
5,828
 
     
 
1,935
 
   
 
(7,665
)
     
 
(8,262
)
Income tax expense
     
 
(3,352
)
   
 
0
 
     
 
377
 
   
 
0
 
     
 
(2,975
)
      
  
    
  
    
Net income (loss)
     
$
(5,008
)
   
$
5,828
 
     
$
1,558
 
   
$
(7,665
)
     
$
(5,287
)
      
  
    
  
    

21

Table of Contents
      
Pinnacle Entertainment, Inc.
     
(a)
Wholly Owned Guarantor Subsidiaries
       
(b)
Wholly Owned Non-Guarantor Subsidiaries
     
Consolidating and Eliminating Entries
       
Pinnacle Entertainment, Inc. Consolidated
  
Statement of Operations (continued)
                                                   
For the six months ended June 30, 2001
                                        
Revenues:
                                                   
Gaming
     
$
0
 
   
$
212,463
 
     
$
9,782
 
   
$
0
 
     
$
222,245
 
Food and beverage
     
 
0
 
   
 
14,362
 
     
 
731
 
   
 
0
 
     
 
15,093
 
Equity in subsidiaries
     
 
16,784
 
   
 
2,712
 
     
 
0
 
   
 
(19,496
)
     
 
0
 
Other
     
 
3,000
 
   
 
25,208
 
     
 
64
 
   
 
0
 
     
 
28,272
 
      
  
    
  
    
      
 
19,784
 
   
 
254,745
 
     
 
10,577
 
   
 
(19,496
)
     
 
265,610
 
      
  
    
  
    
Expenses:
                                                   
Gaming
     
 
0
 
   
 
126,824
 
     
 
2,712
 
   
 
0
 
     
 
129,536
 
Food and beverage
     
 
0
 
   
 
18,762
 
     
 
553
 
   
 
0
 
     
 
19,315
 
Administrative and other
     
 
7,978
 
   
 
71,704
 
     
 
3,088
 
   
 
0
 
     
 
82,770
 
Depreciation and amortization
     
 
1,352
 
   
 
21,610
 
     
 
703
 
   
 
558
 
     
 
24,223
 
      
  
    
  
    
      
 
9,330
 
   
 
238,900
 
     
 
7,056
 
   
 
558
 
     
 
255,844
 
      
  
    
  
    
Operating income (loss)
     
 
10,454
 
   
 
15,845
 
     
 
3,521
 
   
 
(20,054
)
     
 
9,766
 
Interest expense, (income) net
     
 
22,414
 
   
 
(939
)
     
 
(133
)
   
 
0
 
     
 
21,342
 
      
  
    
  
    
Income (loss) before taxes
     
 
(11,960
)
   
 
16,784
 
     
 
3,654
 
   
 
(20,054
)
     
 
(11,576
)
Income tax expense
     
 
(5,110
)
   
 
0
 
     
 
942
 
   
 
0
 
     
 
(4,168
)
      
  
    
  
    
Net income (loss)
     
$
(6,850
)
   
$
16,784
 
     
$
2,712
 
   
$
(20,054
)
     
$
(7,408
)
      
  
    
  
    
Statement of Cash Flows
                                                   
For the six months ended June 30, 2002
                                        
Net cash provided by (used in) operating activities
     
$
3,767
 
   
$
17,930
 
     
$
(397
)
   
$
0
 
     
$
21,300
 
Net cash provided by (used in) investing activities
     
 
(683
)
   
 
(21,722
)
     
 
0
 
   
 
0
 
     
 
(22,405
)
Net cash provided by (used in) financing activities
     
 
2,335
 
   
 
(453
)
     
 
0
 
   
 
0
 
     
 
1,882
 
Effect of exchange rate changes on cash
     
 
0
 
   
 
0
 
     
 
(3,680
)
   
 
0
 
     
 
(3,680
)
Statement of Cash Flows
                                                   
For the six months ended June 30, 2001
                                        
Net cash provided by (used in) operating activities
     
$
(17,664
)
   
$
15,454
 
     
$
1,978
 
   
$
558
 
     
$
326
 
Net cash provided by (used in) investing activities
     
 
(77
)
   
 
(16,479
)
     
 
(1,312
)
   
 
0
 
     
 
(17,868
)
Net cash provided by (used in) financing activities
     
 
(8,041
)
   
 
(410
)
     
 
0
 
   
 
0
 
     
 
(8,451
)
Balance Sheet
                                                   
As of December 31, 2001
                                                   
Current assets
     
$
140,407
 
   
$
70,992
 
     
$
7,425
 
   
$
0
 
     
$
218,824
 
Property, plant and equipment, net
     
 
21,753
 
   
 
552,633
 
     
 
1,913
 
   
 
0
 
     
 
576,299
 
Other non-current assets
     
 
20,796
 
   
 
57,631
 
     
 
4,949
 
   
 
40,850
 
     
 
124,226
 
Investment in subsidiaries
     
 
542,202
 
   
 
5,280
 
     
 
0
 
   
 
(547,482
)
     
 
0
 
Inter-company
     
 
156,082
 
   
 
20,360
 
     
 
0
 
   
 
(176,442
)
     
 
0
 
      
  
    
  
    
      
$
881,240
 
   
$
706,896
 
     
$
14,287
 
   
$
(683,074
)
     
$
919,349
 
      
  
    
  
    
Current liabilities
     
$
34,816
 
   
$
46,223
 
     
$
2,615
 
   
$
0
 
     
$
83,654
 
Notes payable, long term
     
 
492,016
 
   
 
1,477
 
     
 
0
 
   
 
0
 
     
 
493,493
 
Other non-current liabilities
     
 
34,892
 
   
 
0
 
     
 
0
 
   
 
(12,206
)
     
 
22,686
 
Inter-company
     
 
0
 
   
 
170,050
 
     
 
6,392
 
   
 
(176,442
)
     
 
0
 
Equity
     
 
319,516
 
   
 
489,146
 
     
 
5,280
 
   
 
(494,426
)
     
 
319,516
 
      
  
    
  
    
      
$
881,240
 
   
$
706,896
 
     
$
14,287
 
   
$
(683,074
)
     
$
919,349
 
      
  
    
  
    
(a)
 
The following subsidiaries are treated as guarantors of both the 9.5% Notes and 9.25% Notes for all periods presented: Belterra Resort Indiana LLC, Boomtown, Inc., Boomtown Hotel & Casino, Inc., Louisiana—  I Gaming, Louisiana Gaming Enterprises, Inc., HP/Compton, Inc., Casino Magic Corp., Biloxi Casino Corp., Casino One Corporation, Crystal Park Hotel and Casino Development Company, LLC, PNK (Bossier City), Inc., Casino Parking, Inc. and St. Louis Casino Corp.
(b)
 
The following subsidiaries are treated as wholly owned non-guarantors of both the 9.5% Notes and the 9.25% Notes for all periods presented: Casino Magic Neuquen S.A. and its subsidiary Casino Magic Support Services.

22

Table of Contents
 
Item 2.    Management’s Discussion and Analysis of Financial Condition and Results of Operations
 
The following discussion and analysis of financial condition, results of operations, liquidity and capital resources should be read in conjunction with the Company’s Annual Report on Form 10-K for the year ended December 31, 2001, and other filings with the Securities and Exchange Commission.
 
 
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. Words such as, but not limited to, “believes”, “expects”, “anticipates”, “estimates”, “intends”, “plans”, and similar expressions are intended to identify forward-looking statements. Such forward-looking statements, which may include, without limitation, statements regarding expansion plans, cash needs, cash reserves, liquidity, operating and capital expenses, financing options, expense reductions, operating results and pending regulatory matters, are subject to a variety of risks and uncertainties that could cause actual results to differ materially from those anticipated by the Company. Factors that may cause actual performance of the Company to differ materially from that contemplated by such forward-looking statements include, among others:
 
 
·
 
any failure to comply with the conditions negotiated with the Louisiana Gaming Control Board for the Company’s casino development project in Lake Charles, Louisiana, and its ability to complete the project on time and on budget;
 
 
·
 
a failure to improve results at the Belterra Casino Resort and the effectiveness of management at the Belterra Casino Resort in containing costs without negatively affecting revenues, customer service or efforts to expand the number of customers visiting the property;
 
 
·
 
the effectiveness of the planned new hotel tower at the Belterra Casino Resort in enhancing Belterra Casino Resort’s status as a regional resort property and in increasing utilization of its casino and other facilities;
 
 
·
 
additional costs in connection with the settlement of the Indiana Gaming Commission investigation, including a failure to complete on a timely basis the new hotel at Belterra Casino Resort;
 
 
·
 
changes in gaming laws and regulations, including the expansion of casino gaming in states in which the Company operates (or in states bordering the states in which it operates), such as the potential expansion of Native American gaming in California and Louisiana and the possible introduction of casino gaming into such states as Kentucky, Ohio or Arkansas;
 
 
·
 
the effectiveness of the renovation and re-branding project at Boomtown Bossier City in drawing additional customers to the property despite significant competition in the local market;
 
 
·
 
the effect of current and future weather conditions and other natural events affecting the key markets in which the Company operates;
 
 
·
 
the amount and effect of future impairment charges under Statement of Financial Accounting Standards No. 121 and Statement of Financial Accounting Standards No. 142;
 
 
·
 
any failure to obtain adequate financing to meet strategic goals, including financing for the Lake Charles and Belterra projects;
 
 
·
 
any failure to obtain or retain gaming licenses or regulatory approvals, or the limitation, conditioning, suspension or revocation of any existing gaming license;
 
 
·
 
risks associated with substantial indebtedness, leverage, debt service and liquidation;
 

23

Table of Contents
 
·
 
loss or retirement of key executives;
 
 
·
 
risks related to pending litigation and the possibility of future litigation;
 
 
·
 
increased competition from casino operators who have more resources and have built or are building competitive casino properties;
 
 
·
 
increases in existing taxes or the imposition of new taxes on gaming revenues or gaming devices;
 
 
·
 
adverse changes in the public perception and acceptance of gaming and the gaming industry;
 
 
·
 
the impact of fuel and transportation costs on the willingness of customers to travel by automobile to the Company’s casino properties; and
 
 
·
 
other adverse changes in the gaming markets in which the Company operates.
 
In addition, these statements could be affected by general domestic and international economic and political conditions, including slowdowns in the economy, uncertainty as to the future direction of the economy and vulnerability of the economy to domestic or international incidents, as well as market conditions in the Company’s industry.
 
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 that could affect the Company’s operating results and financial condition, see “—Risk Factors” and “—Factors Affecting Future Operating Results” below and review the Company’s other filings with the Securities and Exchange Commission.
 
 
The following is a summary list of some of the risk factors relating to the Company and its business. In addition to the other information set forth in this Quarterly Report on Form 10-Q, one should carefully consider the risk factors as disclosed in the Company’s Annual Report on Form 10-K for the year ended December 31, 2001 and in the Company’s other filings with the Securities and Exchange Commission for additional detail regarding these and other risk factors.
 
 
·
 
All of the Company’s properties are dependent upon retaining existing and attracting new customers within their respective geographical markets.
 
 
·
 
The Company faces intense competition in all the markets in which it operates.
 
 
·
 
Loss of land-based, riverboat or dockside facilities from service would adversely affect the Company’s operations.
 
 
·
 
As the Company is highly leveraged, future cash flows may not be sufficient to meet the Company’s obligations and the Company might have difficulty obtaining additional financing.
 
 
·
 
Development of the Lake Charles project, expansion of the Belterra Casino Resort and other capital-intensive projects could strain the Company’s financial resources and may not provide a sufficient return on investment.
 
 
·
 
The Company could lose the right to pursue the Lake Charles project if it fails to continue to meet the Lake Charles Conditions.
 
 
·
 
Financing for the Company’s capital spending plans may not be available or acceptable to lenders or the Company.
 
 
·
 
The Company faces extensive regulatory oversight from gaming authorities and any adverse regulatory changes or changes in the gaming environment in any of the jurisdictions the Company operates could have a material adverse effect on the Company’s operations.

24

Table of Contents
 
 
·
 
The Company is currently subject to litigation and in the future could be subject to additional litigation, all of which is time consuming and can divert resources and attention of management.
 
 
·
 
Due to the risks associated with any construction project, the Company may not be able to complete expansion projects and new construction projects on time, on budget or as planned.
 
 
·
 
Construction at the Company’s existing properties could disrupt its operations.
 
 
·
 
The Company experiences quarterly fluctuations in operating results due to seasonality of the Company’s business, including the stronger summer months and weaker winter months.
 
 
·
 
The Company faces environmental and archaeological regulation of its real estate.
 
 
·
 
Terrorism and the uncertainty of war, as well as other factors affecting discretionary consumer spending, may harm the Company’s operating margins.
 
 
·
 
The Company operates in Argentina, which has experienced political and economic instability since the second half of 2001.
 
For more information on the potential factors that could affect the Company’s financial results, please see “Forward-Looking Statements” above and “Factors Affecting Future Operating Results” below and review the Company’s filings with the Securities and Exchange Commission.
 
 
The Company’s significant accounting policies are discussed in Note 1 to the Condensed Notes to Consolidated Financial Statements. The preparation of consolidated financial statements in conformity with “generally accepted accounting principles” requires management to apply significant judgment in defining the estimates and assumptions. The Company’s accounting policies that require significant judgment in determining the appropriate assumptions include, among others, policies for:
 
 
·
 
insurance reserves, asset disposition reserves, Indiana regulatory settlement reserves, allowances for doubtful accounts, asset impairment and other reserves;
 
 
·
 
valuation of goodwill and long-lived assets;
 
 
·
 
depreciable lives of various assets; and
 
 
·
 
the calculation of income tax liabilities.
 
These judgments are subject to an inherent degree of uncertainty. Management’s judgments are based on the Company’s historical experience, terms of various past and present agreements and contracts, industry trends, and information available from other sources, as appropriate. There can be no assurance that actual results will not differ from the estimates.

25

Table of Contents
 
The following table highlights the Company’s results of operations for the three and six months ended June 30, 2002 and 2001.
    
For the three months
ended June 30,
     
For the six months
ended June 30,
  
    
2002
     
2001
     
2002
     
2001
  
    
(unaudited, in thousands)
  
Revenues:
                                    
Boomtown New Orleans
   
$
25,782
 
   
$
24,839
 
   
$
52,482
 
   
$
50,581
 
Casino Magic Biloxi
   
 
22,462
 
   
 
21,548
 
   
 
45,362
 
   
 
44,263
 
Boomtown Reno
   
 
23,801
 
   
 
24,833
 
   
 
42,196
 
   
 
43,945
 
Boomtown Bossier City
   
 
23,782
 
   
 
25,431
 
   
 
50,965
 
   
 
57,959
 
Belterra Casino Resort
   
 
31,334
 
   
 
25,994
 
   
 
59,801
 
   
 
52,189
 
Casino Magic Argentina
   
 
1,573
 
   
 
5,384
 
   
 
3,623
 
   
 
10,577
 
Card Clubs
   
 
1,560
 
   
 
1,800
 
   
 
3,120
 
   
 
3,600
 
    
  
  
  
    
 
130,294
 
   
 
129,829
 
   
 
257,549
 
   
 
263,114
 
Sold properties(a)
   
 
0
 
   
 
1,774
 
   
 
0
 
   
 
2,496
 
    
  
  
  
Revenues
   
$
130,294
 
   
$
131,603
 
   
$
257,549
 
   
$
265,610
 
    
  
  
  
Operating income (loss):
                                    
Boomtown New Orleans
   
$
5,222
 
   
$
4,874
 
   
$
10,666
 
   
$
10,867
 
Casino Magic Biloxi
   
 
2,992
 
   
 
2,509
 
   
 
6,333
 
   
 
5,275
 
Boomtown Reno
   
 
3,783
 
   
 
4,148
 
   
 
4,353
 
   
 
4,518
 
Boomtown Bossier City(c)
   
 
(720
)
   
 
(3,883
)
   
 
1,807
 
   
 
(934
)
Belterra Casino Resort(c)
   
 
846
 
   
 
(5,689
)
   
 
(13
)
   
 
(8,494
)
Casino Magic Argentina
   
 
61
 
   
 
1,871
 
   
 
113
 
   
 
3,521
 
Card Clubs
   
 
964
 
   
 
796
 
   
 
1,861
 
   
 
1,485
 
Corporate(c)
   
 
(10,113
)
   
 
(4,366
)
   
 
(13,677
)
   
 
(9,540
)
    
  
  
  
    
 
3,035
 
   
 
260
 
   
 
11,443
 
   
 
6,698
 
Sold properties (a) and (c)
   
 
0
 
   
 
2,361
 
   
 
0
 
   
 
3,068
 
    
  
  
  
Operating income
   
$
3,035
 
   
$
2,621
 
   
$
11,443
 
   
$
9,766
 
    
  
  
  
EBITDA(b):
                                    
Boomtown New Orleans
   
$
6,879
 
   
$
6,321
 
   
$
13,876
 
   
$
13,727
 
Casino Magic Biloxi
   
 
4,887
 
   
 
4,179
 
   
 
10,088
 
   
 
8,610
 
Boomtown Reno
   
 
5,602
 
   
 
