Amendment #1 to Form 10-Q
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q/A
Amendment No. 1
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
(Registrants 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 registrants common stock, as of the close of business on August 12, 2002: 25,910,812.
PINNACLE ENTERTAINMENT, INC.
TABLE OF CONTENTS
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2 |
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Part I |
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Item 1. Financial information |
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3 |
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4 |
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5 |
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6 |
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Item 2. Managements Discussion and Analysis of Financial Condition and Results of
Operations |
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27 |
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28 |
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29 |
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30 |
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33 |
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37 |
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Part II |
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40 |
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41 |
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42 |
1
On June 24, 2002, Pinnacle Entertainment, Inc. filed Amendment No.
1 to its Registration Statement on Form S-3/A with the Securities and Exchange Commission (the SEC), amending its Registration Statement on Form S-3 originally filed on June 13, 2002. The Company hereby amends and restates Items 1, 2 and
6 of its Quarterly Report on Form 10-Q for the quarterly period ended June 30, 2002 that was originally filed with the SEC on August 14, 2002 (the Original Filing), to respond to comments the Company received from the SEC in connection
with the Form S-3/A and to make certain other changes, including to conform the presentation in this report with that contained in the Form S-3/A. As discussed in Note 5 of the Companys condensed consolidated financial statements, the
Companys reportable segments have been restated to include segment information for the Companys properties and operations on a disaggregated basis.
This report continues to speak as of the date of the Original Filing and we have not updated the disclosures in this report to speak as of a later date. Updated information
regarding recent developments is included in the Companys other filings with the SEC and in press releases issued by the Company.
References to Pinnacle Entertainment, the Company, we or our in this report refer to Pinnacle Entertainment, Inc.
2
PINNACLE ENTERTAINMENT, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
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For the three months ended June 30,
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For the six months ended June 30,
|
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|
2002
|
|
|
2001
|
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2002
|
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|
2001
|
|
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|
(in thousands, except per share dataunaudited) |
|
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 |
|
|
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|
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|
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Expenses: |
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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 |
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Selling, general and administrative |
|
|
26,093 |
|
|
|
33,581 |
|
|
|
52,691 |
|
|
|
62,553 |
|
Depreciation and amortization |
|
|
11,301 |
|
|
|
12,135 |
|
|
|
22,463 |
|
|
|
24,223 |
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Other |
|
|
2,232 |
|
|
|
2,671 |
|
|
|
4,413 |
|
|
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6,034 |
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Indiana regulatory settlement and related costs |
|
|
6,493 |
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|
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0 |
|
|
|
6,493 |
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|
|
0 |
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Re-branding costs, Bossier City |
|
|
1,234 |
|
|
|
0 |
|
|
|
1,343 |
|
|
|
0 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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127,259 |
|
|
|
128,982 |
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|
|
246,106 |
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|
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255,844 |
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|
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Operating income |
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3,035 |
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|
|
2,621 |
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|
|
11,443 |
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|
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9,766 |
|
Interest income |
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|
(532 |
) |
|
|
(1,428 |
) |
|
|
(1,166 |
) |
|
|
(3,276 |
) |
Interest expense, net of capitalized interest |
|
|
12,319 |
|
|
|
12,311 |
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|
|
24,952 |
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|
|
24,618 |
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|
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|
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|
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|
|
|
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Loss before income taxes and change in accounting principle |
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|
(8,752 |
) |
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|
(8,262 |
) |
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|
(12,343 |
) |
|
|
(11,576 |
) |
Income tax benefit |
|
|
(2,337 |
) |
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|
(2,975 |
) |
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|
(3,630 |
) |
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|
(4,168 |
) |
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Loss before change in accounting principle |
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(6,415 |
) |
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|
(5,287 |
) |
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|
(8,713 |
) |
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|
(7,408 |
) |
Cumulative effect of change in accounting principle, net of income tax benefit |
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|
0 |
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|
|
0 |
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|
|
56,704 |
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|
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0 |
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|
|
|
|
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Net loss |
|
$ |
(6,415 |
) |
|
$ |
(5,287 |
) |
|
$ |
(65,417 |
) |
|
$ |
(7,408 |
) |
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Net loss per common sharebasic and diluted |
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Loss before change in accounting principlebasic and diluted |
|
$ |
(0.25 |
) |
|
$ |
(0.20 |
) |
|
$ |
(0.34 |
) |
|
$ |
(0.28 |
) |
Cumulative effect of change in accounting principlebasic and diluted |
|
|
0.00 |
|
|
|
0.00 |
|
|
|
(2.21 |
) |
|
|
0.00 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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Net loss per common sharebasic and diluted |
|
$ |
(0.25 |
) |
|
$ |
(0.20 |
) |
|
$ |
(2.55 |
) |
|
$ |
(0.28 |
) |
|
|
|
|
|
|
|
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|
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|
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Number of sharesbasic and diluted |
|
|
25,804 |
|
|
|
25,996 |
|
|
|
25,625 |
|
|
|
26,141 |
|
See accompanying notes to the condensed consolidated financial statements.
3
PINNACLE ENTERTAINMENT, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
|
|
June 30, 2002
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|
|
December 31, 2001
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(in thousands, except share data, unaudited) |
|
ASSETS |
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|
|
|
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|
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Current Assets: |
|
|
|
|
|
|
|
|
Cash and cash equivalents |
|
$ |
129,714 |
|
|
$ |
153,187 |
|
Restricted cashArgentina |
|
|
422 |
|
|
|
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 |
|
|
193,866 |
|
|
|
218,824 |
|
Restricted cash |
|
|
23,600 |
|
|
|
0 |
|
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 |
|
|
|
|
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|
|
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|
LIABILITIES AND STOCKHOLDERS' EQUITY |
|
|
|
|
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|
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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 notes to the condensed consolidated financial statements.
4
PINNACLE ENTERTAINMENT, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
|
|
For the six months ended June 30,
|
|
|
|
2002
|
|
|
2001
|
|
|
|
(in thousandsunaudited) |
|
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 effect of 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 |
|
|
1,294 |
|
|
|
1,764 |
|
|
|
|
|
|
|
|
|
|
Net cash provided by operating activities |
|
|
20,527 |
|
|
|
326 |
|
|
|
|
|
|
|
|
|
|
Cash flows from investing activities: |
|
|
|
|
|
|
|
|
Additions to property, plant and equipment |
|
|
(23,452 |
) |
|
|
(25,518 |
) |
Principal collected on notes receivable |
|
|
1,000 |
|
|
|
7,563 |
|
Additions to restricted cash |
|
|
(23,477 |
) |
|
|
0 |
|
All other, net |
|
|
47 |
|
|
|
87 |
|
|
|
|
|
|
|
|
|
|
Net cash used in investing activities |
|
|
(45,882 |
) |
|
|
(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 |
) |
|
|
|
|
|
|
|
|
|
Decrease in cash and cash equivalents |
|
|
(23,473 |
) |
|
|
(25,993 |
) |
Cash and cash equivalents at beginning of period |
|
|
153,187 |
|
|
|
172,868 |
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents at end of period |
|
$ |
129,714 |
|
|
$ |
146,875 |
|
|
|
|
|
|
|
|
|
|
Supplemental Disclosure of Cash Flow Information
Cash paid for interest |
|
$ |
23,174 |
|
$ |
23,701 |
Cash paid for income taxes |
|
|
679 |
|
|
1,286 |
Non-cash transactions: |
|
|
|
|
|
|
Translation rate adjustmentrestricted cashArgentina |
|
|
2,907 |
|
|
0 |
Translation rate adjustmentnet assets, excluding restricted cashArgentina |
|
|
32 |
|
|
0 |
See accompanying notes to condensed consolidated financial statements.
5
PINNACLE ENTERTAINMENT, INC.
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
Note 1Summary 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 Amendment No. 2 to the Companys consolidated Annual Report
on Form 10-K/A, as filed with the Securities and Exchange Commission, for the year ended December 31, 2001. This Quarterly Report on Form 10-Q/A does not include certain footnotes and financial presentations normally presented annually and should be
read in conjunction with Amendment No. 2 to the Companys 2001 Annual Report on Form 10-K/A.
The
information furnished herein is unaudited. However, in managements 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 companys foreign subsidiaries be 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
6
PINNACLE ENTERTAINMENT, INC.
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)(Continued)
adjustments are reflected in a separate component of Stockholders EquityAccumulated 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 Income (Loss) Statement of Financial Accounting Standards No. 130 Reporting Comprehensive Income (SFAS No. 130)
requires that a company disclose other comprehensive income (loss) and the components of such income (loss). 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 CashArgentina Restricted cashArgentina at June 30,
2002 and December 31, 2001 consists of cash which cannot be transferred out of Argentina. 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 Argentine government restriction on transferring funds is lifted, cash of Casino Magic Argentina maintained in Argentina will be classified as
7
PINNACLE ENTERTAINMENT, INC.
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)(Continued)
Restricted CashArgentina on the Consolidated Balance Sheet. Such funds are available to pay all obligations denominated in the Argentina currency. In addition, due to the inability to
transfer cash out of the country, in the first half of 2002 the Company established a reserve of approximately $1,860,000 against its restricted cash held in Argentina. This reserve is a reduction of Restricted CashArgentina in the
accompanying Consolidated Balance Sheet as of June 30, 2002.
Restricted
Cash Restricted cash at June 30, 2002 consists of $22,500,000 set aside related to the Lake Charles project and $1,100,000 related to an insurance cash-collateralized letter of credit.
As discussed below (see Note 8), under the Companys 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 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 Companys 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.
Pre-Opening Costs It is the Companys 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 Companys 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.
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. This statement supercedes SFAS No. 121 and the accounting and reporting provisions of
Accounting Principles Board Opinion No. 30 Reporting the Results of OperationsReporting the Effects of Disposal of a Segment of a Business, and Extraordinary, Unusual and Infrequently Occurring Events and Transactions (APB Opinion
No. 30) for the disposal of a segment of a business. Because SFAS No. 121 did not address the accounting of a segment of a business accounted for as a discontinued operation under APB Opinion No. 30, two accounting models existed for
long-lived assets to be disposed. The Financial Accounting Standards Board (FASB) decided to establish a single accounting model, based on the framework established in SFAS No. 121, for long-lived assets to be disposed of by sale. The
FASB also decided to resolve significant implementation issues related to SFAS No. 121. The provisions of the statement are effective for financial statements issued for fiscal years beginning after December 31, 2001, and interim periods within
those fiscal years, with early application encouraged. The provisions of SFAS No. 144 generally are to be applied prospectively. The adoption of SFAS No. 144 did not have a material impact on the Companys financial position or results of
operations.
8
PINNACLE ENTERTAINMENT, INC.
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)(Continued)
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.
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 entitys 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. The effect of stock options outstanding was not included in the diluted calculations for the periods ended June 30, 2002 and 2001, respectively, since the Company incurred a net loss for those periods. The number of
potentially dilutive options was 472,000 and 90,000 for the three-month periods ended June 30, 2002 and 2001, respectively, and 168,000 and 139,000 for the six-month periods ended June 30, 2002 and 2001, respectively.