6,088
 
   
 
7,972
 
   
 
8,455
 
Boomtown Bossier City(c)
   
 
1,255
 
   
 
(1,749
)
   
 
5,709
 
   
 
3,322
 
Belterra Casino Resort(c)
   
 
4,154
 
   
 
(2,614
)
   
 
6,537
 
   
 
(2,429
)
Casino Magic Argentina
   
 
172
 
   
 
2,215
 
   
 
400
 
   
 
4,224
 
Card Clubs
   
 
1,473
 
   
 
1,749
 
   
 
2,946
 
   
 
3,406
 
Corporate(c)
   
 
(10,086
)
   
 
(3,794
)
   
 
(13,622
)
   
 
(8,394
)
    
  
  
  
    
 
14,336
 
   
 
12,395
 
   
 
33,906
 
   
 
30,921
 
Sold properties (a) and (c)
   
 
0
 
   
 
2,361
 
   
 
0
 
   
 
3,068
 
    
  
  
  
EBITDA(b)
   
$
14,336
 
   
$
14,756
 
   
$
33,906
 
   
$
33,989
 
    
  
  
  
Revenue by property as a % of Total Revenue:
                                    
Boomtown New Orleans
   
 
19.8
%
   
 
18.9
%
   
 
20.4
%
   
 
19.0
%
Casino Magic Biloxi
   
 
17.2
%
   
 
16.4
%
   
 
17.6
%
   
 
16.7
%
Boomtown Reno
   
 
18.3
%
   
 
18.9
%
   
 
16.4
%
   
 
16.5
%
Boomtown Bossier City(c)
   
 
18.3
%
   
 
19.3
%
   
 
19.8
%
   
 
21.8
%
Belterra Casino Resort(c)
   
 
24.0
%
   
 
19.8
%
   
 
23.2
%
   
 
19.6
%
Casino Magic Argentina
   
 
1.2
%
   
 
4.1
%
   
 
1.4
%
   
 
4.0
%
Card Clubs
   
 
1.2
%
   
 
1.4
%
   
 
1.2
%
   
 
1.4
%
    
  
  
  
    
 
100.0
%
   
 
98.7
%
   
 
100.0
%
   
 
99.1
%
Sold properties (a) and (c)
   
 
0.0
%
   
 
1.3
%
   
 
0.0
%
   
 
0.9
%
    
  
  
  
    
 
100.0
%
   
 
100.0
%
   
 
100.0
%
   
 
100.0
%
    
  
  
  
Operating margins(d)
                                    
Boomtown New Orleans
   
 
20.3
%
   
 
19.6
%
   
 
20.3
%
   
 
21.5
%
Casino Magic Biloxi
   
 
13.3
%
   
 
11.6
%
   
 
14.0
%
   
 
11.9
%
Boomtown Reno
   
 
15.9
%
   
 
16.7
%
   
 
10.3
%
   
 
10.3
%
Boomtown Bossier City(c)
   
 
(3.0
%)
   
 
(15.3
%)
   
 
3.5
%
   
 
(1.6
%)
Belterra Casino Resort(c)
   
 
2.7
%
   
 
(21.9
%)
   
 
0.0
%
   
 
(16.3
%)
Casino Magic Argentina
   
 
3.9
%
   
 
34.8
%
   
 
3.1
%
   
 
33.3
%
Card Clubs
   
 
61.8
%
   
 
44.2
%
   
 
59.6
%
   
 
41.3
%
Corporate(c)
   
 
(7.8
%)
   
 
(3.4
%)
   
 
(5.3
%)
   
 
(3.6
%)
    
  
  
  
    
 
2.3
%
   
 
0.2
%
   
 
4.4
%
   
 
2.5
%
Sold properties (a) and (c)
   
 
0.0
%
   
 
133.1
%
   
 
0.0
%
   
 
122.9
%
    
  
  
  
    
 
2.3
%
   
 
2.0
%
   
 
4.4
%
   
 
3.7
%]
    
  
  
  

26

Table of Contents
(a)
 
Includes the income from a Native American casino in Yakima, Washington, under various lease agreements with the tribe. These agreements were terminated in June 2001.
 
(b)
 
The Company defines “EBITDA” as earnings before interest, income taxes, depreciation and amortization. EBITDA has not been adjusted for certain non-recurring and unusual items at various properties—see note (c) below. EBITDA is not a measure of financial performance under the promulgations of the accounting profession, known as “generally accepted accounting principles” or “GAAP.” Nevertheless, some investors use EBITDA to determine a company’s ability to service or incur indebtedness and to estimate the company’s underlying cash flow from operations before capital costs and maintenance capital expenditures. EBITDA is not calculated in the same manner by all entities and accordingly, may not be an appropriate measure for comparing performance amongst different companies. EBITDA should not be considered in isolation from, or as a substitute for, net income (loss), cash flows from operations or cash flow data prepared in accordance with GAAP. EBITDA is calculated by adding the provision for income taxes, minority interests, net interest expense, depreciation and amortization and extraordinary items to net income (loss). A reconciliation from net loss to EBITDA is as follows:
 
    
For the three months
ended June 30,
     
For the six months
ended June 30,
  
    
2002
     
2001
     
2002
     
2001
  
    
(unaudited, in thousands)
  
Net loss
   
$
(6,415
)
   
$
(5,287
)
   
$
(65,417
)
   
$
(7,408
)
Cumulative effect of change in accounting principle
   
 
0
 
   
 
0
 
   
 
56,704
 
   
 
0
 
    
  
  
  
Net loss before change in accounting principle
   
 
(6,415
)
   
 
(5,287
)
   
 
(8,713
)
   
 
(7,408
)
Income tax benefit
   
 
(2,337
)
   
 
(2,975
)
   
 
(3,630
)
   
 
(4,168
)
    
  
  
  
Loss before change in accounting principle and income taxes
   
 
(8,752
)
   
 
(8,262
)
   
 
(12,343
)
   
 
(11,576
)
Interest expense, net of capitalized interest
   
 
12,319
 
   
 
12,311
 
   
 
24,952
 
   
 
24,618
 
Interest income
   
 
(532
)
   
 
(1,428
)
   
 
(1,166
)
   
 
(3,276
)
    
  
  
  
Operating income
   
 
3,035
 
   
 
2,621
 
   
 
11,443
 
   
 
9,766
 
Depreciation and amortization
   
 
11,301
 
   
 
12,135
 
   
 
22,463
 
   
 
24,223
 
    
  
  
  
EBITDA
   
$
14,336
 
   
$
14,756
 
   
$
33,906
 
   
$
33,989
 
    
  
  
  
 
(c)
 
“Operating income” and “EBITDA” disclosed above have not been adjusted at locations for certain non-recurring and unusual items, such as: Re-branding costs at Boomtown Bossier City; Pre-opening costs at Belterra Casino Resort; Regulatory and other settlement costs and terminated merger costs at Corporate; and, Asset disposition gain for sold operations. Below is a listing of such items:
 
    
For the
three months
ended June 30,
     
For the
six months
ended June 30,
  
    
2002
   
2001
     
2002
   
2001
  
    
(unaudited, in thousands)
  
Non-recurring and unusual items, by location
                                
Re-branding costs, Boomtown Bossier City
   
$
1,234
   
$
0
 
   
$
1,343
   
$
0
 
Pre-opening costs, Belterra Casino Resort
   
 
0
   
 
412
 
   
 
0
   
 
610
 
Regulatory and terminated merger, Corporate
   
 
6,493
   
 
(464
)
   
 
6,493
   
 
(464
)
Gain on asset dispositions, sold properties
   
 
0
   
 
(581
)
   
 
0
   
 
(581
)
    
  
  
  
    
$
7,727
   
$
(633
)
   
$
7,836
   
$
(435
)
    
  
  
  
 
(d)
 
Operating margin by property is calculated by dividing revenue by location by operating income (loss) by location.

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Three and Six Months Ended June 30, 2002 Compared to the Three and Six Months Ended June 30, 2001
 
Operating Results    Operating results improved significantly in the quarter, while total revenues were approximately flat. For the six month period, operating results improved significantly, while revenues declined by 2.1%. In each period, significant revenue improvement at Belterra Casino Resort was offset by declines at Boomtown Bossier City, which was under construction, and the dollar-denominated results of Casino Magic Argentina. Total EBITDA (excluding sold operations) increased by 15.7% and 9.7% in the three and six months ended June 30, 2002, respectively, as compared to the three and six months ended June 30, 2001. Total operating income (again, excluding sold operations) increased ten-fold and by 70.8% in the corresponding three and six-month periods of 2002, respectively, as compared to the three and six-month periods ended June 30, 2001. Each property’s contribution to these results is as follows:
 
The Company’s Belterra Casino Resort reported the strongest period-over-period improvement among the Company’s properties in the three and six months ended June 30, 2002, as well as posting record revenue and operating income. Revenues for the three and six month periods grew by $5,340,000, or 20.5%, and $7,612,000, or 14.6%. EBITDA in the three and six months improved to $4,154,000 from a loss of ($2,614,000), and to $6,537,000 from a loss of ($2,429,000), respectively, and while operating income improved to $846,000 from a loss of ($5,689,000), and to a loss of ($13,000) from a loss of ($8,494,000), respectively. The dramatic improvement in results reflects the benefits of more efficient marketing programs, maturation of the property which opened in late 2000 and overall operating efficiencies. In addition, EBITDA and operating income results for the three and six months ended June 30, 2001 include pre-opening costs of $412,000 and $610,000, respectively, related to the opening of the Belterra golf course on July 1, 2001.
 
At Casino Magic Biloxi, revenues improved by 4.2% and 2.5% for the three and six months ended June 30, 2002, respectively, versus the three and six months ended June 30, 2001. The increases in revenues over prior year periods are primarily from new casino marketing programs. The property’s results have also benefited from cost control programs established in late 2001. EBITDA increased in the second quarter and first half by 16.9% and 17.2%, respectively. Operating income also increased in these periods, by 19.3% and 20.1%, respectively.
 
In the third quarter of 2001, the Company’s Boomtown New Orleans property added approximately 300 slot machines and a new high-limit table games area. As a result, revenues in the three months ended June 30, 2002 exceeded those of the prior year by 3.8%. EBITDA and Operating Income increased by 8.8% and 7.1%, respectively, in the quarter.
 
The revenue increase at Boomtown New Orleans in the first half was also 3.8%. However, the change in Louisiana gaming regulations that permitted dockside operations beginning April 1, 2001 also increased the state gaming taxes at Boomtown New Orleans from 18.5% to 21.5%. The higher tax rate was therefore in effect during the second quarter periods of both years, but the first quarter of 2002 had a higher gaming tax as compared to the first quarter of 2001. The benefits of dockside gaming in the first quarter did not offset the higher tax rate. As a result, EBITDA in the first half grew by only 1.1% and Operating Income declined by 1.8%.
 
At Boomtown Reno, results for the three and six months ended June 30, 2002 reflect the continued impact of the sluggish economy in nearby northern California and expansion of casinos in California owned by Native Americans. The property is believed to have performed much better than many other Reno properties. Revenues for the three and six-month periods declined by 4.2% and 4.0%, respectively. Also impacting revenues for the property were reductions in fuel prices at the two large gas stations at the property, as the company largely “passed through” the lower wholesale prices that it paid for fuel. Excluding fuel sales, revenues at Boomtown Reno declined by 3.0% and 2.0%, respectively, in the three and six month period. Overall, EBITDA declined, by $486,000 (8.0%) and $483,000 (5.7%). Due to reduced depreciation and amortization charges in 2002 versus 2001, operating income was down by only $365,000 (8.8%) and $165,000 (3.7%) for the three and six-month periods of 2002, respectively.

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On July 1, 2002, the Bossier City facility was officially re-branded “Boomtown Bossier City” from the former Casino Magic brand and motif. The $25,000,000 expansion, renovation and re-branding project that began in December 2001 is expected to be completed in the fourth quarter, however the future customer disruption should be minimal as the remaining work to be completed is primarily in the “back-of-the-house” areas. Due principally to the construction disruption, revenues declined in the quarter and first half by 6.5% and 12.1%, respectively, from the prior year periods.
 
The property was able to reduce its costs of operations and marketing during the construction period and also benefited from the absence of the $400,000 per quarter of amortization of gaming license expense. The Company wrote-off the unamortized cost of the Bossier City gaming license in the first quarter of 2002, in accordance with SFAS 142. In the prior year second quarter, expensive and inefficient marketing programs and a $2.6 million charge for certain reserves and write-downs related to inventory, accounts receivable and other working capital valuation matters caused the property to have negative EBITDA of $1.7 million and an operating loss of $3.9 million. The recent quarter showed significant improvement over the prior year period, with positive EBITDA of $1.3 million and an operating loss of $0.7 million, despite the construction. The recent period’s improved results were achieved despite the inclusion of $1.2 million of costs related to the re-branding of the property, such as special advertising expenses, costs associated with the grand re-opening and expenses for new uniforms and other items with the new “Boomtown” logo.
 
The same factors affected the six month numbers. EBITDA and operating income improved significantly despite the construction disruptions and $1.3 million of rebranding expenses. This was attributable to cost controls, more efficient marketing and the absence in the recent period of both the $2.6 million working capital valuation charge and $800,000 of amortization of capitalized licensing costs that affected the prior year period.
 
Casino Magic Argentina revenues, EBITDA and operating income in the three and six month periods declined substantially from the year-earlier periods primarily due to the adverse economic and political conditions in that country which has resulted in the devaluation of the Argentine currency. Attendance at the Company’s Argentine casinos declined by less than 1% in the quarter and 3.2% in the first half. However, the steep decline in the value of the peso vis-a-vis the dollar substantially reduced the dollar-denominated revenues, EBITDA and operating income in both periods.
 
Revenues and operating income from the Company’s Card Clubs declined in the periods presented due to a reduction in lease income from the Crystal Park card club.
 
Corporate Costs    Corporate costs increased by $5,747,000 and $4,137,000 in the three and six months ended June 30, 2002, primarily due to a $6,493,000 charge in the second quarter of 2002 related to the previously announced Indiana Gaming Commission investigation (see Note 3 to the Condensed Notes to Consolidated Financial Statements). Adjusted for such non-recurring charge, corporate costs in the second quarter were 17.1% below those of the prior year period.
 
The Company recently reached a settlement with the Indiana Gaming Commission where it agreed, among other things, to pay a fine of $2.26 million; suspend gaming operations at Belterra Casino Resort for a 3-day period beginning at 6:00 p.m. on October 6, 2002 to 12:01 p.m. on October 9, 2002; to pay taxes, wages, tips and community development fees as if the casino remained open during the suspension period; build a new 300 guest-room tower at the Belterra Casino Resort; and establish a new compliance committee of the Company’s Board of Directors.
 
The settlement agreement also requires the Company to place $5 million into an escrow account to ensure the completion of the new guest-room tower by July 2004, at which time the funds will be returned to the Company. In the event the Company does not complete the tower by July 2004, subject to extension for events beyond the Company’s control upon approval of the Indiana Gaming Commission, the escrow funds will be forfeited to the State of Indiana.

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The Company recorded a $6,493,000 charge in the quarter for such fine, estimated operating costs for the October closure period, investigation costs, estimated settlement with former officers and estimated legal and other related costs.
 
Sold Properties    The reduction in revenues, EBITDA and operating income from sold operations during the three and six months ended June 30, 2002 versus the year-earlier periods reflects the termination in June, 2001 of various lease agreements with a Native American tribe under which the Company derived income from the Legends Casino in Yakima, Washington. See “—Factors Affecting Future Operating Results—Assets Sold” below.
 
Interest Income and Expense    Interest income for the three and six months ended June 30, 2002 decreased by $896,000, or 62.7%, and $2,110,000, or 64.4%, respectively, from the year-earlier periods, primarily due to the early repayment of a promissory note from a Native American casino, lower investment funds and lower interest rates.
 
Interest expense, net of capitalized interest, for the three and six months ended June 30, 2002 was approximately flat versus the prior year periods.
 
Change in Accounting Principle    The charge in the first quarter of 2002 for the cumulative change in accounting principle of $56,704,000 related to the write-down of goodwill and other intangible assets. This charge reflected the adoption of SFAS 142 as of January 1, 2002. See Note 10 to the Condensed Notes to Consolidated Financial Statements.
 
 
At June 30, 2002, the Company had $129,714,000 of cash and cash equivalents, with all of its cash equivalents being marketable securities having remaining terms of less than 90 days; and $24,022,000 of restricted cash, primarily in escrow accounts to fund future expansion. At December 31, 2001, the Company had cash and cash equivalents of $153,187,000 and restricted cash of $3,452,000. Management currently estimates that approximately $45,000,000 is needed to fund the Company’s casino cages, slot machines, operating accounts or otherwise is used in day-to-day operations.
 
Working capital for the Company (current assets less current liabilities) was $128,820,000 at June 30, 2002, versus $135,170,000 at December 31, 2001.
 