Reclassifications Certain reclassifications have been made to the 2001 amounts to be consistent with
the 2002 financial statement presentation.
Note 2Management 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. Lees compensation includes grants of options to purchase an aggregate of 865,801 shares of
the Companys 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 Companys annual shareholder meeting held June 18, 2002.
9
PINNACLE ENTERTAINMENT, INC.
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)(Continued)
The Companys share price was higher on the date that some of
Mr. Lees 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 3Indiana 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.
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 Companys 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 Companys 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, 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 4Dockside 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 Belterras 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 5Segment Information
Subsequent to the issuance of the Companys consolidated financial statements for the six months ended June 30, 2002, management of the Company determined that it
should have disaggregated its segments into a separate segment for each of the U.S. properties, a segment for foreign operations (Casino Magic Argentina), a segment for card club leases and a segment for sold operations. Previously, such segments
had been aggregated and presented as two reportable segments. Accordingly, the following information pertaining to the Companys operating segments has been restated to present such disaggregated segment disclosures.
10
PINNACLE ENTERTAINMENT, INC.
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)(Continued)
The following table reconciles the Companys 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 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Boomtown New Orleans |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues |
|
$ |
25,782 |
|
|
$ |
24,839 |
|
|
$ |
52,482 |
|
|
$ |
50,581 |
|
Expenses, excluding depreciation and amortization |
|
|
18,903 |
|
|
|
18,518 |
|
|
|
38,606 |
|
|
|
36,854 |
|
Depreciation and amortization |
|
|
1,657 |
|
|
|
1,447 |
|
|
|
3,210 |
|
|
|
2,860 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net operating incomeBoomtown New Orleans |
|
$ |
5,222 |
|
|
$ |
4,874 |
|
|
$ |
10,666 |
|
|
$ |
10,867 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Casino Magic Biloxi |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues |
|
$ |
22,462 |
|
|
$ |
21,548 |
|
|
$ |
45,362 |
|
|
$ |
44,263 |
|
Expenses, excluding depreciation and amortization |
|
|
17,575 |
|
|
|
17,369 |
|
|
|
35,274 |
|
|
|
35,653 |
|
Depreciation and amortization |
|
|
1,895 |
|
|
|
1,670 |
|
|
|
3,755 |
|
|
|
3,335 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net operating incomeCasino Magic Biloxi |
|
$ |
2,992 |
|
|
$ |
2,509 |
|
|
$ |
6,333 |
|
|
$ |
5,275 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Boomtown Bossier City |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues |
|
$ |
23,782 |
|
|
$ |
25,431 |
|
|
$ |
50,965 |
|
|
$ |
57,959 |
|
Expenses, excluding depreciation and amortization |
|
|
22,527 |
|
|
|
27,180 |
|
|
|
45,256 |
|
|
|
54,637 |
|
Depreciation and amortization |
|
|
1,975 |
|
|
|
2,134 |
|
|
|
3,902 |
|
|
|
4,256 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net operating income (loss)Boomtown Bossier City |
|
$ |
(720 |
) |
|
$ |
(3,883 |
) |
|
$ |
1,807 |
|
|
$ |
(934 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Belterra Casino Resort |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues |
|
$ |
31,334 |
|
|
$ |
25,994 |
|
|
$ |
59,801 |
|
|
$ |
52,189 |
|
Expenses, excluding depreciation and amortization |
|
|
27,180 |
|
|
|
28,608 |
|
|
|
53,264 |
|
|
|
54,618 |
|
Depreciation and amortization |
|
|
3,308 |
|
|
|
3,075 |
|
|
|
6,550 |
|
|
|
6,065 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net operating income (loss)Belterra |
|
$ |
846 |
|
|
$ |
(5,689 |
) |
|
$ |
(13 |
) |
|
$ |
(8,494 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Boomtown Reno |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues |
|
$ |
23,801 |
|
|
$ |
24,833 |
|
|
$ |
42,196 |
|
|
$ |
43,945 |
|
Expenses, excluding depreciation and amortization |
|
|
18,199 |
|
|
|
18,745 |
|
|
|
34,224 |
|
|
|
35,490 |
|
Depreciation and amortization |
|
|
1,819 |
|
|
|
1,940 |
|
|
|
3,619 |
|
|
|
3,937 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net operating incomeBoomtown Reno |
|
$ |
3,783 |
|
|
$ |
4,148 |
|
|
$ |
4,353 |
|
|
$ |
4,518 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Casino Magic Argentina |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues |
|
$ |
1,573 |
|
|
$ |
5,384 |
|
|
$ |
3,623 |
|
|
$ |
10,577 |
|
Expenses, excluding depreciation and amortization |
|
|
1,401 |
|
|
|
3,169 |
|
|
|
3,223 |
|
|
|
6,353 |
|
Depreciation and amortization |
|
|
111 |
|
|
|
344 |
|
|
|
287 |
|
|
|
703 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net operating incomeCasino Magic Argentina |
|
$ |
61 |
|
|
$ |
1,871 |
|
|
$ |
113 |
|
|
$ |
3,521 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Card Clubs |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues |
|
$ |
1,560 |
|
|
$ |
1,800 |
|
|
$ |
3,120 |
|
|
$ |
3,600 |
|
Expenses, excluding depreciation and amortization |
|
|
60 |
|
|
|
(521 |
) |
|
|
119 |
|
|
|
(952 |
) |
Depreciation and amortization |
|
|
536 |
|
|
|
1,525 |
|
|
|
1,140 |
|
|
|
3,067 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net operating incomeCard clubs |
|
$ |
964 |
|
|
$ |
796 |
|
|
$ |
1,861 |
|
|
$ |
1,485 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sold Properties |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues |
|
$ |
0 |
|
|
$ |
1,774 |
|
|
$ |
0 |
|
|
$ |
2,496 |
|
Expenses, excluding depreciation and amortization |
|
|
0 |
|
|
|
(587 |
) |
|
|
0 |
|
|
|
(572 |
) |
Depreciation and amortization |
|
|
0 |
|
|
|
0 |
|
|
|
0 |
|
|
|
0 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net operating incomeSold properties |
|
$ |
0 |
|
|
$ |
2,361 |
|
|
$ |
0 |
|
|
$ |
3,068 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Reportable Segments |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues |
|
$ |
130,294 |
|
|
$ |
131,603 |
|
|
$ |
257,549 |
|
|
$ |
265,610 |
|
Expenses, excluding depreciation and amortization |
|
|
105,845 |
|
|
|
112,481 |
|
|
|
209,966 |
|
|
|
222,081 |
|
Depreciation and amortization |
|
|
11,301 |
|
|
|
12,135 |
|
|
|
22,463 |
|
|
|
24,223 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net operating incomeTotal reportable segments |
|
$ |
13,148 |
|
|
$ |
6,987 |
|
|
$ |
25,120 |
|
|
$ |
19,306 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
11
PINNACLE ENTERTAINMENT, INC.
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)(Continued)
|
|
For the three months ended
June 30,
|
|
|
For the six months ended June
30,
|
|
|
|
2002
|
|
|
2001
|
|
|
2002
|
|
|
2001
|
|
|
|
(in thousands) |
|
Reconciliation to Consolidated Net Income |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total net operating income for reportable segments |
|
$ |
13,148 |
|
|
$ |
6,987 |
|
|
$ |
25,120 |
|
|
$ |
19,306 |
|
Unallocated income and expenses |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Corporate expense |
|
|
10,113 |
|
|
|
4,366 |
|
|
|
13,677 |
|
|
|
9,540 |
|
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 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss before cumulative effect of change in accounting principle |
|
|
(6,415 |
) |
|
|
(5,287 |
) |
|
|
(8,713 |
) |
|
|
(7,408 |
) |
Cumulative effect of change in accounting principle, net of taxes |
|
|
|
|
|
|
|
|
|
|
56,704 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss |
|
$ |
(6,415 |
) |
|
$ |
(5,287 |
) |
|
$ |
(65,417 |
) |
|
$ |
(7,408 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30, 2002
|
|
December 31, 2001
|
|
|
(in thousands) |
Total Assets |
|
|
|
|
|
|
Boomtown New Orleans |
|
$ |
84,612 |
|
$ |
85,632 |
Casino Magic Biloxi |
|
|
107,182 |
|
|
109,053 |
Boomtown Bossier City |
|
|
126,262 |
|
|
129,127 |
Belterra Casino Resort |
|
|
224,211 |
|
|
226,228 |
Boomtown Reno |
|
|
90,020 |
|
|
91,479 |
Casino Magic Argentina |
|
|
5,445 |
|
|
20,417 |
Card Clubs |
|
|
29,047 |
|
|
29,988 |
Corporate |
|
|
184,789 |
|
|
227,425 |
|
|
|
|
|
|
|
Total Reportable Segments and Corporate |
|
$ |
851,568 |
|
$ |
919,349 |
|
|
|
|
|
|
|
Note 6Property, 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). |
Depreciation expense for the three months ended June 30, 2002 and 2001 was $11,283,000 and $10,659,000, respectively, and for the six months ended June 30, 2002 and 2001
was $22,236,000 and $21,322,000, respectively.
12
PINNACLE ENTERTAINMENT, INC.
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)(Continued)
Note 7Assets 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 a corporate asset, 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, 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. The Crystal Park Casino generated a net operating loss of $54,000 and
$345,000 for the six months ended June 30, 2002 and 2001, respectively.
Note 8Expansion 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.
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
13
PINNACLE ENTERTAINMENT, INC.
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)(Continued)
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 propertys casino and other existing facilities. In connection with the Companys 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 9Note 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 Companys 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.
Note 10Goodwill 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.
14
PINNACLE ENTERTAINMENT, INC.
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)(Continued)
Gaming Licenses Casino Magic
Argentina. In connection with the acquisition of Casino Magic, Corp. in 1998 a portion of the purchase price was allocated to a concession agreement to operate two casinos in Argentina. 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 extension agreement whereby the concession contract was extended for an additional ten years, through 2016, provided Casino Magic Argentina, among other things, pays admission taxes, makes annual contributions for
scholarships and invests in the development of a new casino facility and related amenities in accordance with the terms of the extension agreement. The dollar-denominated cost of such investment has been reduced significantly as a result of the
Argentine governments conversion of all contracts into peso-denominated contracts in January, 2002, and the subsequent devaluation of the Argentine currency.
In accordance with the guidance provided by SFAS No. 142 (see Implementation of SFAS Nos. 141 and 142 below), the Company is amortizing the capitalized
costs of the Argentina concession over the extended life of the concession agreement based on its expectation that it will receive benefits from the concession agreement through 2016, taking into account the following factors: (i) so long as the
Company remains in compliance with the requirements of the extension agreement, which are within the Companys control, the Company will be permitted to operate under the concession agreement through 2016; (ii) at the current time, the Company
has remained in compliance with the terms of the extension agreement, except for certain delays in the planning and construction schedules which have been approved by the Province; (iii) the Company currently intends, and believes it is able, to
continue to perform under the terms of the extension agreement; (iv) no other related assets of the Company limit the useful life of the concession agreement through 2016; (v) at the current time, the Company is not aware of any obsolescence,
demand, competition or other economic factors that limit the viability of the Argentina gaming market through 2016, although the Company continues to monitor the ongoing political and economic instability in Argentina; and (vi) the only significant
cost that the Company is required to incur in connection with the concession is the construction of a hotel casino, which the Company has the intent and ability to fund.