In the six months ended June 30, 2002, the Company incurred property, plant and equipment additions of $23,196,000, principally reflecting the expansion and renovation project at Boomtown Bossier City. The cash flow from operations in the six months ended June 30, 2002 was $21,300,000, as compared to $326,000 in the six-month period ended June 30, 2001, reflecting the improved operating results at Belterra Casino Resort and Boomtown Bossier City and tax refunds received in the first quarter of 2002. Also during the six months ended June 30, 2002, a number of former employees exercised their stock options, generating cash proceeds to the Company of $4,043,000. Overall, the cash flow from operations and the proceeds from the stock option exercise activity were not quite sufficient to offset the investment in the Company’s properties. Therefore, cash and equivalents declined by $2,903,000 in the six months ended June 30, 2002.
 
In the six months ended June 30, 2001, the Company incurred property, plant and equipment additions of $25,037,000, principally reflecting the construction of the golf course at the Belterra Casino Resort, initial costs related to the Boomtown New Orleans renovation project in 2001 and the purchase of the 14 acres of leased land at Crystal Park Casino. The Company also used $6,849,000 of its cash to repurchase common stock and $2,082,000 to pay down certain of its notes payable. Offsetting these uses of cash were the notes receivable collected in the six months ended June 30, 2001 of $7,563,000, the majority of which was the repayment of the note receivable from the Native American tribe in Yakima, Washington (see Note 9 to the Condensed Notes to

30

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Consolidated Financial Statements). Overall, the cash flow from operations and cash collected on the notes receivable were not enough to offset the investment in the properties, purchase of stock and paydown of notes payable. Therefore, cash and equivalents declined by $25,993,000 in the six months ended June 30, 2001.
 
The Company currently has a $110,000,000 bank credit facility with a group of banks, none of which was drawn at June 30, 2002. The credit facility matures in December, 2003. The Company also had a $1,100,000 stand-by letter of credit outstanding at June 30, 2002, which facility is cash collateralized and for the benefit of the Company’s self-insured workers compensation program. In July 2002, the Company increased the letter of credit facility (and related cash collateral) to $2,600,000 in connection with the annual renewal of the insurance program. (See Note 11 to the Condensed Notes to the Consolidated Financial Statements.)
 
The Company’s debt consists principally of two issues of senior subordinated indebtedness: $350,000,000 of 9.25% Senior Subordinated Notes due February 2007, and $125,000,000 of 9.50% Senior Subordinated Notes due August 2007. The 9.50% notes became callable at a premium over their face amount on August 1, 2002; the 9.25% notes become callable at a premium over their face amount on February 15, 2003. Such premiums decline periodically as the bonds near their respective maturities. Neither series of notes has any required sinking fund or other principal payments prior to their maturities in 2007. Both series of notes permit the Company to have up to $350 million of senior indebtedness, none of which is currently outstanding.
 
The Company intends to continue to maintain its current properties in excellent condition and estimates that this will require maintenance and miscellaneous capital spending of approximately $20 million per year. The Company has also committed to adding a 300 guest-room hotel tower within two years at its Belterra Casino Resort at an estimated cost of approximately $30 million. Finally, the Company has plans to build a major resort in Lake Charles, Louisiana, estimated to cost approximately $325 million, including capitalized interest and pre-opening costs. The Company expects to break ground in early 2003 and open this resort in 2004. See Note 8 to the Condensed Notes to Consolidated Financial Statements for a more detailed discussion of both of these projects.
 
The Company currently believes that, for at least the next 12 months, its existing cash resources and cash flows from operations will be sufficient to fund operations, maintain existing properties, make necessary debt service payments, fund construction of the tower at the Belterra Casino Resort and continue the design and planning for the Lake Charles project.
 
Construction of the Lake Charles project will require additional financing. The Company has begun discussions with its banks over the possible extension, expansion and modification of the existing $110,000,000 bank credit facility. There can be no assurance that the Company will be able to secure such modifications under terms and conditions favorable or acceptable to the Company. The Company has also filed with the Securities and Exchange Commission a shelf registration statement which, if declared effective, would permit the issuance of up to $500,000,000 of debt, equity or other securities. There can be no assurance, however, that the Company will be able to issue any of such securities on terms acceptable to the Company. The Company does not intend, nor is it permitted under its agreement with the Louisiana Gaming Control Board (“LGCB”), to begin construction of the Lake Charles facility unless and until it has sufficient resources to complete the facility.
 
The Company’s selection for the fifteenth and final Louisiana riverboat license is conditioned on its continued compliance with certain conditions designed to ensure that the Lake Charles facility is actually built and successfully opened. For example, the Company must submit its architectural plans to the LGCB in August, 2002. Then, it must submit its proposed general contract and shipbuilding contract to the LGCB within 120 days after the LGCB’s approval of its architectural plans and it must then demonstrate that it has the resources to complete the facility within 10 days and begin construction within 30 days after the LGCB’s approval of such contracts. The Company must then complete the facility within 18 months of the date that it starts construction. Management intends to meet all of these conditions. There can be no assurance, however, that all conditions will be met. In the event that the Company does not meet all these conditions, the LGCB may opt to retract their selection of the Company for the fifteenth license.

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Amortization of Goodwill and Similar Intangible Assets    With the required adoption of SFAS No. 142 on January 1, 2002, goodwill and other intangible assets (such as the capitalized cost of the Boomtown Bossier City gaming license, which constituted a significant portion of the value of an entity that Casino Magic acquired in 1996) are no longer amortized over their estimated useful lives, which amortization expense was $712,000 and $1,422,000 for the three and six months ended June 30, 2001, respectively. Instead of annual amortization, goodwill and similar intangible assets are now subject to an assessment at least annually to determine if the fair value of the intangible asset is at least equal to the carrying amount on the balance sheet.
 
Argentina    During the second half of 2001, the political and economic condition of Argentina deteriorated. In early 2002, the government also devalued the Argentine peso, which for over ten years previously had been pegged to be equal to the U.S. dollar.
 
The value of the Argentine peso has declined from $1.00 on December 31, 2001 to $0.27 as of June 30, 2002. Laws have been enacted that converted the dollar-denominated bank accounts owned by the Company in Argentina to peso-denominated accounts and, simultaneously with that, the government devalued the peso. New laws have also restricted the Company’s ability to transfer funds out of Argentina. These events have adversely affected operations in Argentina and will probably continue to do so.
 
The Company’s casinos in Argentina have experienced some decline in customer counts. Inflation in Argentina, measured in pesos, is believed to be very high and, as noted, the exchange rates have been extremely volatile and generally declining. The division’s revenues and profitability measured in pesos are down slightly, but with the declining value of the peso, its revenues and profits measured in U.S. dollars are down significantly. The Company anticipates the economic instability will continue through the remainder of 2002. At June 30, 2002, the Company’s assets in Argentina were $5,445,000 or less than 1% of the Company’s consolidated assets.
 
Legislation Regarding Dockside Gaming in Louisiana    Effective April 1, 2001, the gaming taxes paid to the state of Louisiana by riverboats in the southern region of the state, including the Boomtown New Orleans property, increased from 18.5% to 21.5% of net gaming proceeds. At the same time, these riverboats were required to remain “dockside” rather than cruising. Casinos operating in parishes bordering the Red River, including Boomtown Bossier City, were already permitted to remain dockside prior to 2001. For these facilities, the gaming tax increase to 21.5% of net gaming proceeds is being phased in, with a one percentage point increase on each of April 1, 2001, 2002, and 2003.
 
Through April 1, 2002, this change was slightly detrimental to the Boomtown New Orleans operations. Casino patrons were no longer required to arrange their plans to coincide with a cruising schedule. However, any positive impact of this on the patronage was not sufficient to offset the higher tax rate. The increased gaming taxes also have had a negative impact at Boomtown Bossier City, as gaming was already being conducted on a dockside basis prior to the new legislation. The Company believes, however, that the new legislation will benefit the proposed Lake Charles project, as it will enable the Company to build a riverboat casino that will remain dockside at all times and be incorporated into the surrounding resort and thus compete more effectively with existing operators, some of whom have land-based facilities.
 
Legislation Regarding Dockside Gaming in Indiana    Effective July 1, 2002, the state of Indiana passed a law that increases gaming taxes for casino riverboats in Indiana that continue to cruise, but also allows riverboat operators to opt to cease cruising and remain dockside. Customers generally prefer the convenience of dockside operation because access to the casino is not tied to a cruising schedule. The Company converted its Belterra Casino Resort to dockside operation on August 1, 2002, which was the first date permitted by Indiana law. The Indiana dockside riverboats will be taxed in accordance with a new graduated tax structure. Based on the Belterra

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Casino Resort’s recent operating results, the Company believes that at current revenue levels the graduated tax structure results in an overall tax rate for the property similar to the prior tax structure.
 
Boomtown Bossier City Expansion and Re-branding    In July 2002, the Company substantially completed the major portion of the public areas of its $25 million renovation and expansion project in Bossier City, which project included remodeling the dockside riverboat casino and adjoining building with a new buffet, Mexican restaurant and bar, as well as re-branding the facility from “Casino Magic” to “Boomtown”. Construction is continuing in the hotel lobby and the new steakhouse, which is expected to be completed in the fourth quarter.
 
The Company incurred re-branding expenses of $1,234,000 and $1,343,000 for the three and six months ended June 30, 2002, respectively. Such costs include special advertising programs, costs associated with the grand re-opening and expenses for new uniforms and other items with the new “Boomtown” logo. The Company anticipates it will incur additional re-branding costs in the third quarter of approximately $1 million.
 
Lake Charles, Louisiana    During the quarter ended June 30, 2002, the Company increased the scope and projected cost of its Lake Charles Project to $325 million, including capitalized interest and pre-opening costs, from its earlier estimates. The Company expects to begin construction in early 2003 and complete construction in 2004. The resort will now feature approximately 1,000 deluxe guest-rooms, an integrated casino, a golf course and numerous food and beverage, entertainment and retail amenities. It will be located on 225 acres that the Company has an option to lease for up to 70 years, as more fully described below. At June 30, 2002, the Company had capitalized $633,000 for architectural and design costs.
 
In October 2001, the Company was selected by the LGCB to receive the fifteenth and final riverboat gaming license to be issued by the LGCB. Issuance of the license is subject to a number of remaining conditions, including, but not limited to, building a facility consistent with presentations made to the LGCB, meeting various construction milestone dates and satisfying the financing requirements to complete the project (the “Lake Charles Conditions”). Financing requirements of the Lake Charles Conditions include setting aside $22.5 million in a separate account owned by the Company, which was satisfied in April 2002, and demonstrating sufficient financial resources for the full project prior to commencement of construction in early 2003. The Company is considering various financing options for the development of the proposed project.
 
The Company anticipates exercising its option in August 2002 to lease from the Lake Charles Harbor and Terminal District some 225 acres of unimproved land upon which the proposed project will be constructed. Effectiveness of the lease agreement will be subject to the satisfaction of various conditions, including obtaining all of the necessary permits and approvals to construct the project. The lease calls for annual payments of $815,000, commencing upon opening of the resort complex, with a maximum annual increase thereafter of 5%. Although the lease payments are not payable until commencement of operations, a portion of the future rent will be accrued during the construction period. Upon effectiveness, the lease will have an initial term of ten years with six renewal options of ten years each. The lease will require the Company to develop certain improvements at or near the site.
 
Belterra Casino Resort    The Company has committed to adding a new 300 guest-room hotel tower at its Belterra Casino Resort property, at a cost of approximately $30 million. The Company expects to begin construction in early 2003 and complete construction in 2004. The new hotel tower will accommodate the excess demand that cannot be accommodated in the existing 308 guest-room tower and increase utilization of the property’s casino and other existing facilities. In connection with the Company’s August 2002 settlement agreement with the Indiana Gaming Commission, the Company placed $5 million into an escrow account to insure the completion of the new tower within two years, at which time the funds will be returned to the Company (see Note 3 to the Condensed Notes to Consolidated Financial Statements).

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Assets Sold    In 1998, the Company entered into a seven-year loan agreement with a Native American tribe for $9,618,000, which proceeds were used to construct the Legends Casino in Yakima, Washington. Concurrently, the Company entered into various lease agreements with the tribe providing for, among other things, participation in the casino’s cash flow. In June 2001, the Company sold its rights to receive future income from these agreements, by entering into an agreement whereby the tribe paid the Company $8,490,000 to repay the loan and terminate the related lease agreements. After deducting for receivables and certain closing costs, the pre-tax gain from the transaction (which was recorded in the second quarter of 2001) was approximately $639,000.
 
Assets Held for Sale    Assets held for sale of $18,285,000 at June 30, 2002 and December 31, 2001 consist primarily of approximately 97 acres of vacant land in Inglewood, California and the Crystal Park Casino (a card club) in Compton, California. Because current California law requires every owner of a card club to be licensed, which is an impractical requirement for a public company, the Company leases both of its California card clubs to a third party operator under a year-to-year lease. In November 2001, the operator of the Crystal Park Casino requested, and the Company granted, a reduction in rent to $20,000 per month from $100,000 per month, due to increased card club competition and the overall slowdown in the U.S. economy. In addition, in the fourth quarter 2001, the Company began seeking buyers for Crystal Park, and accordingly, reclassified the assets as held for sale.
 
On June 17, 2002, the Company announced that it had entered into an agreement with a national retail developer for the sale of 60 of the 97 acres of real property it currently owns in Inglewood, California. The purchase price is $36 million, or $600,000 an acre. The Company expects that this sale, which is subject to the developer obtaining the necessary entitlements to develop the land, will close in mid-2003.
 
Terminated Merger Agreement    On April 17, 2000, the Company entered into an agreement with subsidiaries of Harveys Casino Resorts wherein Harveys would have acquired by merger all of the outstanding capital stock of Pinnacle Entertainment for $24 per share, plus other consideration. Consummation of the merger was subject to numerous conditions. Since all of the conditions to consummation of the merger would not be met by January 31, 2001, the parties mutually agreed to terminate the agreement. Due to the settlement of certain purported class action lawsuits in the second quarter of 2001, $464,000 of accrued expenses were reversed in such quarter.
 
 
The Company has market risk with respect to the foreign currency exchange rate between the Argentine peso and the U.S. dollar. Such rate has been very volatile of late, with the peso generally declining in value (see Note 1 “—Foreign Currency Translation” to the Condensed Notes to Consolidated Financial Statements).
 
The Company could also have potential market risk associated with the floating interest rate on borrowings under the Company’s existing Credit Facility. However, at June 30, 2002, the Company had no outstanding borrowings under the Credit Facility.
 
As of June 30, 2002, the Company did not hold any investments in market risk sensitive instruments of the type described in Item 305 of Regulation S-K.

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PART II
 
OTHER INFORMATION
 
 
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 “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 was held November 15, 2001. At a March 27, 2002 status conference, the Court lifted the stay on discovery allowing the parties to conduct limited discovery on the manufacturers and casinos where the named plaintiffs played. During the status conference, the presiding judge also indicated that he was withdrawing from the case and that the case will be reassigned to one of the three new judges in the District of Nevada. Such reassignment has not yet occurred. On June 21, 2002, the Court denied Plaintiffs’ Motion for Class Certification. On July 11, 2002, the Plaintiffs filed a Petition for Permission to Appeal the Court’s denial of the Plaintiffs’ Motion for Class Certification.
 

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The claims are not covered under the Company’s insurance policies. While the Company cannot predict the outcome of this litigation, management intends to vigorously defend the action.
 
Other Legal Proceedings.    See the Company’s Quarterly Report on Form 10-Q for the quarter ended March 31, 2002 for other material legal proceedings.
 
 
At an Annual Meeting of Stockholders held June 18, 2002, the Company’s stockholders approved the following:
 
Proposal One:    Proposal to elect seven (7) directors.
 
Nominee
   
For Votes
   
Withheld Votes
Daniel R. Lee
   
20,898,122
   
3,333,607
James L. Martineau
   
23,008,363
   
1,223,366
Gary G. Miller
   
23,008,335
   
1,223,394
Michael Ornest
   
23,008,335
   
1,223,394
Timothy J. Parrott
   
22,972,663
   
1,259,066
Lynn P. Reitnouer
   
23,008,238
   
1,223,491
Marlin Torguson
   
23,008,363
   
1,223,366
 
Proposal Two:    Proposal to approve stock options granted to Daniel R. Lee.
 
    
Shares
     
% of Shares Represented and Voting
  
For votes
   
15,571,870
     
85.56
%
Against votes
   
2,535,270
     
13.93
%
Abstain votes
   
93,599
     
.51
%
Broker non-votes
   
6,932,410
     
N/A
 
 
Proposal Three:    Proposal to approve the Company’s 2002 Stock Option Plan.
 