In connection with the extension of the concession agreement, in August 2001, the Company reclassified a $2,276,000 receivable from the Province of Neuquen to Gaming
Licenses on the Consolidated Balance Sheet, as the Company agreed to not pursue the collection of such receivable as additional consideration for the ten-year extension. Such additional concession agreement cost will be amortized over the
extended life of the concession agreement.
The Company has acquired the land to build the new casino, has been
paying the required additional taxes and scholarship contributions, and, except as described in the next sentence, is in compliance with the other provisions of the concession agreement and extension agreement. Although the Company has not yet met
the extension agreement requirement to submit plans and begin construction of a hotel casino, the Company has held meetings with the Province authorities, including the governor, and received their approval for the delays (caused by current economic
conditions in Argentina) in providing the detail plans and beginning actual construction. The Company currently intends to move forward with the project and does not believe that the Province will change the terms of the extension agreement.
However, if the Company determines not to proceed with the capital improvements required by the extension agreement, the amortization period for the concession agreement will be reduced to be consistent with a December 2006 expiration date. 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. The unamortized gaming license costs related to Casino
Magic Argentina as of June 30, 2002 and December 31, 2001 were $2,013,000 and $4,949,000 (which amounts reflect the translation adjustment for Casino Magic Argentina assets and liabilities pursuant to SFAS No. 52see Foreign
Currency Translation above), respectively, and amortization expense was $82,000 and $237,000 for the three months ended
15
PINNACLE ENTERTAINMENT, INC.
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)(Continued)
June 30, 2002 and 2001, respectively, and $212,000 and $474,000 for the six months ended June 30, 2002 and 2001, respectively. Accumulated amortization was $1,519,000 at June 30, 2002.
Boomtown Bossier City. In connection with the acquisition of Casino Magic
Corp. in 1998, a portion of the purchase price was allocated to the Louisiana gaming license which permits the Company to conduct the gaming operations of Boomtown Bossier City. Through December 31, 2001, the cost of the gaming license was being
amortized on the straight-line method over twenty-five years. In connection with the implementation of SFAS No. 142 effective January 1, 2002, the Company no longer amortizes the gaming license as the Company has classified such asset as a
non-amortizing intangible asset with an indefinite useful life based on managements assessment that no legal, regulatory, contractual, competitive, economic or other factors limit the useful life of the gaming license. In accordance with the
guidance provided by SFAS No. 142, this assessment is based on the following pertinent factors: (i) the Company currently expects to use the gaming license indefinitely; (ii) no other related assets of the Company limit the useful
life of the gaming license; (iii) the Company believes that it will continue to be able to renew the Bossier City license every five years without substantial cost or material modification, based in part upon the historic renewal experience of the
Company and other holders of Louisiana casino licenses; (iv) because the Louisiana gaming industry is relatively mature and stable, and the exclusivity of Louisiana gaming licenses is currently protected by law, the Company believes that there
are no known effects of obsolescence, demand, competition or other economic factors that limit the economic life of the Bossier City gaming license; and (v) the Company is not required to make any significant expenditures to maintain the
Companys intangible Bossier City license rights.
Based on the classification of the gaming license as a
non-amortizing intangible asset and pursuant to the implementation of SFAS No. 142, 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
intangible assets with indefinite lives no longer be amortized, 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 a transition adjustment 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 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-adjustment charge was classified as a cumulative effect of a change in accounting principle, net of the income tax benefit. The impairment write-downs
resulted upon implementation of SFAS No. 142 due to the requirement to apply a fair-value-based test to goodwill and certain other intangibles. Previously, under SFAS No. 121, impairment write-downs were only recognized if the estimated expected
future undiscounted cash flows were less than the carrying amount of the asset. As of December 31, 2001, managements estimates of the future undiscounted cash flows expected to result from the Casino Magic locations exceeded their carrying
values.
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
16
PINNACLE ENTERTAINMENT, INC.
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)(Continued)
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 Casino Magic Biloxi, Boomtown Bossier City and Casino Magic Argentina. The properties 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 propertys fair
value was allocated to the propertys 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
acquirers 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: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Boomtown New Orleans |
|
$ |
11,140 |
|
$ |
0 |
|
|
$ |
0 |
|
|
$ |
11,140 |
Boomtown Reno |
|
|
8,418 |
|
|
0 |
|
|
|
0 |
|
|
|
8,418 |
Casino Magic Biloxi |
|
|
18,609 |
|
|
(18,609 |
) |
|
|
0 |
|
|
|
0 |
Boomtown Bossier City |
|
|
19,320 |
|
|
(19,320 |
) |
|
|
0 |
|
|
|
0 |
Casino Magic-Argentina |
|
|
11,240 |
|
|
(11,240 |
) |
|
|
0 |
|
|
|
0 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
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. |
17
PINNACLE ENTERTAINMENT, INC.
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)(Continued)
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.
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
|
|
|
|
(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 lossbasic 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 sharesbasic and diluted |
|
|
25,804 |
|
|
|
25,996 |
|
|
|
25,625 |
|
|
|
26,141 |
|
Note 11Secured and Unsecured Notes Payable
Notes payable at June 30, 2002 and December 31, 2001:
|
|
June 30, 2002
|
|
December 31, 2001
|
|
|
(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 |
|
|
|
|
|
|
|
18
PINNACLE ENTERTAINMENT, INC.
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)(Continued)
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).
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 Companys 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 $225,000,000see 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 Companys 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
19
PINNACLE ENTERTAINMENT, INC.
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)(Continued)
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.
Note
12Stock Buyback
Under the Companys 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
13Litigation
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. Astorias 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 Astorias 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 LGEs 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
20
PINNACLE ENTERTAINMENT, INC.
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)(Continued)
(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 Courts denial
of the Plaintiffs Motion for Class Certification.
The claims are not covered under the Companys
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 plaintiffs contracts and business relations; and (iii) breached covenants
21
PINNACLE ENTERTAINMENT, INC.
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)(Continued)
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 plaintiffs 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 defendants motion for summary judgment. On October 22, 2001, the Court granted defendants 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 plaintiffs revised damage claims. Trial has been set for
November 12, 2002. The Companys insurer has essentially denied coverage of the claim against Mr. Ernst under the Companys 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.
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.
22
PINNACLE ENTERTAINMENT, INC.
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)(Continued)
Hellass 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 courts 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 PCCs stock was sold to an unrelated company in December of 1996, and the buyer assumed all of PCCs 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
Companys 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 Companys board of directors and Chairman of the Board of CME in 1995) and Robert Callaway (the Companys former Associate General Counsel and, prior to
its acquisition by the Company, CMEs 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 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 Companys financial results.
23
PINNACLE ENTERTAINMENT, INC.
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)(Continued)
Note 14Consolidating Condensed Financial Information
The Companys 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)
|
|
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 |
|
$ |
118,835 |
|
|
$ |
72,414 |
|
|
$ |
2,617 |
|
|
$ |
0 |
|
|
$ |
193,866 |
|
Property, plant and equipment, net |
|
|
21,277 |
|
|
|
553,990 |
|
|
|
816 |
|
|
|
0 |
|
|
|
576,083 |
|
Other non-current assets |
|
|
34,003 |
|
|
|
34,753 |
|
|
|
2,013 |
|
|
|
10,850 |
|
|
|
81,619 |
|
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 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
24
PINNACLE ENTERTAINMENT, INC.
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)(Continued)
|
|
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 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) before change in accounting principle |
|
|
(20,486 |
) |
|
|
14,399 |
|
|
|
1,211 |
|
|
|
(3,837 |
) |
|
|
(8,713 |
) |
Cumulative effect of 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 (income), 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 (benefit) |
|
|
(3,352 |
) |
|
|
0 |
|
|
|
377 |
|
|
|
0 |
|
|
|
(2,975 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) |
|
$ |
(5,008 |
) |
|
$ |
5,828 |
|
|
$ |
1,558 |
|
|
$ |
(7,665 |
) |
|
$ |
(5,287 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
25
PINNACLE ENTERTAINMENT, INC.
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)(Continued)
|
|
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 (benefit) |
|
|
(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 |
|
$ |
2,994 |
|
|
$ |
17,930 |
|
|
$ |
(397 |
) |
|
$ |
0 |
|
|
$ |
20,527 |
|
Net cash provided by (used in) investing activities |
|
|
(24,160 |
) |
|
|
(21,722 |
) |
|
|
0 |
|
|
|
0 |
|
|
|
(45,882 |
) |
Net cash provided by (used in) financing activities |
|
|
2,335 |
|
|
|
(453 |
) |
|
|
0 |
|
|
|
0 |
|
|
|
1,882 |
|
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. |
26
Item 2. Managements 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 Companys Annual Report on Form 10-K (including all amendments thereto on Form 10-K/A) for the year ended December 31, 2001, and other filings with the
Securities and Exchange Commission.
FORWARD-LOOKING STATEMENTS
Except for the historical information contained herein, the
matters addressed in this Quarterly Report on Form 10-Q/A 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 Companys 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 Resorts 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. 144 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; |
27
|
· |
|
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 Companys 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 Companys 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/A are made pursuant to the Act. For more information on the potential factors that could affect the Companys operating results and financial condition, see
Risk Factors and Factors Affecting Future Operating Results below and review the Companys 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/A, one should carefully consider the risk factors as disclosed in the Companys Annual Report on Form 10-K (including all
amendments thereto on Form 10-K/A) for the year ended December 31, 2001 and in the Companys other filings with the Securities and Exchange Commission for additional detail regarding these and other risk factors.
|
· |
|
All of the Companys 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 Companys operations. |
|
· |
|
As the Company is highly leveraged, future cash flows may not be sufficient to meet the Companys 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 Companys 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 Companys 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 Companys operations. |
28
|
· |
|
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 Companys existing properties could disrupt its operations. |
|
· |
|
The Company experiences quarterly fluctuations in operating results due to seasonality of the Companys 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 Companys 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 Companys financial results, please see
Forward-Looking Statements above and Factors Affecting Future Operating Results below and review the Companys filings with the Securities and Exchange Commission.
CRITICAL ACCOUNTING POLICIES
The Companys 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 Companys 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 and other reserves;
|
|
· |
|
valuation of goodwill, intangible assets 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. Managements judgments are based on the Companys 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.