    
Shares
     
% of Shares Represented and Voting
  
For votes
   
14,876,591
     
81.74
%
Against votes
   
3,228,276
     
17.74
%
Abstain votes
   
95,872
     
.52
%
Broker non-votes
   
6,024,412
     
N/A
 

36

Table of Contents
 
 
(a)  Exhibits
 
Exhibit Number
   
Description of Exhibit
  3.1*
   
Restated Certificate of Incorporation of Pinnacle Entertainment, Inc.
  4.1
   
Pinnacle Entertainment, Inc. 2002 Stock Option Plan is hereby incorporated by reference to
Appendix A to Pinnacle Entertainment, Inc.’s Definitive Proxy Statement filed May 15, 2002.
10.1
   
Employment Agreement dated as of April 10, 2002 by and between Pinnacle Entertainment, Inc. and Daniel R. Lee is hereby incorporated by reference to Exhibit 10.1 to the Company’s Quarterly Report on Form 10-Q for the quarter ended March 31, 2002.
10.2
   
Nonqualified Stock Option Agreement dated as of April 10, 2002 by and between Pinnacle Entertainment, Inc. and Daniel R. Lee is hereby incorporated by reference to Exhibit 10.2 to the Company’s Quarterly Report on Form 10-Q for the quarter ended March 31, 2002.
10.3
   
Nonqualified Stock Option Agreement dated as of April 10, 2002 by and between Pinnacle Entertainment, Inc. and Daniel R. Lee is hereby incorporated by reference to Exhibit 10.3 to the Company’s Quarterly Report on Form 10-Q for the quarter ended March 31, 2002.
10.4*
   
Purchase Agreement between Rothbart Development Corporation and Pinnacle Entertainment, Inc., dated June 14, 2002.
11*
   
Statement re Computation of Per Share Earnings
99.1*
   
Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 — CEO.
99.2*
   
Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the SarbanesOxley Act of 2002 — CFO.
*
 
Filed herewith
 
(b)  Reports on Form 8-K:
 
A Current Report on Form 8-K was filed April 11, 2002 to report the issuance of a press release on April 11, 2002, in which the Company (i) announced the resignation of R. D. Hubbard and Paul R. Alanis and the hiring of Daniel R. Lee as Chairman of the Board of Directors and Chief Executive Officer, (ii) provided guidance for its first quarter and full-year 2002 financial results, and (iii) announced the initiation of the Indiana Gaming Commission investigation.
 
A Current Report on Form 8-K was filed May 3, 2002 to report the selection of Holthouse Carlin & Van Trigt LLP, and the dismissal of Arthur Andersen LLP, as independent public accountants for the financial statements of the Pinnacle Entertainment 401(k) Investment Plan effective April 26, 2002.
 
A Current Report on Form 8-K was filed May 30, 2002 to report the dismissal of Arthur Andersen LLP as independent public accountants for Pinnacle Entertainment, Inc., effective May 28, 2002.
 
A Current Report on Form 8-K was filed June 19, 2002 to report the engagement of Deloitte & Touche LLP as independent public accountants for Pinnacle Entertainment, Inc., effective June 17, 2002.

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Table of Contents
 
PINNACLE ENTERTAINMENT, INC.
 
SELECTED FINANCIAL DATA BY PROPERTY
 
    
For the three months ended June 30,
     
For the six months ended June 30,
  
    
2002
     
2001
     
2002
     
2001
  
    
(in thousands, except per share data—unaudited)
 
Revenues:
                                    
Belterra Casino Resort
   
$
31,334
 
   
$
25,994
 
   
$
59,801
 
   
$
52,189
 
Boomtown New Orleans
   
 
25,782
 
   
 
24,839
 
   
 
52,482
 
   
 
50,581
 
Boomtown Reno
   
 
23,801
 
   
 
24,833
 
   
 
42,196
 
   
 
43,945
 
Casino Magic Biloxi
   
 
22,462
 
   
 
21,548
 
   
 
45,362
 
   
 
44,263
 
Boomtown Bossier City
   
 
23,782
 
   
 
25,431
 
   
 
50,965
 
   
 
57,959
 
Casino Magic Argentina
   
 
1,573
 
   
 
5,384
 
   
 
3,623
 
   
 
10,577
 
Card Clubs
   
 
1,560
 
   
 
1,800
 
   
 
3,120
 
   
 
3,600
 
    
  
  
  
    
 
130,294
 
   
 
129,829
 
   
 
257,549
 
   
 
263,114
 
Sold operations
   
 
0
 
   
 
1,774
 
   
 
0
 
   
 
2,496
 
    
  
  
  
    
 
130,294
 
   
 
131,603
 
   
 
257,549
 
   
 
265,610
 
    
  
  
  
Expenses:
                                    
Belterra Casino Resort
   
 
27,180
 
   
 
28,196
 
   
 
53,264
 
   
 
54,008
 
Boomtown New Orleans
   
 
18,903
 
   
 
18,518
 
   
 
38,606
 
   
 
36,854
 
Boomtown Reno
   
 
18,199
 
   
 
18,745
 
   
 
34,224
 
   
 
35,490
 
Casino Magic Biloxi
   
 
17,575
 
   
 
17,369
 
   
 
35,274
 
   
 
35,653
 
Boomtown Bossier City
   
 
21,293
 
   
 
27,180
 
   
 
43,913
 
   
 
54,637
 
Casino Magic Argentina
   
 
1,401
 
   
 
3,169
 
   
 
3,223
 
   
 
6,353
 
Card Clubs
   
 
87
 
   
 
51
 
   
 
174
 
   
 
194
 
Corporate
   
 
3,593
 
   
 
4,258
 
   
 
7,129
 
   
 
8,858
 
    
  
  
  
    
 
108,231
 
   
 
117,486
 
   
 
215,807
 
   
 
232,047
 
Sold operations
   
 
0
 
   
 
(6
)
   
 
0
 
   
 
9
 
    
  
  
  
    
 
108,231
 
   
 
117,480
 
   
 
215,807
 
   
 
232,056
 
    
  
  
  
Non-recurring and unusual items:
                                    
Regulatory settlement and related costs
   
 
(6,493
)
   
 
0
 
   
 
(6,493
)
   
 
0
 
Re-branding costs, Bossier City
   
 
(1,234
)
   
 
0
 
   
 
(1,343
)
   
 
0
 
Prior year non-recurring and unusual items
   
 
0
 
   
 
633
 
   
 
0
 
   
 
435
 
    
  
  
  
    
 
(7,727
)
   
 
633
 
   
 
(7,836
)
   
 
435
 
    
  
  
  
Depreciation and amortization
   
 
(11,301
)
   
 
(12,135
)
   
 
(22,463
)
   
 
(24,223
)
    
  
  
  
Operating income
   
 
3,035
 
   
 
2,621
 
   
 
11,443
 
   
 
9,766
 
Interest income
   
 
532
 
   
 
1,428
 
   
 
1,166
 
   
 
3,276
 
Interest expense, net of capitalized interest
   
 
(12,319
)
   
 
(12,311
)
   
 
(24,952
)
   
 
(24,618
)
    
  
  
  
Loss before income taxes and change in accounting principle
   
 
(8,752
)
   
 
(8,262
)
   
 
(12,343
)
   
 
(11,576
)
Income tax benefit
   
 
2,337
 
   
 
2,975
 
   
 
3,630
 
   
 
4,168
 
    
  
  
  
Net loss before change in accounting principle
   
 
(6,415
)
   
 
(5,287
)
   
 
(8,713
)
   
 
(7,408
)
Cumulative change in accounting principle, net of income tax benefit
   
 
0
 
   
 
0
 
   
 
(56,704
)
   
 
0
 
    
  
  
  
Net loss
   
$
(6,415
)
   
$
(5,287
)
   
$
(65,417
)
   
$
(7,408
)
    
  
  
  
Net loss per common share—basic and diluted
                                    
Net loss before cumulative change in accounting principle
   
$
(0.25
)
   
$
(0.20
)
   
$
(0.34
)
   
$
(0.28
)
Cumulative change in accounting principle
   
 
0.00
 
   
 
0.00
 
   
 
(2.21
)
   
 
0.00
 
    
  
  
  
Net loss—basic and diluted
   
$
(0.25
)
   
$
(0.20
)
   
$
(2.55
)
   
$
(0.28
)
    
  
  
  
Number of shares—basic and diluted
   
 
25,804
 
   
 
25,996
 
   
 
25,625
 
   
 
26,141
 

38

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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/    DANIEL R. LEE
  
Dated:    August 13, 2002
   
Daniel R. Lee
    
   
Chairman of the Board and
Chief Executive Officer
(Principal Executive Officer)
    
         
By:
  
/s/    BRUCE C. HINCKLEY
  
Dated:    August 13, 2002
   
Bruce C. Hinckley
    
   
Senior Vice President and Chief Financial Officer
(Principal Financial and Accounting Officer)
    
         
         
         