29
The following table highlights the Companys 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
|
|
|
|
(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(b) |
|
|
(720 |
) |
|
|
(3,883 |
) |
|
|
1,807 |
|
|
|
(934 |
) |
Belterra Casino Resort(b) |
|
|
846 |
|
|
|
(5,689 |
) |
|
|
(13 |
) |
|
|
(8,494 |
) |
Casino Magic Argentina |
|
|
61 |
|
|
|
1,871 |
|
|
|
113 |
|
|
|
3,521 |
|
Card Clubs |
|
|
964 |
|
|
|
796 |
|
|
|
1,861 |
|
|
|
1,485 |
|
Corporate(b) |
|
|
(10,113 |
) |
|
|
(4,366 |
) |
|
|
(13,677 |
) |
|
|
(9,540 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3,035 |
|
|
|
260 |
|
|
|
11,443 |
|
|
|
6,698 |
|
Sold properties (a) |
|
|
0 |
|
|
|
2,361 |
|
|
|
0 |
|
|
|
3,068 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income |
|
$ |
3,035 |
|
|
$ |
2,621 |
|
|
$ |
11,443 |
|
|
$ |
9,766 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-recurring and unusual items |
|
$ |
7,727 |
|
|
($ |
633 |
) |
|
$ |
7,836 |
|
|
($ |
435 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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(b) |
|
|
18.3 |
% |
|
|
19.3 |
% |
|
|
19.8 |
% |
|
|
21.8 |
% |
Belterra Casino Resort(b) |
|
|
24.0 |
% |
|
|
19.7 |
% |
|
|
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 |
% |
|
|
99.0 |
% |
Sold properties (a) |
|
|
0.0 |
% |
|
|
1.3 |
% |
|
|
0.0 |
% |
|
|
1.0 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
100.0 |
% |
|
|
100.0 |
% |
|
|
100.0 |
% |
|
|
100.0 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating margins(c) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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(b) |
|
|
(3.0 |
%) |
|
|
(15.3 |
%) |
|
|
3.5 |
% |
|
|
(1.6 |
%) |
Belterra Casino Resort(b) |
|
|
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(b) |
|
|
(7.8 |
%) |
|
|
(3.4 |
%) |
|
|
(5.3 |
%) |
|
|
(3.6 |
%) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2.3 |
% |
|
|
0.2 |
% |
|
|
4.4 |
% |
|
|
2.5 |
% |
Sold properties (a) |
|
|
0.0 |
% |
|
|
133.1 |
% |
|
|
0.0 |
% |
|
|
122.9 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2.3 |
% |
|
|
2.0 |
% |
|
|
4.4 |
% |
|
|
3.7 |
%] |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(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) |
|
Operating income (loss) includes the non- recurring and unusual items. |
(c) |
|
Operating margin by property is calculated by dividing revenue by location by operating income (loss) by location. |
30
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 operating income (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 propertys contribution to these results is as follows:
The Companys Belterra Casino Resort reported the strongest period-over-period improvement among the Companys 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%. Operating income in the three and six
months 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, operating income 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 propertys results have also benefited
from cost control programs established in late 2001. Operating income increased in the second quarter and first half of 2002 by 19.3% and 20.1%, respectively.
In the third quarter of 2001, the Companys 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%. Operating income increased by 7.1% 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, operating income in the first half 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. 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.
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.
31
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 an operating loss of $3.9 million. The recent quarter showed significant improvement over the prior year period, with an operating loss of $0.7 million, despite the construction. The recent periods 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. 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 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 Companys 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, and operating income in both periods.
Revenues and operating income from
the Companys 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 Companys 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 Companys control upon approval of the
Indiana Gaming Commission, the escrow funds will be forfeited to the State of Indiana.
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 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 ResultsAssets Sold below.
32
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 Consolidated Financial Statements.
LIQUIDITY AND CAPITAL RESOURCES
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 (including Restricted CashArgentina), 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 (including Restricted CashArgentina) of $3,452,000. Management currently estimates that approximately $45,000,000 is needed
to fund the Companys 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 $105,220,000 at June 30, 2002, versus $135,170,000 at December 31, 2001. The decline in working capital at June 30, 2002 is due primarily to setting aside
$22,500,000 for the Lake Charles project. As more fully discussed in Note 8 to the Condensed Consolidated Financial Statements, the Company set aside such funds in a separate account owned by the Company pursuant to the Lake Charles Conditions. In
the event the Company does not proceed with such project, the funds will be reclassified on the Consolidated Balance Sheet as Cash and Cash Equivalents.
In the six months ended June 30, 2002, the Company incurred property, plant and equipment additions of $23,452,000, 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 $20,527,000, 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. Finally, $23,477,000 was
reclassified to Restricted Cash on the Consolidated Balance Sheet, including the $22,500,000 for the Lake Charles project (see above) and $1,100,000 for the cash collateralized letter of credit (see below). 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 Companys properties and paydown of notes payable. Including the classification of $23,477,000 as Restricted Cash on the Consolidated
Balance Sheet, cash and cash equivalents declined by $23,473,000 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 $25,518,000, 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
33
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 Companys 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 Consolidated Financial Statements.)
The Companys 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 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 Companys 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
LGCBs 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 LGCBs 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.