39
EX-3.1 3 dex31.txt RESTATED CERTIFICATE OF INCORPORATION OF PINNACLE RESTATED CERTIFICATE OF INCORPORATION OF PINNACLE ENTERTAINMENT, INC. a Delaware corporation Pinnacle Entertainment, Inc., a corporation organized and existing under the laws of the State of Delaware, hereby certifies as follows: 1. The present name of this corporation is Pinnacle Entertainment, Inc. (the "Company"). The Company was originally incorporated under the name Hollywood Park Realty Enterprises, Inc., and its original Certificate of Incorporation was filed with the Delaware Secretary of State on October 26, 1981. 2. The Restated Certificate of Incorporation has been duly adopted in accordance with Section 245 of the Delaware General Corporation Law by the Board of Directors of the Company without a vote of the stockholders of the Company. 3. The Restated Certificate of Incorporation of the Company attached hereto as Exhibit A only restates and integrates, but does not further amend, all of the provisions of the Company's Certificate of Incorporation as theretofore amended or supplemented and currently in effect, and there is no discrepancy between the provisions of the Certificate of Incorporation of the Company currently in effect and the provisions of the Restated Certificate of Incorporation. 4. The Company's Certificate of Incorporation is hereby restated in its entirety to read as set forth on Exhibit A attached hereto and incorporated herein by this reference. IN WITNESS WHEREOF, the Company has caused this Restated Certificate of Incorporation to be duly executed by the undersigned officer of the Company this 12th day of August, 2002. PINNACLE ENTERTAINMENT, INC. By: /s/ Bruce C. Hinckley ------------------------ Bruce C. Hinckley, Senior Vice President and Chief Financial Officer Exhibit A RESTATED CERTIFICATE OF INCORPORATION OF PINNACLE ENTERTAINMENT, INC. ARTICLE I The name of the corporation is: Pinnacle Entertainment, Inc. ARTICLE II The address of its registered office in the State of Delaware is 30 Old Rudnick Lane, in the City of Dover, County of Kent. The name of its registered agent is CorpAmerica, Inc. ARTICLE III The nature of the business to be conducted or promoted is to engage in any lawful act or activity for which corporations may be organized under the General Corporation Law of the State of Delaware. ARTICLE IV The amount of the total authorized capital stock of the corporation is 40,250,000 shares which are divided into two classes as follows: 250,000 shares of Preferred Stock having a par value of $1.00 per share; and 40,000,000 shares of Common Stock having a par value of $0.10 per share. The designations, voting powers, preferences and relative participating, optional or other special rights, and qualifications, limitations or restrictions of the above classes of stock are as follows: A. Preferred Stock. The Board of Directors is expressly authorized, from time to time, (1) to fix the number of shares of one or more series of Preferred Stock; (2) to determine the designation of any such series; (3) to determine or alter, without limitation or restriction, the rights, preferences, privileges and restrictions granted to or imposed upon any wholly unissued series of Preferred Stock; and (4) within the limits or restrictions stated in any resolution or resolutions of the Board of Directors originally fixing the number of shares constituting any series, to increase or decrease (but not below the number of shares then outstanding) the number of shares of any such series subsequent to the issue of shares of that series. B. Common Stock. (i) Subject to the preferential rights of the Preferred Stock, the holders of the Common Stock shall be entitled to receive, to the extent permitted by law, such dividends as may be declared from time to time by the Board of Directors. (ii) In the event of the voluntary or involuntary liquidation, dissolution, distribution of assets or winding up of the corporation, after distribution in full of the preferential amount to be distributed to the holders of shares of the Preferred Stock, holders of the Common Stock shall be entitled to receive all the remaining assets of the corporation of whatever kind available for distribution to stockholders, ratably in proportion to the number of shares of Common Stock held by them respectively. A consolidation, merger or reorganization of the corporation with any other corporation or corporations, or a sale of all or substantially all of the assets of the corporation, shall not be considered a dissolution, liquidation or winding up of the corporation within the meaning of these provisions. (iii) Except as may be otherwise required by law, each share of Common Stock shall entitle the holder to one vote in respect of each matter voted by the stockholders. ARTICLE V Any and all right, title, interest and claim in or to any dividends declared by the corporation, whether in cash, stock, or otherwise, which are unclaimed by the stockholder entitled thereto for a period of six years after the close of business on the payment date, shall be and is deemed to be extinguished and abandoned; and such unclaimed dividends in the possession of the corporation, its transfer agents or other agents or depositories shall at such time become the absolute property of the corporation, free and clear of any and all claims of any persons whatsoever. ARTICLE VI In furtherance and not in limitation of the power conferred by statute, the Board of Directors is expressly authorized to make, alter, amend or repeal the by-laws of the corporation. ARTICLE VII Whenever a compromise or arrangement is proposed between the corporation and its creditors or any class of them and/or between the corporation and its stockholders or any class of them, any court of equitable jurisdiction within the State of Delaware may, on the application in a summary way of the corporation or of any creditor or stockholder thereof or on the application of any receiver or receivers appointed for the corporation under the provisions of Section 291 of Title 8 of the Delaware Code or on the application of trustees in dissolution or of any receiver or receivers appointed for the corporation under the provisions of Section 279 of Title 8 of the Delaware Code order a meeting of the creditors or class of creditors, and/or of the stockholders or class of stockholders of the corporation, as the case may be, to be summoned in such manner as the said court directs. If a majority in number representing three-fourths in value of the creditors or class of creditors, and/or of the stockholders or class of stockholders of the corporation, as the case may be, agree to any compromise or arrangement and to any reorganization of the corporation as consequence of such compromise or arrangement, the said compromise or arrangement and the said reorganization shall, if sanctioned by the court to which the said application has been made, - 2 - be binding on all the creditors or class of creditors, and/or on all the stockholders or class of stockholders, of the corporation, as the case may be, and also on the corporation. ARTICLE VIII The corporation shall indemnify its officers and directors to the full extent permitted by the Delaware General Corporation Law. ARTICLE IX Elections of directors need not be by written ballot unless the by-laws of the corporation so provide. ARTICLE X The corporation reserves the right to amend, alter, change or repeal any provision contained in this Certificate of Incorporation, in the manner now or hereafter prescribed by statute, and all rights conferred upon stockholders herein are granted subject to this reservation. ARTICLE XI [ARTICLE XI has been intentionally omitted.] ARTICLE XII No director of the corporation shall be personally liable to the corporation or its stockholders for monetary damages for breach of fiduciary duty by such director for corporate actions as a director; provided, however, that this Article XII shall not eliminate or limit the liability of a director to the extent provided by applicable law (1) for any breach of the director's duty of loyalty to the corporation or its stockholders, (2) for acts or omissions not in good faith or which involve intentional misconduct or a knowing violation of law, (3) under Section 174 of the Delaware General Corporation Law, or (4) for any transaction from which the director derived an improper personal benefit. No amendment to repeal this Article XII shall apply to, or have any effect on the liability or alleged liability of any director of the corporation for or with respect to any acts or omissions of such director occurring prior to such amendment or repeal. ARTICLE XIII A. Definitions. For purposes of this Article XIII, the following terms shall have the meanings specified below: 1. "Affiliate" shall have the meaning ascribed to such term in Rule 12b-2 promulgated by the Securities and Exchange Commission ("SEC") under the Securities Exchange Act of 1934, as amended (the "Exchange Act"). 2. "Affiliated Companies" shall mean those companies directly or indirectly affiliated or under common Ownership or Control with the corporation, including, without limitation, subsidiaries, holding companies and intermediary companies (as those and similar terms are defined in the Gaming Laws of the applicable Gaming Jurisdictions) that are registered or licensed under applicable Gaming Laws. - 3 - 3. "Gaming" or "Gaming Activities" shall mean the conduct of gaming and gambling activities, or the use of gaming devices, equipment and supplies in the operation of a casino, card club or other enterprise, including, without limitation, slot machines, gaming tables, cards, dice, gaming chips, player tracking systems, cashless wagering systems and related and associated equipment and supplies. 4. "Gaming Authorities" shall mean all international, foreign, federal, state and local regulatory and licensing bodies and agencies with authority over Gaming within any Gaming Jurisdiction. 5. "Gaming Jurisdictions" shall mean all jurisdictions, domestic and foreign, and their political subdivisions, in which Gaming Activities are lawfully conducted. 6. "Gaming Laws" shall mean all laws, statutes and ordinances pursuant to which any Gaming Authority possesses regulatory and licensing authority over Gaming within any Gaming Jurisdiction, and all rules and regulations promulgated by such Gaming Authority thereunder. 7. "Gaming Licenses" shall mean all licenses, permits, approvals, authorizations, registrations, findings of suitability, franchises and entitlements issued by a Gaming Authority necessary for or relating to the conduct of Gaming Activities. 8. "Ownership or Control" (and derivatives thereof) shall mean (i) ownership of record, (ii) "beneficial ownership" as defined in Rule 13d-3 or Rule 16a-1(a)(2) promulgated by the SEC under the Exchange Act, (iii) the power to direct and manage, by agreement, contract, agency or other manner, the voting or management rights or disposition of securities of the corporation, and/or (iv) definitions of ownership or control under applicable Gaming Laws. 9. "Person" shall mean an individual, partnership, corporation, limited liability company, trust or any other entity. 10. "Redemption Date" shall mean the date by which the securities Owned or Controlled by an Unsuitable Person are to be redeemed by the corporation. 11. "Redemption Notice" shall mean that notice of redemption served by the corporation on an Unsuitable Person if a Gaming Authority requires the corporation, or the corporation deems it necessary or advisable, to redeem such Unsuitable Person's securities. Each Redemption Notice shall set forth (i) the Redemption Date; (ii) the number of shares of securities to be redeemed; (iii) the Redemption Price and the manner of payment therefor; (iv) the place where certificates for such shares shall be surrendered for payment; and (v) any other requirements of surrender of the certificates, including how they are to be endorsed, if at all. 12. "Redemption Price" shall mean the per share price for the redemption of any securities to be redeemed pursuant to this Article XIII, which shall be that price (if any) required to be paid by the Gaming Authority making the finding of unsuitability, or if such Gaming Authority does not require a certain price per share to be paid, that sum deemed reasonable by the corporation (which may include, in the corporation's discretion, - 4 - the original purchase price per share of the securities); provided, however, the Redemption Price, unless the Gaming Authority requires otherwise, shall in no event exceed (i) the closing sales price of the securities on the national securities exchange on which such shares are then listed on the date the notice of redemption is delivered to the Unsuitable Person by the corporation, or (ii) if such shares are not then listed for trading on any national securities exchange, then the closing sales price of such shares as quoted in the NASDAQ National Market System, or (iii) if the shares are not then so quoted, then the mean between the representative bid and the ask price as quoted by NASDAQ or another generally recognized reporting system. The Redemption Price may be paid in cash, by promissory note, or both, as required by the applicable Gaming Authority and, if not so required, as the corporation elects. 13. "Unsuitable Person" shall mean a Person who Owns or Controls any securities of the corporation or any securities of or interest in any Affiliated Company (i) that is determined by a Gaming Authority to be unsuitable to Own or Control such securities or unsuitable to be connected with a Person engaged in Gaming Activities in that Gaming Jurisdiction, or (ii) who causes the corporation or any Affiliated Company to lose or to be threatened with the loss of, or who, in the sole discretion of the Board of Directors of the corporation, is deemed likely to jeopardize the corporation's right to the use of or entitlement to, any Gaming License. B. Compliance with Gaming Laws. The corporation, all Persons Owning or Controlling securities of the corporation and any Affiliated Companies, and each director and officer of the corporation and any Affiliated Companies shall comply with all requirements of the Gaming Laws in each Gaming Jurisdiction in which the corporation or any Affiliated Companies conduct Gaming Activities. All securities of the corporation shall be held subject to the requirements of such Gaming Laws, including any requirement that (i) the holder file applications for Gaming Licenses with, or provide information to, applicable Gaming Authorities, or (ii) that any transfer of such securities may be subject to prior approval by Gaming Authorities, and any transfer of securities of the corporation in violation of any such approval requirement shall not be permitted and the purported transfer shall be void ab initio. C. Finding of Unsuitability. 1. The securities of the corporation Owned or Controlled by an Unsuitable Person or an Affiliate of an Unsuitable Person shall be redeemable by the corporation, out of funds legally available therefor, by appropriate action of the Board of Directors, to the extent required by the Gaming Authority making the determination of unsuitability or to the extent deemed necessary or advisable by the corporation. If a Gaming Authority requires the corporation, or the corporation deems it necessary or advisable, to redeem such securities, the corporation shall serve a Redemption Notice on the Unsuitable Person or its Affiliate and shall purchase the securities on the Redemption Date and for the Redemption Price set forth in the Redemption Notice. From and after the Redemption Date, such securities shall no longer be deemed to be outstanding and all rights of the Unsuitable Person or any Affiliate of the Unsuitable Person therein, other than the right to receive the Redemption Price, shall cease. The Unsuitable Person shall surrender the certificates for any securities to be redeemed in accordance with the requirements of the Redemption - 5 - Notice. Notwithstanding the foregoing, so long as the corporation and Hollywood Park Operating Company are a paired stock real estate investment trust and operating company, the corporation may, in its sole discretion, convert any securities that are redeemable pursuant to this Section (C)(1) into shares of Excess Stock effective upon written notice to the Unsuitable Person or its Affiliate, and such shares of Excess Stock shall be transferred to a Trust for sale to a Permitted Transferee (as such terms are defined in Article IV) in accordance with Sections (D)(4) through (9) of Article IV. 2. Commencing on the date that a Gaming Authority serves notice of a determination of unsuitability or the loss or threatened loss of a Gaming License upon the corporation, and until the securities Owned or Controlled by the Unsuitable Person or the Affiliate of an Unsuitable Person are Owned or Controlled by Persons found by such Gaming Authority to be suitable to own them, it shall be unlawful for the Unsuitable Person or any Affiliate of an Unsuitable Person (i) to receive any dividend, payment, distribution or interest with regard to the securities; (ii) to exercise, directly or indirectly or through any proxy, trustee, or nominee, any voting or other right conferred by such securities, and such securities shall not for any purposes be included in the securities of the corporation entitled to vote, or (iii) to receive any remuneration in any form from the corporation or an Affiliated Company for services rendered or otherwise. D. Issuance and Transfer of Securities. The corporation shall not issue or transfer any securities or any interest, claim or charge thereon or thereto except in accordance with applicable Gaming Laws. The issuance or transfer of any securities in violation thereof shall be ineffective until (i) the corporation shall cease to be subject to the jurisdiction of the applicable Gaming Authorities, or (ii) the applicable Gaming Authorities shall, by affirmative action, validate said issuance or transfer or waive any defect in said issuance or transfer. E. Indenture Restrictions. The corporation shall cause to be placed in every indenture or other operative document relating to publicly traded securities (other than capital stock) of the corporation a provision requiring that any Person or Affiliate of a Person who holds the indebtedness represented by that indenture and is found to be unsuitable to hold such interest shall have the interest redeemed or shall dispose of the interest in the corporation in the manner set forth in the indenture or other document. F. Notices. All notices given by the corporation pursuant to this Article XIII, including Redemption Notices, shall be in writing and shall be deemed given when delivered by personal service or telegram, facsimile, overnight courier or first class mail, postage prepaid, to the Person's address as shown on the corporation's books and records. G. Indemnification. Any Unsuitable Person and any Affiliate of an Unsuitable Person shall indemnify the corporation and its Affiliated Companies for any and all costs, including attorneys' fees, incurred by the corporation and its Affiliated Companies as a result of such Unsuitable Person's or Affiliate's continuing Ownership or Control or failure to promptly divest itself of any securities in the corporation. H. Fiduciary Obligations; Contractual Arrangements; Etc. Nothing contained in this Article XIII shall be construed (i) to relieve any Unsuitable Person (or Affiliate of such - 6 - Person) from any fiduciary obligation imposed by law, (ii) to prohibit or affect any contractual arrangement which the corporation may make from time to time with any holder of securities of the corporation to purchase all or any part of shares of capital stock or other securities held by them, or (iii) to be in derogation of any action, past or future, which has been or may be taken by the Board of Directors or any holder of securities with respect to the subject matter of this Article XIII. I. Injunctive Relief. The corporation is entitled to injunctive relief in any court of competent jurisdiction to enforce the provisions of this Article XIII and each holder of the securities of the corporation shall be deemed to have acknowledged, by acquiring the securities of the corporation, that the failure to comply with this Article XIII will expose the corporation to irreparable injury for which there is no adequate remedy at law and that the corporation is entitled to injunctive relief to enforce the provisions of this Article XIII. J. Legend. The restrictions set forth in this Article XIII shall be noted conspicuously on any certificate representing securities of the corporation in accordance with the requirements of the Delaware General Corporation Law and applicable Gaming Laws. - 7 - EX-10.4 4 dex104.txt PURCHASE AGREEMENT - ROTHBART AND PINNACLE Store # ______ Inglewood, California PURCHASE AGREEMENT Between ROTHBART DEVELOPMENT CORPORATION, a California corporation ("Rothbart") and PINNACLE ENTERTAINMENT, INC. a Delaware corporation ("Seller") June 14, 2002 TABLE OF CONTENTS
Page ---- 1. Sale and Purchase.......................................................................... 1 2. Purchase Price............................................................................. 1 3. Escrow..................................................................................... 2 4. Survey..................................................................................... 3 5. Contingency Period......................................................................... 3 6. Title Insurance............................................................................ 4 7. Title and Deed............................................................................. 4 8. Condemnation............................................................................... 5 9. Taxes and Assessments...................................................................... 5 10. Transfer and Sales Taxes................................................................... 5 11. Time of the Essence/Defaults/Remedies...................................................... 5 A. Default by Rothbart.................................................................. 6 B. Default by Seller.................................................................... 7 12. Right of Entry............................................................................. 7 13. Brokerage Fees............................................................................. 7 14. Utilities.................................................................................. 7 15. Contingencies and Seller's Warranties...................................................... 7 A. Governmental Approvals To Be Obtained by Rothbart.................................... 7 B. No Seller Obligation to Obtain Governmental Approvals for the Wal-Mart Plan.......... 9 C. Inspections and Soils Tests.......................................................... 10 D. Seller Warranties.................................................................... 10 E. Natural Hazard Disclosure............................................................ 11 F. Real Estate Committee Approval....................................................... 11 G. Intentionally Deleted................................................................ 11 H. Parcel Map........................................................................... 11 I. Additional Rothbart Covenants........................................................ 11 16. Condition of the Property.................................................................. 12 A. AS-IS................................................................................ 12 B. Hazardous Substances................................................................. 12
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Page ---- 17. Notices.................................................................................... 13 18. Closing.................................................................................... 13 A. Closing Date......................................................................... 13 B. Extensions for Litigation............................................................ 13 C. Escrow Holder's Duties............................................................... 14 19. Closing Costs.............................................................................. 15 20. Time of Essence; Acceptance................................................................ 15 21. Entire Agreement........................................................................... 15 22. Headings................................................................................... 16 23. Modifications.............................................................................. 16 24. Successors................................................................................. 16 25. Non Foreign Affidavit...................................................................... 16 26. Effective Date............................................................................. 16 27. Survival................................................................................... 16 28. Condition of Property...................................................................... 16 29. Development Covenant....................................................................... 16 30. Cooperation in Exchange.................................................................... 17 31. Confidentiality............................................................................ 17 33. Counterparts............................................................................... 17 34. Choice of Law.............................................................................. 18 35. Severability............................................................................... 18 36. Relationship of Parties.................................................................... 18 37. No Obligations to Third Parties............................................................ 18 38. Attorneys' Fees............................................................................ 18 39. Knowledge.................................................................................. 18
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Page ---- SCHEDULE OF EXHIBITS THE PROPERTY........................................................................... Exhibit "A" LAST VESTING DEED...................................................................... Exhibit "B" INTENTIONALLY DELETED.................................................................. Exhibit "C" INSTRUCTIONS TO SURVEYORS.............................................................. Exhibit "D" REAL PROPERTY TAX GUIDELINES........................................................... Exhibit "E" INTENTIONALLY DELETED.................................................................. Exhibit "F" GOVERNMENTAL APPROVALS................................................................. Exhibit "G" WAL-MART PLAN.......................................................................... Exhibit "H" SELLER'S MATERIALS..................................................................... Exhibit "I" CONTINGENCY MILESTONES................................................................. Exhibit "J"
-iii- Inglewood, California PURCHASE AGREEMENT This Agreement is dated as of the _____ day of June, 2002, between PINNACLE ENTERTAINMENT, INC., a Delaware corporation ("Seller"), and ROTHBART DEVELOPMENT CORPORATION, a California corporation, or nominee if permitted pursuant to Section 24 hereof ("Rothbart"); W I T N E S S E T H: 1. Sale and Purchase. Seller shall sell and Rothbart shall purchase, subject to the terms and conditions herein, an approximately sixty (60) acre tract of land (the "Property") more particularly described in Exhibit "A" attached hereto and made a part hereof located in the City of Inglewood (the "City"), Los Angeles County (the "County"), California. Seller warrants that it owns the Property. Attached hereto as Exhibit "B" is the last vesting deed recorded in the Official Records of the County with respect to the Property. 2. Purchase Price. The purchase price, subject to the provisions of Section 4 contained herein, for the Property shall be Thirty-Six Million and No/100 Dollars ($36,000,000.00) computed at Six Hundred Thousand and No/100 Dollars ($600,000.00) per acre (the "Purchase Price") payable as follows: (a) Twenty-Five Thousand and No/100 Dollars ($25,000.00) shall be paid within seven (7) days of the Effective Date of this Agreement to the Escrow (as defined below) to be held in an interest bearing account (the "Initial Deposit"). Interest accruing on the Initial Deposit shall be added to the Initial Deposit and shall be released to the party entitled thereto pursuant to the terms of this Agreement; (b) An additional Three Hundred Twenty-Five Thousand and No/100 Dollars ($325,000.00) shall be paid to the Escrow, to be held in an interest bearing account, within five (5) days of the expiration of the Contingency Date ("Additional Deposit"). As an alternative, Wal-Mart (as hereinafter defined in Section 24) may elect to have any Deposit (as hereinafter defined in Section 2(d)) required hereunder, whether the Initial Deposit, Additional Deposit, Extension Deposit, Additional Extension Deposit, or otherwise, allocated as such deposit, as the case may be, pursuant to an irrevocable letter of credit existing in favor of Escrow Holder upon delivery of a copy of this fully executed Agreement to Escrow Holder ("Letter of Credit"). In the event Wal-Mart elects to allocate any such Deposit pursuant to the Letter of Credit, Wal-Mart agrees to maintain the Letter of Credit during the entirety of the term of this Agreement. (c) The balance of the Purchase Price shall be paid into Escrow on the date of the closing of this sale (the "Closing") by Federal wire transfer. Rothbart shall likewise deposit its share of Escrow charges and other charges as set forth in this Agreement. -1- (d) The term "Deposit" shall mean the Initial Deposit until such time as pursuant to this Section 2, Rothbart is obligated to deposit the Additional Deposit, and thereafter shall mean both the Initial Deposit and the Additional Deposit until such time as Rothbart may elect to make one or more Extension Deposits or Additional Extension Deposits pursuant to Section 18.B, and thereafter shall mean the Initial Deposit, the Additional Deposit, any Extension Deposits and any Additional Extension Deposits. The Deposit shall be non-refundable to Rothbart in the event that Seller is entitled to liquidated damages pursuant to Section 11.A. (e) Except as otherwise provided herein, an amount equal to one-fourth (1/4) of the sum of the (a) Initial Deposit, plus (b) the Additional Deposit shall be automatically earned by Seller and shall be nonrefundable to Rothbart on each of the 91/st/, 180/th/, 270/th/, and 365/th/ day following the Opening of Escrow (each earned, nonrefundable portion of the Initial Deposit and the Additional Deposit shall be referred to herein as the "Nonrefundable Deposit"). In the event Rothbart makes any Extension Deposit, or Additional Extension Deposit pursuant to Section 18.B, any such Extension Deposit or Additional Extension Deposit shall become a part of the "Nonrefundable Deposit". The Nonrefundable Deposit shall be retained by Escrow Holder and shall be fully applicable toward the Purchase Price upon the Closing. In the event that Rothbart is entitled to terminate this Agreement and obtain a return of the Deposit, Rothbart shall only be entitled to a return of the Deposit, less the aggregate Nonrefundable Deposit. Notwithstanding the foregoing: (i) in the event that Rothbart is unable to obtain Final Approval (as hereinafter defined in Section 15.A), Seller shall only be entitled to retain an amount equal to one-third (1/3) of the Nonrefundable Deposit; or (ii) in the event that Rothbart is entitled to terminate this Agreement because of a default of Seller, because Seller causes a change in the condition of title or physical condition of the Property, or because the Property is subject to a condemnation proceeding (as provided in Section 8 hereof), then in such event, Rothbart shall be entitled to a refund of the entirety of the Deposit, including the portion deemed to be the Nonrefundable Deposit. 3. Escrow. (a) For all purposes, the date of the "Opening of Escrow" shall be the date this Agreement is deposited with Fidelity National Title Insurance Company, National Title Services, Wellington Center, 14643 Dallas Parkway, Suite 380, Dallas, TX 75240 (the "Escrow") as escrow holder ("Escrow Holder"), whether or not escrow instructions have been executed. Escrow fees shall be subject to the review and approval of Rothbart and Seller, and then shall be shared in the manner provided herein. The "Close of Escrow" or the "Closing" shall be the date Seller's grant deed for the Property in accordance with this Agreement ("Grant Deed") is recorded. In the event of any inconsistency between any such escrow instructions and this Agreement, this Agreement shall control, notwithstanding the fact that either party may have intentionally or inadvertently executed such inconsistent instructions. (b) Provided Rothbart has advised Seller, in writing, of the appropriate vesting information, Seller shall provide Rothbart with a copy of the Grant Deed, 2 fully executed and notarized, at least seven (7) days prior to the Closing. Seller shall deposit the originally executed Grant Deed in Escrow at least two (2) business days prior to the Closing. 4. Survey. Rothbart shall order a certified ALTA boundary line and topographic survey of the Property (the "Surveys"). Rothbart shall pay for the Surveys. The Surveys shall (i) be prepared by a registered land surveyor pursuant to the instructions attached hereto as Exhibit "D", and (ii) contain an accurate legal description of the Property, and (iii) depict, and note the applicability of, every title exception contained in the Commitment (as hereinafter defined in Section 6). If the Surveys reveal that the actual area is more or less than the approximation shown above, the Purchase Price to be paid hereunder shall be adjusted accordingly. 5. Contingency Period. In addition to any other conditions of Rothbart's obligations under this Agreement, until the date that is the ninety (90) days following the Opening of Escrow (the "Contingency Date"), Rothbart shall have the right to review and approve or disapprove the matters identified in subparagraphs (a)-(e) of this Section 5, and Rothbart's obligations hereunder shall be conditioned upon Rothbart's approval of such matters on, or before, the Contingency Date, in its sole and absolute discretion. On, or before, the Contingency Date, Rothbart shall, by written notice to Seller and Escrow Holder, either (1) terminate this Agreement based upon Rothbart's dissatisfaction with the Property, (2) approve the Property with regard to all matters identified in subparagraphs (a)-(e) below and waive this condition to the Close of Escrow, or (3) approve the Property with regards to all matters identified in subparagraphs (a)-(e) below and waive this condition to the Close of Escrow, subject only to Seller's written agreement to eliminate or ameliorate matters that Rothbart may have disapproved prior to the Contingency Date, in the event Seller so elects to eliminate or ameliorate such matters in its sole and absolute discretion. The failure of Rothbart to approve all matters identified in subparagraphs (a)-(e) below (subject only to Seller's written agreement to eliminate or ameliorate matters that Rothbart may have disapproved prior to the Contingency Date, in the event Seller so elects to eliminate or ameliorate such matters in its sole and absolute discretion) by written notice to Seller on or before the Contingency Date shall be conclusively deemed to be disapproval thereof by Rothbart and this Agreement shall terminate, in which event Rothbart shall be entitled to the return of its Deposit, and all interest accrued thereon, and neither party shall have any further rights or obligations hereunder, except as otherwise provided in this Agreement. The matters subject to Rothbart's approval prior to the Contingency Date are as follows: (a) Exceptions which are disclosed in the Commitment (as defined in Section 6 hereof); (b) Matters disclosed by the Surveys; (c) Rothbart's physical inspection of the Property pursuant to Sections 12 and 15.C, or other matters that Rothbart deems relevant; (d) The approval of the Property by the Wal-Mart Real Estate Committee pursuant to Section 15.F; and (e) Assessments and bonds encumbering the Property (other than those created by Rothbart or any party on Rothbart's behalf). 3 In the event that, prior to the Close of Escrow, there is a change in any of the matters set forth in Section 5(a), (b), (c), or (e), previously approved by Rothbart pursuant to this Section 5, Rothbart shall have ten (10) days from the date Rothbart first learns of such change to approve or disapprove in writing to Seller such changed matter, in its sole and absolute discretion. The failure of Rothbart to approve or disapprove such changed matter by written notice to Seller on or before the expiration of such additional ten (10) day period shall be conclusively deemed disapproval thereof by Rothbart. If Rothbart disapproves or is deemed to have disapproved any such changed matter, and Seller, in its sole and absolute discretion, does not elect by written notice given to Rothbart and Escrow Holder within ten (10) days thereafter to eliminate or ameliorate such matter to Rothbart's satisfaction in its sole and absolute direction, then Rothbart shall have the option within ten (10) days after receipt of such notice from Seller to either: (1) waive its disapproval and approve such changed matter; or (2) terminate this Agreement and Escrow Holder shall return to Rothbart and/or Seller, as applicable, the Deposit pursuant to the Section 2(e) hereof. The failure of Rothbart to make the foregoing election shall be deemed an election by Rothbart to exercise the termination option in subpart (2) of the immediately preceding sentence. 6. Title Insurance. Rothbart shall order a standard form ALTA Owner's Title Commitment Policy (the "Commitment") covering the Property and issued by Fidelity National Title Insurance Company, National Title Services, Wellington Center, 14643 Dallas Parkway, Suite 380, Dallas, TX 75240 ("Title Company"), together with copies of all instruments, if any, referred to in the Commitment as exceptions to title. The Commitment shall also contain the Title Company's commitment to issue such California Land Title Association endorsements ("CLTA Endorsements") to the title policy as Rothbart or its lender shall require. Rothbart may, not later than sixty (60) days after the receipt of its Survey and the Commitment, but without affecting the Contingency Date, give notice in writing to Seller of any defects in or objections to the title as so evidenced. Seller shall, within fifteen (15) days of receipt of said notice, give Rothbart written notice ("Seller's Title Notice") of those disapproved or conditionally approved title matters, if any, which Seller, in its sole and absolute discretion, covenants and agrees to either eliminate from the Title Policy (as hereinafter defined in Section 7) as exceptions to title to the Property or to ameliorate to Rothbart's satisfaction by the Closing Date (as hereinafter defined in Section 18.A) as a condition to the Close of Escrow for Rothbart's benefit. If Seller does not elect to eliminate or ameliorate to Rothbart's satisfaction any disapproved or conditionally approved title matters, or if Rothbart disapproves of Seller's Title Notice, then Rothbart shall by a writing delivered to Seller and Escrow Holder on, or before, the Contingency Date, either (1) waive its prior disapproval and approve such title matter, or (2) terminate this Agreement and the Escrow in which event Rothbart shall be entitled to the return of the Deposit, and this Agreement, the Escrow and the rights and obligations of the parties hereunder shall terminate, except as otherwise provided in this Agreement. Rothbart's failure to deliver a notice as required in the preceding sentence shall be deemed an election by Rothbart to terminate this Agreement pursuant to subpart (2) of the preceding sentence. 7. Title and Deed. At the Closing, Seller shall convey to Rothbart, marketable title to the Property, free and clear of any and all encumbrances, subject only to: (i) a lien to secure payment of taxes, not delinquent, (ii) matters affecting the condition of title created by or with the written consent of Rothbart or as a direct result of Rothbart's (or any party on behalf of Rothbart) acts or omissions, and (iii) those title matters that are approved by Rothbart pursuant to Sections 5 and 6 and (iv) matters reflected on the Surveys that are approved by Rothbart pursuant to Sections 5 and 6 (all of the foregoing in clauses (i) through (iv) hereinafter referred to as the "Permitted Exceptions"). Mortgages, deeds of 4 trust, mechanics' liens and other such monetary encumbrances, other than those created by or with the consent of Rothbart or as a direct result of Rothbart's (or any party on behalf of Rothbart) acts or omissions ("Monetary Liens"), are not Permitted Exceptions and shall be removed by Seller through Escrow. At the Closing, Rothbart shall also be able to obtain a standard form ALTA Owner's Title Insurance Policy (the "Title Policy") issued by the Title Company, insuring marketable title to Rothbart in the full amount of the Purchase Price and containing no exceptions or conditions other than the Permitted Exceptions, and containing the CLTA Endorsements which Rothbart or its lender shall require; provided, however, that Rothbart's inability to obtain a requested endorsement shall not be a failure of condition to its obligations under this Agreement. Seller shall pay for the CLTA portion of the Title Policy, in an amount not to exceed Fifty-Six Cents ($.56) per $1,000.00 of coverage, and Rothbart shall pay for the ALTA portion of the Title Policy and any and all endorsements, except for those endorsements that Seller expressly agrees to provide, in Seller's sole and absolute discretion, pursuant to Sections 5 and/or 6, in order to eliminate or ameliorate Rothbart's disapproved or conditionally approved title matters. 8. Condemnation. If, prior to the Closing, all or any part of the Property shall be condemned by governmental or other lawful authority, Rothbart shall have the option of (a) completing the purchase in accordance with this Agreement, in which event all condemnation proceeds or claims thereof shall be assigned to Rothbart, or (b) canceling this Agreement, in which event the Deposit shall be returned to Rothbart and this Agreement shall be terminated with neither party having any rights against the other, except as expressly provided herein. 9. Taxes and Assessments. Real property taxes, water rates and sewer charges and rents, if any, shall be prorated and adjusted on the basis of the actual days in the calendar year, Seller to have the last day, to the date of Closing. Taxes for all prior years shall be paid by Seller. If the Closing shall occur before the tax rate is fixed for the then current year, the apportionment of taxes shall be upon the basis of the tax rate for the preceding year applied to the latest assessed valuation, with the proration to be adjusted between the parties based on actual taxes for the year in which the Closing occurs, at the time such actual taxes are determined. Assessments and bonds, either general or special, for improvements completed prior to the date of Closing, whether matured or unmatured, shall be paid in full by Seller. Furthermore, the Seller shall cause to be completed the Real Property Tax Guidelines For Wal-Mart Built Stores attached hereto as Exhibit "E" and upon completion will forward to Wal-Mart's Real Estate Manager. Seller hereby agrees to pay, reimburse, indemnify, defend and hold Rothbart harmless from any supplemental assessments, or taxes or assessments (and any late charges or penalties associated therewith) levied by the taxing authorities after the Close of Escrow to the extent attributable to time periods before the Close of Escrow. Notwithstanding the foregoing, Seller will not be responsible for any supplemental assessments, or taxes or assessments (and any late charges or penalties associated therewith) caused by Rothbart or its employees, agents or contractors. 10. Transfer and Sales Taxes. The expense and cost of all Federal, state and local documentary or revenue stamps, transfer or sales taxes, if any, relating to the sale of the Property shall be paid by Seller on the date of Closing. Both parties agree to execute any tax returns required to be filed in connection with any such taxes. 11. Time of the Essence/Defaults/Remedies. Time is of the essence of this Agreement and failure to comply with this provision shall be a material breach of this 5 Agreement. Subject to the further provisions of this Section 11, if the Escrow fails to close as provided herein, Rothbart or Seller may at any time thereafter give written notice to Escrow Holder to cancel the Escrow, and pay or return the Deposit to the party or parties entitled hereto under the terms hereof, including, without limitation, Section 2(e), and return all other money and documents in Escrow to their respective depositors. Escrow Holder shall comply with such notice without further consent from any other party to the Escrow. Cancellation as provided herein shall be without prejudice to whatever legal rights Rothbart and Seller may have against each other, including as provided in Sections 12 and 13 hereof. A. Default by Rothbart. IF ROTHBART FAILS TO COMPLETE SAID PURCHASE AS HEREIN PROVIDED BY REASON OF ANY DEFAULT BY ROTHBART, SELLER SHALL BE RELEASED FROM ALL OBLIGATIONS UNDER THIS AGREEMENT (EXCEPT FOR THE EFFECT OF THIS SECTION 11.A) AND SELLER, BY INITIALING THIS PARAGRAPH, SHALL HAVE RELEASED ROTHBART FROM ANY CLAIMS OR CAUSES OF ACTION ARISING OUT OF SUCH DEFAULT, AND SELLER SHALL HAVE AGREED THAT SELLER SHALL RETAIN THE "DEPOSIT" PLUS ACCRUED INTEREST THEREON AS LIQUIDATED DAMAGES, AND THAT SUCH RETENTION SHALL BE SELLER'S SOLE REMEDY AGAINST ROTHBART IN REGARD TO SUCH DEFAULT. THE PARTIES HERETO HAVE CONSIDERED THE AMOUNT OF DAMAGES WHICH SELLER IS LIKELY TO INCUR IN THE EVENT OF A DEFAULT OR BREACH HEREUNDER BY ROTHBART, AND THE PARTIES HERETO HAVE AGREED THAT THE DEPOSIT PLUS ANY ACCRUED INTEREST THEREON IS A REASONABLE APPROXIMATION AND LIQUIDATION OF SELLER'S POTENTIAL DAMAGES, CONSIDERING ALL OF THE CIRCUMSTANCES EXISTING ON THE DATE OF THIS AGREEMENT, INCLUDING THE RELATIONSHIP OF THE SUM TO THE RANGE OF HARM TO SELLER THAT REASONABLY COULD BE ANTICIPATED AND THE ANTICIPATION THAT PROOF OF ACTUAL DAMAGES WOULD BE COSTLY OR INCONVENIENT. THE RECEIPT AND RETENTION OF SUCH AMOUNT BY SELLER IS INTENDED TO CONSTITUTE THE LIQUIDATED DAMAGES TO SELLER PURSUANT TO THE CALIFORNIA CIVIL CODE, AND SHALL NOT BE DEEMED TO CONSTITUTE A FORFEITURE OR PENALTY WITHIN THE MEANING OF THE CALIFORNIA CIVIL CODE, OR ANY SIMILAR PROVISION. SAID AMOUNT OF LIQUIDATED DAMAGES SHALL BE IN LIEU OF ANY OTHER REMEDIES, DAMAGES OR SUMS DUE OR PAYABLE TO SELLER UNDER THIS AGREEMENT. IN NO EVENT SHALL SELLER'S ACCEPTANCE OF THE LIQUIDATED DAMAGES BE A LIMIT OF ANY KIND ON ROTHBART'S INDEMNITY AND DEFENSE OBLIGATIONS PURSUANT TO THIS AGREEMENT. IN PLACING THEIR INITIALS AT THE PLACES PROVIDED, EACH PARTY SPECIFICALLY CONFIRMS THE ACCURACY OF THE STATEMENTS MADE ABOVE. /s/ SN /s/ LSO ROTHBART SELLER 6 B. Default by Seller. If Seller fails to complete the sale of the Property as herein provided by reason of any default by Seller, Rothbart may, at its option, exercise every right and remedy available at law and in equity under California law, including but not limited to the right to: (i) rescind this Agreement and recover from Escrow or Seller the Deposit, as well as any and all reasonable expenses, paid or incurred by or on behalf of Rothbart in connection with this Agreement, (ii) proceed with this Agreement and take the Property as is, subject to the qualification below, (iii) record a lis pendens and enforce Rothbart's right to specific performance and related injunctive relief, and/or (iv) select another location for Rothbart's contemplated development, and bring an action for its actual and consequential damages. Seller acknowledges that if Rothbart seeks specific performance of this Agreement, Rothbart shall be entitled to an order by the court enforcing this Section, without any need to make a showing that the Property is unique, or that its damages are liquidated and not speculative, or no other remedies are practical, available, effective or adequate. Seller acknowledges that if Rothbart seeks injunctive relief, the same may be fashioned in a mandatory or prohibitive manner. 12. Right of Entry. At any time prior to the Closing, at Rothbart's sole expense and subject to the terms and conditions of the Early Entry Agreement of even date herewith, between Rothbart and Seller (the "Early Entry Agreement"), Rothbart or its authorized agents shall have the right to enter upon the Property for any lawful purpose, including without limitation making such surveys and site analyses, test borings and engineering studies and to erect such signs as Rothbart may deem necessary. Rothbart shall indemnify and hold Seller harmless from and against any and all claims and liens as specified in the Early Entry Agreement. 13. Brokerage Fees. Both parties represent that no broker is involved in this Agreement and each party agrees to indemnify the other against brokerage or commission claims arising out of the indemnifying party's actions. 14. Utilities. Seller warrants that to the actual knowledge of Seller, except as described in Seller's Materials (as defined herein), no public agency or utility has, as of the date of this Agreement, imposed a connection or service commencement fee or assessment which would be a precondition to Rothbart's use of said services, nor is any moratorium against connection to such services, or quantitative or qualitative limitation on such services in place at the date hereof. 15. Contingencies and Seller's Warranties. A. Governmental Approvals To Be Obtained by Rothbart. Rothbart's obligation to close Escrow is expressly conditioned on the general plan, applicable specific plan, zoning, zone clearance, subdivision map, environmental clearance, planned development program or permit, conditional use permit program, architectural review process, redevelopment plan, approved traffic study, development agreement, redevelopment agreement, subdivision improvement agreement, special assessment district creation and bond issuance, and other discretionary approval programs of the governmental agencies and owners associations with jurisdiction over the Property, which are specified on Exhibit "G" hereto (hereinafter, individually 7 and collectively the "Governmental Approvals") permitting the uses of the Property for business retail usage to be undertaken by Rothbart, Wal-Mart and/or Sam's specified on Exhibit "H" hereto (hereinafter, collectively, "the Wal-Mart Plan"). Rothbart agrees that since the Property does not have all of the Governmental Approvals necessary for the Wal-Mart Plan, Rothbart shall, at its expense and as set forth in Section 15.I hereof, submit an application to obtain each and every Governmental Approval for the Wal-Mart Plan. In addition, it is acknowledged and agreed that if, (i) on or before the Contingency Date, Rothbart delivers written notice to Seller that a permit or approval provided for in Chapter 12 of the Inglewood Municipal Code (pertaining to Planning and Zoning) is necessary for the development and operation of a Wal-Mart Store but was omitted despite Rothbart's reasonable efforts to identify necessary Planning and Zoning permits and approvals for the Wal-Mart Plan, or (ii) at any time, Rothbart delivers written notice to Seller that (a) the City of Inglewood has imposed as a condition of approval for any Governmental Approval being issued by the City of Inglewood, that Rothbart, obtain a discretionary permit or approval from another governmental agency, and (b) Rothbart's inability to obtain any such permit or approval from the other governmental agency on reasonable conditions would affect Rothbart's ability to use the Property consistent with the Wal-Mart Plan, then: (x) the list of Governmental Approvals shall be amended to add such permit or approval to the list of Governmental Approvals for the Wal-Mart Plan; and (y) the Contingency Schedule (discussed in Section 15.I below) shall be revised to include a timetable for processing and obtaining the City of Inglewood's and (if applicable) other agency's approval of such permit or approval. Rothbart, at its sole cost and expense, shall pursue the applications and processing to completion and shall execute all necessary and appropriate instruments, provided that each representation, covenant, condition, limitation, exaction, fee and design change mandated by the governmental agencies shall be subject and contingent to Rothbart's review, approval or disapproval, counter-offer or counter-condition, and Rothbart shall not be obligated to give any binding or final approval of any of the same unless and until: (i) the totality of the Governmental Approvals for the Wal-Mart Plan have been reviewed and finally approved in writing (and by publication of necessary ordinances) by each and every one of the governmental agencies charged with originally granting the Governmental Approvals for the Wal-Mart Plan, (ii) any ordinances with respect thereto having taken effect, (iii) the time period has passed for appeal of any such Governmental Approvals for the Wal-Mart Plan to any administrative agency with jurisdiction over such Governmental Approvals for the Wal-Mart Plan, (iv) the 30-day statute of limitations for filing challenges to the Environmental Impact Report of the Governmental Approvals for the Wal-Mart Plan has passed without any litigation having been filed to challenge the same, (iv) no notice of intent to circulate an initiative petition or petition for referendum has been filed with the City of Inglewood with respect to the Governmental Approvals for the Wal-Mart Plan within 30 days after the City of Inglewood's approval of the Governmental Approvals for the Wal-Mart Plan and (v) any appeals or litigation with respect to (iii) or (iv) have been prosecuted and resolved in a manner which is not subject to remand to lower 8 courts or governmental agencies, all of the enumerated processes being the "Final Approval". If the Final Approval has not occurred, and/or all of the Governmental Approvals for the Wal-Mart Plan have not been obtained on or before the scheduled Closing, this Agreement shall, at Rothbart's option, but subject to Seller's termination rights under this Agreement, either (a) continue in full force and effect until the same has occurred, or (b) be of no further force and effect, and Escrow Holder shall return to Rothbart and/or Seller, as applicable, the Deposit pursuant to the Section 2(e) hereof, or (c) Rothbart shall waive some or all parts of this contingency, (with or without imposition of further conditions not involving additional dollar expense by Seller) at Rothbart's sole and absolute discretion, and proceed with the Closing. Seller and Rothbart agree that this contingency shall be deemed satisfied in the event that the Director of Planning or the Director of Building and Safety in the municipality where the Property is located issues an unconditional letter indicating that so long as Rothbart complies with the Conditions of Approval for the Governmental Approvals for the Wal-Mart Plan and applicable building codes, Rothbart will be able to obtain a building permit for construction of the improvements authorized by the Governmental Approvals for the Wal-Mart Plan. B. No Seller Obligation to Obtain Governmental Approvals for the Wal-Mart Plan. Seller shall be under no obligation to obtain any Governmental Approvals for the Wal-Mart Plan. In connection with the Governmental Approvals for the Wal-Mart Plan described in Sections 15.A hereof, Seller agrees to (i) reasonably cooperate with Rothbart including using its best efforts to execute all such applications for Governmental Approvals for the Wal-Mart Plan which require Seller's signature upon Rothbart's written request but in no event later than ten (10) business days after receipt of Rothbart's written request therefor and (ii) make such appearances as may be reasonably requested by Rothbart which are necessary to obtain Governmental Approvals for the Wal-Mart Plan, in each case provided that Seller does not bear any expense for that purpose and or appearance is reasonably necessary for the processing of Governmental Approvals for the Wal-Mart Plan. Notwithstanding anything to the contrary in this Agreement Rothbart shall not take any actions that subject the Property to any zone changes, conditions, restrictions, impositions or obligations of any kind which become effective and binding upon the Property or Seller prior to the Closing without Seller's consent which may be granted or withheld in Seller's sole and absolute discretion. Rothbart shall be solely and absolutely responsible for any obligations arising under any such permits, zoning changes, conditions, restrictions, impositions or obligations placed upon the Property by Rothbart's (or its agents') activities, and hereby agrees to indemnify, protect, defend (by counsel satisfactory to Seller) and hold Seller harmless from any and all claims, demands, losses, liabilities, costs and expenses (including attorneys' fees) arising therefrom. The foregoing indemnity shall be for the benefit of Seller, whether or not the Closing occurs and will survive the Closing or earlier termination of this Agreement. 9 C. Inspections and Soils Tests. Subject to the terms and conditions of the Early Entry Agreement, Rothbart shall have the right, at Rothbart's expense, to select licensed engineers, contractors, and/or other qualified professional(s) to make "Inspections" (including tests, surveys, other studies, inspections, investigations and interviews of persons familiar with the Property) concerning the Property, including but not limited to tests of structures, wells, septic tanks, and underground storage tanks on the Property, soils, geologic hazards, utility lines and systems, possible environmental hazards, utility lines and systems, possible environmental hazards such as asbestos, formaldehyde, radon gas, methane gas, pesticide residues, oil and gas deposits, and other "Hazardous Substances" as defined in Section 16.B, below. Rothbart's obligation to Close Escrow is expressly conditioned upon Rothbart's approval prior to the Contingency Date of Inspection results which, in the sole judgment of Rothbart, evidence that the Property is suitable for Rothbart's intended use. Rothbart shall order the Inspections within thirty (30) days of receipt of the Surveys, provided for in Section 4 hereof. Seller shall deliver to Rothbart, within ten (10) days of the date hereof, copies of all documents and materials listed on Exhibit "I" attached hereto and incorporated by reference ("Seller's Materials"), and Seller's delivery of Seller's Materials shall be Seller's representation to Rothbart that there are no other reports or materials regarding the Property prepared on Seller's behalf in Seller's possession. Rothbart shall keep the Property free and clear of any liens, and repair any material physical damage to the Property arising as a result of such Inspections. Upon receipt of reports of such Inspections, Rothbart shall promptly deliver one copy of the same to Seller. Notwithstanding anything to the contrary in this Agreement, it is acknowledged and agreed that Seller shall have no obligation to remedy any condition of the Property disclosed by Seller or otherwise discovered by Rothbart unless: (a) Seller so elects in Seller's sole and absolute discretion, or (b) such condition is created by, or on behalf of, Seller after the date hereof. D. Seller Warranties. Seller warrants that Seller has no actual knowledge of any notice of violations of city, county, state, federal, building, land use, fire, health, safety, environmental, hazardous materials or other governmental or public agency codes, ordinances, regulations, or orders with respect to the Property, except as may be described in Seller's Materials. Seller warrants that to Seller's actual knowledge, no litigation is pending or threatened with respect to the Property or Seller's interest therein. Seller warrants that to Seller's actual knowledge, there is no action, litigation or proceeding pending or threatened to take all or any portion of the Property by eminent domain. Seller warrants that to Seller's actual knowledge, other than as may be identified in the Surveys, Seller's Materials and/or by Rothbart's reasonable inspection of the Property, there are no encumbrances or easements affecting the Property, except as set forth in the Commitment. The foregoing warranties shall be true as of the date of this Agreement and the Close of Escrow. If, prior to the Close of Escrow, Rothbart learns that any of the foregoing warranties or any disclosures by Seller are misleading, incomplete or otherwise incorrect, Rothbart may utilize any of its remedies provided in this Agreement. 10 E. Natural Hazard Disclosure. Within twenty (20) days following the Opening of Escrow, Seller shall deliver to Rothbart a natural hazards disclosure report prepared by a reputable, and, if required, licensed, third party preparer of Seller's selection disclosing whether or not the Property is located within (i) a special flood hazard zone designated by the Federal Emergency Management Agency (Government Code (S) 8589.3); (ii) an area of potential flooding shown on an inundation map under Government Code (S) 8959.5 (Government Code (S) 8959.4); (iii) a very high fire hazard severity zone designated by Government Code (S) 51179 (Government Code (S) 51183.5); (iv) a wildland area that may contain substantial forest fire risks and hazards under Public Resources Code (S) 4125 (Public Resources Code (S) 4136); (v) an earthquake fault zone under Public Resources Code (S) 2622 (Public Resources Code (S) 2621.9); or (vi) a seismic hazard zone under Public Resources Code (S) 2696 (Public Resources Code (S) 2694). F. Real Estate Committee Approval. Rothbart's obligation to Close Escrow is wholly contingent upon Rothbart being able to obtain approval prior to the Contingency Date, from Wal-Mart's Real Estate Committee (the "Committee"), of the placement of a Wal-Mart and Sam's store on the Property in Inglewood, California. It is understood that Rothbart shall notify Seller in writing prior to the Contingency Date of the decision of the Committee. If the decision is "yes" this Agreement shall continue in full force and effect. If the decision is "no" Escrow Holder shall return to Rothbart and/or Seller, as applicable, the Deposit pursuant to Section 2(e) hereof, and this Agreement, the Escrow and the rights and obligations of the parties hereunder shall terminate. The failure of Rothbart to provide such written notice to Seller on or prior to the Contingency Date shall be conclusively deemed a "no" decision pursuant to the preceding sentence. G. Intentionally Deleted. H. Parcel Map. This Close of Escrow and Seller's and Wal-Mart's obligation to consummate the transactions contemplated by this Agreement are subject to the recording of a parcel map creating the Property as separate legal parcels, the size and configuration of which shall be determined by Rothbart, in its sole and absolute discretion. I. Additional Rothbart Covenants. Notwithstanding the foregoing provisions of this Section 15 to the contrary, Rothbart covenants and agrees to make reasonable efforts to adhere to the schedule attached hereto as Exhibit "J" for processing the Governmental Approvals for the Wal-Mart Plan (the "Contingency Schedule") and to satisfy each of its obligations under the Contingency Schedule (each a "Contingency Milestone") in accordance with the Contingency Schedule. At anytime upon Rothbart's election, or from time to time upon fifteen (15) days written request from Seller, Rothbart shall provide Seller with a written update detailing its progress with regard to the Contingency Milestones (each a "Contingency Update"). If Rothbart fails to make reasonable efforts to adhere to the Contingency Schedule and diligently pursue to completion the Governmental Approvals for the Wal-Mart Plan, Seller shall have the right to terminate this Agreement by written notice thereof to Rothbart and to Escrow Holder, provided Seller exercises such 11 right to terminate within fifteen (15) days of the receipt of the Contingency Update that evidences such failure to reasonably adhere to the Contingency Schedule. If Seller so elects to terminate this Agreement, this Agreement shall terminate, and Escrow Holder shall return to Rothbart and/or Seller, as applicable, the Deposit pursuant to Section 2(e) hereof. 16. Condition of the Property. A. AS-IS. As a material inducement to the execution and delivery of this Agreement by Seller and the performance by Seller of its duties and obligations hereunder, Rothbart does hereby acknowledge, represent, warrant and agree, to and with the Seller, that, except as otherwise expressly provided for in this Agreement, (i) Seller makes no representation or warranty of any kind whatsoever, express or implied, with respect to the Property; (ii) Seller hereby expressly disclaims any responsibility for any loss, claim, cost or liability with respect to the presence, release, handling, use, generation, processing, production, packaging, treatment, storage, emission, discharge, removal or disposal of any Hazardous Substance in or in the vicinity of the Property; (iii) Rothbart is purchasing the Property in an "AS IS, WHERE IS" condition as of the date of the Close of Escrow with respect to any facts, circumstances, conditions and defects, including, without limitation, any matters disclosed by Seller to Rothbart herein; and (iv) in acquiring the Property, Rothbart will be relying strictly and solely upon its own investigations, inspections and examinations as to all matters relating in any manner to the Property or any interest therein. All materials, including but not limited to the reports referred to in Section 15.C above by third parties and delivered to Rothbart by Seller or any other person acting for or on behalf of Seller, whether in the form of maps, surveys, reports, studies or otherwise, have been furnished by Seller to Rothbart solely as a courtesy, without warranty or representation, and neither Seller nor its agents has verified the accuracy of such information or the qualifications of the persons preparing such information. B. Hazardous Substances. To Seller's actual knowledge, Hazardous Substances have been released and are present in the vicinity of the Property and may be present on the Property. To Seller's actual knowledge, the documents listed in Exhibit "I" include all of the environmental studies of the Property prepared on behalf of Seller and in Seller's possession (but Exhibit "I" is not a comprehensive list of any such documentation relative to any adjacent or nearby parcels). To Seller's actual knowledge, except as described above, no other Hazardous Substances have been released on the Property. For purposes hereof, "Hazardous Substances" means any hazardous, toxic, infectious or other material, substance, pollutant or waste defined, designated or listed as such pursuant to the Comprehensive Environmental Response, Compensation and Liability Act, the Federal Water Pollution Control Act, the Clean Air Act, the Safe Drinking Water Act, the Solid Waste Disposal Act, the Atomic Energy Act, the Federal Insecticide, Fungicide and Rodenticide Act and any similar state or local counterparts thereto, as the foregoing have or may be amended from time to time. 12 17. Notices. All notices and other communications required or permitted to be given hereunder shall be in writing and shall be mailed by certified or registered mail, or by reputable overnight courier, postage prepaid, addressed as follows: If to Rothbart: If to Seller: Rothbart Development Corporation Pinnacle Entertainment, Inc. 1801 Avenue of the Stars, Suite 920 330 North Brand Boulevard, Suite 1100 Los Angeles, CA 90067 Glendale, CA 91203 Attention: Stan Rothbart Attention: General Counsel With a Copy to: With a Copy to: Gresham Savage, Nolan & Tilden, LLP Irell & Manella, LLP 600 N. Arrowhead, Suite 300 1800 Avenue of the Stars, Suite 900 San Bernardino, CA 92401-1148 Los Angeles, CA 90067-4276 Attention: Mark A. Ostoich, Esq. Attention: Sandra G. Kanengiser, Esq. or J. Matthew Wilcox, Esq. and Karin Schwindt, Esq. 18. Closing. A. Closing Date. The Closing shall take place at a place and time mutually agreed upon by the parties within thirty (30) days following the date upon which all conditions and contingencies set forth in Sections 15.A and 15.G contained herein are satisfied (the "Closing Date"). Notwithstanding any other provision or contingency in this Agreement to the contrary, including, without limitation, the preceding sentence, if the Closing has not occurred within twelve (12) months following the Opening of Escrow, Seller shall have the right in its sole and absolute discretion to terminate this Agreement; provided, however, that in the event Seller so elects to terminate the Agreement, Rothbart shall have the one-time option (in addition to Rothbart's Section 18.B extension rights) to continue the Agreement and extend the Closing for up to three (3) additional months. Rothbart shall exercise such extension, if at all, by written notice to Seller within fifteen (15) days of Seller's exercise of its termination right set forth above. Notwithstanding any other provision of this Agreement (including without limitation Section 15 hereof), if Rothbart validly extends the Closing but the Closing has not occurred within fifteen (15) months following the Opening of Escrow and Rothbart has not extended the Closing in accordance with Section 18.B hereof, then Seller shall have the right in its sole and absolute discretion, to terminate this Agreement. B. Extensions. (a) In the event that third party litigation challenging the Governmental Approvals for the Wal-Mart Plan or the City's certification of the Environmental Impact Report therefor is filed (the "Litigation"), then notwithstanding Section 18.A hereof, Rothbart shall have the right to extend the Closing for up to three (3) consecutive six (6) month periods commencing from the date such Litigation is filed in accordance with the following procedures. Upon the exercise of any extension right under this Section 13 18.B, Rothbart shall, at Rothbart's sole cost and expense, vigorously defend the Governmental Approvals for the Wal-Mart Plan and the City's certification of the Environmental Impact Report. Rothbart may exercise its initial 6-month extension right relating to such Litigation by providing written notice to Seller of its intention to exercise such right and prior to date which is twelve (12) months after the Opening of Escrow, as such date may be extended pursuant to Section 18.A hereof. and by concurrently depositing into the Escrow an additional deposit in the amount of Fifty Thousand and No/100 Dollars ($50,000.00) (each an "Extension Deposit"). Thereafter, provided Rothbart is in compliance with this Section 18.B and the Litigation has not concluded, Rothbart may exercise subsequent 6-month extension rights relating to such litigation by providing written notice to Seller of its intention to exercise a subsequent 6-month extension right prior to the expiration of the then pending 6-month extension and by concurrently depositing into Escrow an additional Extension Deposit to be held in an interest bearing account. Once paid into Escrow, each Extension Payment shall be added to the Deposit and shall be subject to the provision of Section 2(e) hereof. (b) In the event that either: (i) Rothbart has vigorously defended the Litigation but the Litigation has nonetheless not been concluded within eighteen (18) months of its filing; or (ii) a referendum or initiative challenging the Governmental Approvals for the Wal-Mart Plan or the City's certification of the Environmental Impact Report has been "qualified" or validly placed on a ballot by legislative action, then Rothbart shall have the right to extend the Closing in consecutive three (3) month increments (the "Additional Extensions") by providing written notice to Seller prior to the expiration of the then pending extension and concurrently depositing into Escrow an additional deposit in an amount equal to the then current property taxes and assessments applicable to the Property pro-rated for the relevant three (3) month period (the "Additional Extension Deposit"). Once paid into Escrow, each Additional Extension Deposit shall be added to the Deposit and shall be subject to the provisions of Section 2(e) hereof. Rothbart shall have no further rights to extend the term of this Agreement beyond the period during which the litigation concludes or a vote on the aforementioned referendum or appeal has occurred. (c) Rothbart shall, at its sole cost and expense, indemnify, protect, defend (by counsel satisfactory to Seller) and hold Seller harmless from any and all claims, demands, losses, liabilities, costs and expenses (including attorneys' fees) arising as a result of or in any way relating to the Litigation. The indemnity set forth in this Section 18.B shall be for the benefit of Seller, whether or not the Closing occurs and will survive the Closing or earlier termination of this Agreement. C. Escrow Holder's Duties. In addition to any other obligation of Escrow Holder herein, on the Close of Escrow, Escrow Holder shall (a) record the Grant Deed(s) in the Office of the County Recorder of the County, (b) pay any transfer taxes, (c) instruct the County Recorder to return the Grant Deed(s) to Rothbart, Wal-Mart and Sam's, as the case may be, (d) deliver to Seller the Purchase Price balance, less Seller's Escrow and cash charges, and 14 (e) deliver to the proper parties the Non-Foreign Affidavits and the Title Policy covering the Property subject only to the Permitted Exceptions. 19. Closing Costs. Notwithstanding anything to the contrary contained herein, or in the escrow instructions, the Closing costs shall be paid as follows: By Seller: (a) Title insurance examination and premium for a CLTA policy (in an amount not to exceed Fifty-Six Cents ($.56) per $1,000.00 of coverage); (b) Expenses of curing any title matters that Seller has agreed, in its sole and absolute discretion, to cure pursuant to Sections 5 and/or 6, including the cost of any endorsements that Seller has agreed to pay for pursuant to Sections 5 and/or 6; (c) Preparation and recording of Grant Deed(s); (d) All documentary, stamp and transfer taxes; and (e) One-half (1/2) the Escrow fee, if any; and (f) Amount necessary to cause the removal of all Monetary Liens. By Rothbart: (a) Title insurance premium for the difference between the cost of a CLTA policy (in an amount not to exceed Fifty-Six Cents ($.56) per $1,000.00 of coverage) and an ALTA standard or extended coverage policy and endorsements, if any (other than endorsements Seller has agreed to pay for, in Seller's sole and absolute direction pursuant to Section 5 and/or 6); (b) Cost of the Surveys ordered by Rothbart (if not previously paid for by Rothbart); (c) Preparation of Mortgage, Deed of Trust or other applicable financing instruments; (d) Recording fees for financing instruments; and (e) One-half (1/2) the Escrow fee, if any. 20. Time of Essence; Acceptance. Time is expressly declared to be of the essence of this Agreement. Seller shall have seven (7) business days from the date of receipt of this Agreement to accept and agree to the terms and conditions herein. 21. Entire Agreement. This Agreement, contains the entire agreement between Seller and Rothbart, and there are no other terms, conditions, promises, undertakings, statements or representations, express or implied, concerning the sale contemplated by this Agreement. All Exhibits to which reference is made in this Agreement are deemed incorporated in this Agreement whether or not actually attached. 15 22. Headings. The headings to the Sections hereof have been inserted for convenience of reference only and shall in no way modify or restrict any provisions hereof or be used to construe any such provisions. 23. Modifications. The terms of this Agreement may not be amended, waived or terminated orally, but only by an instrument in writing signed by both Seller and Rothbart. 24. Successors. This Agreement shall inure to the benefit of and bind the parties hereto and their respective successors and assigns. Seller shall not assign this Agreement without Rothbart's consent, which may be withheld in Rothbart's sole discretion. Rothbart may not assign its rights or delegate its obligations without the prior written consent of Seller, which consent shall be in Seller's sole discretion, except, Rothbart shall have the unrestricted right to assign this Agreement to any corporation, partnership or limited liability company or other entity which controls, is controlled by, or is under common control with Rothbart. Notwithstanding the foregoing, concurrently with the Closing, and by written notice from Rothbart to Seller, Rothbart shall be permitted to (i) assign its rights under this Agreement as to that portion of the Property designated "Wal-Mart" on Exhibit "A-1" to Wal-Mart Real Estate Business Trust ("Wal-Mart") or to any corporation, partnership or limited liability company or other entity which controls, is controlled by, or is under common control with Wal-Mart and (ii) assign its rights under this Agreement as to that portion of the Property designated "Sam's" on Exhibit "A-1 to Sam's Real Estate Business Trust ("Sam's") or to any corporation, partnership or limited liability company or other entity which controls, is controlled by, or is under common control with Sam's that portion of the Property designated "Sam's" on Exhibit "A-1". 25. Non Foreign Affidavit. Seller agrees to execute, at the Closing, the Transferor Form attached hereto as Exhibit "E" and made a part hereof, in compliance with Section 1445 of the Internal Revenue Code. It is understood that if there are multiple Sellers, each Seller shall execute a Transferor Form at the Closing. 26. Effective Date. The Effective Date of this Agreement shall be the last date on which all parties hereto have executed this Agreement. 27. Survival. All warranties, representations and covenants herein shall survive the Closing. 28. Condition of Property. It is understood and agreed that Rothbart, or its representative, has made an inspection of the Property prior to the execution of this Agreement, and based on that inspection and information which may have been provided by the Seller as to the condition of the Property, has entered into this Agreement. Seller hereby warrants and guarantees that, except for changes outside of Seller's reasonable control or changes caused by or on behalf of Rothbart, the Property will remain in substantially its present condition, as of the execution of this Agreement to and including the day that title to said Property is transferred to Rothbart. 29. Development Covenant. Rothbart has been advised of, and agrees to comply with, the covenant made by Seller in favor of Churchill Downs California Company ("CDCC") to use commercially reasonable efforts to cause any blasting or major earth moving (not to include surface grading or landscaping) conducted on the Property in connection with any improvements or development thereon, to be conducted at such times 16 and in such a manner so as to mitigate the impact on the business operations of CDCC on the neighboring land. This obligation shall survive the Close of Escrow. 30. Cooperation in Exchange. Rothbart acknowledges that Seller may transfer the Property to Rothbart as part of a tax-deferred exchange by Seller pursuant to Section 1031 of the Internal Revenue Code of 1986 ("Code"), and that Seller has the right to restructure all or a part of the within transaction as provided in Internal Revenue Code ss. 1031 as a concurrent or delayed (non-simultaneous) tax deferred exchange for the benefit of Seller. Rothbart agrees to cooperate, and if requested by Seller, to accommodate Seller in any such exchange, provided that (i) such cooperation and/or accommodation shall be at no further cost or liability to Rothbart and Seller hereby indemnifies Rothbart in connection therewith; (ii) the restructuring of the within transaction shall not prevent or delay the Closing Date; (iii) the Property shall be conveyed by direct deed from Seller to Rothbart; and (iv) Rothbart shall not be obligated to acquire any "replacement property" in order to effect the tax-deferred exchange. Seller, in electing to structure the sale as an exchange, shall have the right to substitute another entity or person, who will be Seller's accommodator in Seller's place and stead. Rothbart and Seller acknowledge and agree that such substitution will not relieve the herein named Seller of any liability or obligation hereunder, and Rothbart shall have the right to look solely to said herein named Seller with respect to the obligations of Seller under this Agreement. 31. Confidentiality. Each party covenants and agrees for the benefit of the other party to endeavor in good faith and use their commercially reasonable efforts not to disclose the terms or conditions of this Agreement, including, without limitation, the Purchase Price to any person other than a Permitted Person (as hereinafter defined). For purposes of this Agreement, the term "Permitted Person" shall mean: Wal-Mart, Sam's, Wal-Mart Stores, Inc., the officers, directors, members, shareholders and partners of a party, or of Wal-Mart, Wal-Mart Stores, Inc. or Sam's; persons retained by a party, or by Wal-Mart, Wal-Mart Stores, Inc. or Sam's, to conduct studies or investigations; auditors, accountants, lenders and attorneys who have responsibility for participating in the transaction and governmental agencies or auditors to whom disclosure is required. This Section 31, however, shall not apply to: (i) any information that, at the time of disclosure, is available publicly and not as a result of a disclosure in breach of this Agreement by a party, or by Wal-Mart, Wal-Mart Stores, Inc. or Sam's, or any of their officers, directors, employees or agents; (ii) any disclosure made by a party, or by Wal-Mart, Wal-Mart Stores, Inc. or Sam's, that it believes in good faith is required by Law or by obligation pursuant to any rules of or listing agreement with any national securities exchange or the NASDAQ National Market System, (iii) any disclosure of information that is already known to a party, or by Wal-Mart, Wal-Mart Stores, Inc. or Sam's, as of the date hereof, other than as provided by Seller (iv) any information that is rightfully received by a party, or by Wal-Mart, Wal-Mart Stores, Inc. or Sam's, from a third party without restriction and without breach of this Agreement, (v) any information that was independently developed by a party, or by Wal-Mart, Wal-Mart Stores, Inc. or Sam's, and (vi) any disclosure in litigation relating to this Agreement or any proceeding in connection therewith. 32. Intentionally Deleted. 33. Counterparts. This Agreement may be executed in counterparts, each of which shall be deemed an original, but all of which, taken together, shall constitute one and the same instrument. 17 34. Choice of Law. This Agreement and each and every related document are to be governed by, and construed in accordance with, the laws of the State of California. 35. Severability. If any term, covenant, condition or provision of this Agreement, or the application thereof to any person or circumstance, shall to any extent be held by a court of competent jurisdiction or rendered by the adoption of a statute by the State of California or the United States invalid, void or unenforceable, the remainder of the terms, covenants, conditions or provisions of this Agreement, or the application thereof to any person or circumstance, shall remain in full force and effect and shall in no way be affected, impaired or invalidated thereby. 36. Relationship of Parties. The parties agree that their relationship is that of seller and buyer, and that nothing contained herein shall constitute either party the agent or legal representative of the other from any purpose whatsoever, nor shall this Agreement be deemed to create any form of business organization between the parties hereto, nor is either party granted the right or authority to assume or create any obligation or responsibility on behalf of the other party, nor shall either party be in any way liable for any debt of the other. 37. No Obligations to Third Parties. Except as otherwise expressly provided herein, the execution and delivery of this Agreement shall not be deemed to confer any rights upon, nor obligate any of the parties hereto, to any person or entity other than the parties hereto. 38. Attorneys' Fees. If any party hereto institutes an action or proceeding for a declaration of the rights of the parties under this Agreement, for injunctive relief, for an alleged breach or default of, or any other action arising out of, this Agreement, or the transactions contemplated hereby, or if any party is in default of its obligations pursuant thereto, whether or not suit is filed or prosecuted to final judgment, the non-defaulting party or prevailing party shall be entitled to its actual attorneys' fees and to any court costs incurred, in addition to any other damages or relief awarded. 39. Knowledge. As used in this Agreement, Seller's awareness or Seller's knowledge or actual knowledge or phrases of similar import shall mean and refer only to the present, actual knowledge of G. Michael Finnigan ("Finnigan") without any duty of investigation or inquiry. Seller represents that Finnigan is the individual within Seller's organization with the most knowledge regarding the Property. Upon Rothbart's request, Seller shall cause Finnigan to respond to Rothbart's reasonable inquiries concerning the Property. In addition, Seller has advised Rothbart that Norm Cravens and Clen Bounds are individuals with knowledge of the Property. It is acknowledged and agreed that neither Norm Cravens nor Clen Bounds are employees of Seller. Seller will contact each of Norm Cravens and Clen Bounds and advise them that they may be contacted by Rothbart, Wal-Mart and/or Sam's, and that they are free to discuss the condition of the Property with Rothbart, Wal-Mart and/or Sam's. [SIGNATURES FOLLOW - NEXT PAGE] 18 IN WITNESS WHEREOF, the parties have executed this Agreement in quadruplicate as of the day and year first above written. SELLER: PINNACLE ENTERTAINMENT, INC., A DELAWARE CORPORATION BY: /s/ Loren S. Ostrow --------------------------------- ITS: Senior VP ---------------------------- DATE: 6/14/02 --------------------------- ROTHBART: ROTHBART DEVELOPMENT CORPORATION, A CALIFORNIA CORPORATION BY: /s/ Stanley Rothbart --------------------------------- ITS: President ---------------------------- DATE: June 6, 2002 --------------------------- By its signature below, Wal-Mart agrees, for the benefit of Seller to the provisions of Section 2(b) hereof and otherwise approves of the form of this Agreement. WAL-MART REAL ESTATE BUSINESS TRUST, a Delaware Business Trust BY: /s/ Robert M. Bedard --------------------------------- ITS: Assistant Vice President -------------------------------- Approved as to legal terms only by /s/ George Bacao ----------------------------- Wal-Mart Legal Team Date: 6-11-02 -------------------------- -19- EX-11 5 dex11.txt STATEMENT RE COMPUTATION OF PER SHARE EARNINGS Exhibit 11 Pinnacle Entertainment, Inc. Computation of Per Share Earnings
For the three months ended June 30, ----------------------------------------------- Basic Diluted (a) ----------------------- ---------------------- 2002 2001 2002 2001 -------- -------- -------- -------- (in thousands, except per share data - unaudited) Average number of common shares outstanding 25,804 25,996 25,804 25,996 Average common shares due to assumed conversion of stock options 0 0 472 90 -------- -------- -------- -------- Total shares 25,804 25,996 26,276 26,086 ======== ======== ======== ======== Net loss before cumulative change in accounting principle ($6,415) ($5,287) ($6,415) ($5,287) Net loss ($6,415) ($5,287) ($6,415) ($5,287) ======== ======== ======== ======== Per share loss before cumulative change in accounting principle ($0.25) ($0.20) ($0.25) ($0.20) Per share loss ($0.25) ($0.20) ($0.25) ($0.20) ======== ======== ======== ======== For the six months ended June 30, ----------------------------------------------- Basic Diluted (a) ----------------------- ---------------------- 2002 2001 2002 2001 -------- -------- -------- -------- (in thousands, except per share data - unaudited) Average number of common shares outstanding 25,625 26,141 25,625 26,141 Average common shares due to assumed conversion of stock options 0 0 168 139 -------- -------- -------- -------- Total shares 25,625 26,141 25,793 26,280 ======== ======== ======== ======== Net loss before cumulative change in accounting principle ($8,713) ($7,408) ($8,713) ($7,408) Cumulative change in accounting principle, net of taxes (56,704) 0 (56,704) 0 -------- -------- -------- -------- Net (loss) income after extraordinary item ($65,417) ($7,408) ($65,417) ($7,408) ======== ======== ======== ======== Per share loss before cumulative change in accounting principle ($0.34) ($0.28) ($0.34) ($0.28) Per share cumulative change in accounting principle, net of taxes (2.21) 0.00 (2.21) 0.00 -------- -------- -------- -------- Per share loss ($2.55) ($0.28) ($2.55) ($0.28) ======== ======== ======== ========
- --------- (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. EX-99.1 6 dex991.txt CERTIFICATION PURSUANT TO SARBANES-OXLEY ACT EXHIBIT 99.1 CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350, AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002 In connection with the Quarterly Report of Pinnacle Entertainment, Inc. (the Company) on Form 10-Q for the period ending June 30, 2002 as filed with the Securities and Exchange Commission on the date hereof (the Report), I, Daniel R. Lee, Chief Executive Officer of the Company, certify, pursuant to 18 U.S.C. (S) 1350, as adopted pursuant to (S) 906 of the Sarbanes-Oxley Act of 2002, that: (1) The Report fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934; and (2) The information contained in the Report fairly presents, in all material respects, the financial condition and result of operations of the Company. /s/ Daniel R. Lee Daniel R. Lee Chief Executive Officer August 13, 2002 EX-99.2 7 dex992.txt CERTIFICATION PURSUANT TO SARBANES-OXLEY ACT EXHIBIT 99.2 CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350, AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002 In connection with the Quarterly Report of Pinnacle Entertainment, Inc. (the Company) on Form 10-Q for the period ending June 30, 2002 as filed with the Securities and Exchange Commission on the date hereof (the Report), I, Bruce C. Hinckley, Chief Financial Officer of the Company, certify, pursuant to 18 U.S.C. (S) 1350, as adopted pursuant to (S) 906 of the Sarbanes-Oxley Act of 2002, that: (1) The Report fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934; and (2) The information contained in the Report fairly presents, in all material respects, the financial condition and result of operations of the Company. /s/ Bruce C. Hinckley Bruce C. Hinckley Chief Financial Officer August 13, 2002 -----END PRIVACY-ENHANCED MESSAGE-----