34
Other Supplemental Data
Management believes EBITDA, which the Company defines as earnings before net interest expense, provision for income taxes, depreciation, amortization and cumulative effect
of change in accounting principle, to be a relevant and useful measure to compare operating results among its properties and between accounting periods. EBITDA is not a measure of financial performance under the promulgations of the accounting
profession, known as generally accepted accounting principles or GAAP. Nevertheless, management believes some investors use EBITDA to help determine a companys ability to service or incur indebtedness and to estimate a
companys underlying cash flow from operations before capital costs, taxes and maintenance capital expenditures. EBITDA is one of several comparative tools used by management to assist in the evaluation of operating performance and to measure
cash flow generated by ongoing operations. Below is a reconciliation of operating income (loss), as presented in the Results of Operations table above, to EBITDA. Operating income (loss) and EBITDA reflect the $7,727,000,
($633,000), $7,836,000 and ($435,000) of non-recurring and unusual items listed in the Results of Operations table above for the three and six months ended June 30, 2002 and 2001, respectively.
|
|
Operating Income (Loss)
|
|
|
Depreciation and Amortization
|
|
EBITDA
|
|
Three months ended June 30, 2002 |
|
|
|
|
|
|
|
|
|
|
|
Boomtown New Orleans |
|
$ |
5,222 |
|
|
$ |
1,657 |
|
$ |
6,879 |
|
Casino Magic Biloxi |
|
|
2,992 |
|
|
|
1,895 |
|
|
4,887 |
|
Boomtown Reno |
|
|
3,783 |
|
|
|
1,819 |
|
|
5,602 |
|
Boomtown Bossier City |
|
|
(720 |
) |
|
|
1,975 |
|
|
1,255 |
|
Belterra Casino Resort |
|
|
846 |
|
|
|
3,308 |
|
|
4,154 |
|
Casino Magic Argentina |
|
|
61 |
|
|
|
111 |
|
|
172 |
|
Card clubs |
|
|
964 |
|
|
|
509 |
|
|
1,473 |
|
Corporate |
|
|
(10,113 |
) |
|
|
27 |
|
|
(10,086 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
3,035 |
|
|
$ |
11,301 |
|
$ |
14,336 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended June 30, 2001 |
|
|
|
|
|
|
|
|
|
|
|
Boomtown New Orleans |
|
$ |
4,874 |
|
|
$ |
1,447 |
|
$ |
6,321 |
|
Casino Magic Biloxi |
|
|
2,509 |
|
|
|
1,670 |
|
|
4,179 |
|
Boomtown Reno |
|
|
4,148 |
|
|
|
1,940 |
|
|
6,088 |
|
Boomtown Bossier City |
|
|
(3,883 |
) |
|
|
2,134 |
|
|
(1,749 |
) |
Belterra Casino Resort |
|
|
(5,689 |
) |
|
|
3,075 |
|
|
(2,614 |
) |
Casino Magic Argentina |
|
|
1,871 |
|
|
|
344 |
|
|
2,215 |
|
Card clubs |
|
|
796 |
|
|
|
953 |
|
|
1,749 |
|
Corporate |
|
|
(4,366 |
) |
|
|
572 |
|
|
(3,794 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
260 |
|
|
|
12,135 |
|
|
12,395 |
|
Sold operations |
|
|
2,361 |
|
|
|
0 |
|
|
2,361 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
2,621 |
|
|
$ |
12,135 |
|
$ |
14,756 |
|
|
|
|
|
|
|
|
|
|
|
|
|
35
|
|
Operating Income (Loss)
|
|
|
Depreciation and Amortization
|
|
EBITDA
|
|
Six months ended June 30, 2002 |
|
|
|
|
|
|
|
|
|
|
|
Boomtown New Orleans |
|
$ |
10,666 |
|
|
$ |
3,210 |
|
$ |
13,876 |
|
Casino Magic Biloxi |
|
|
6,333 |
|
|
|
3,755 |
|
|
10,088 |
|
Boomtown Reno |
|
|
4,353 |
|
|
|
3,619 |
|
|
7,972 |
|
Boomtown Bossier City |
|
|
1,807 |
|
|
|
3,902 |
|
|
5,709 |
|
Belterra Casino Resort |
|
|
(13 |
) |
|
|
6,550 |
|
|
6,537 |
|
Casino Magic Argentina |
|
|
113 |
|
|
|
287 |
|
|
400 |
|
Card clubs |
|
|
1,861 |
|
|
|
1,085 |
|
|
2,946 |
|
Corporate |
|
|
(13,677 |
) |
|
|
55 |
|
|
(13,622 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
11,443 |
|
|
$ |
22,463 |
|
$ |
33,906 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Six months ended June 30, 2001 |
|
|
|
|
|
|
|
|
|
|
|
Boomtown New Orleans |
|
$ |
10,867 |
|
|
$ |
2,860 |
|
$ |
13,727 |
|
Casino Magic Biloxi |
|
|
5,275 |
|
|
|
3,335 |
|
|
8,610 |
|
Boomtown Reno |
|
|
4,518 |
|
|
|
3,937 |
|
|
8,455 |
|
Boomtown Bossier City |
|
|
(934 |
) |
|
|
4,256 |
|
|
3,322 |
|
Belterra Casino Resort |
|
|
(8,494 |
) |
|
|
6,065 |
|
|
(2,429 |
) |
Casino Magic Argentina |
|
|
3,521 |
|
|
|
703 |
|
|
4,224 |
|
Card clubs |
|
|
1,485 |
|
|
|
1,921 |
|
|
3,406 |
|
Corporate |
|
|
(9,540 |
) |
|
|
1,146 |
|
|
(8,394 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
6,698 |
|
|
|
24,223 |
|
|
30,921 |
|
Sold operations |
|
|
3,068 |
|
|
|
0 |
|
|
3,068 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
9,766 |
|
|
$ |
24,223 |
|
$ |
33,989 |
|
|
|
|
|
|
|
|
|
|
|
|
|
EBITDA is not calculated in the same manner by all companies 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. A reconciliation from net income (loss) to EBITDA is 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 |
) |
Cumulative effect of change in accounting principle |
|
|
0 |
|
|
|
0 |
|
|
|
56,704 |
|
|
|
0 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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 cumulative effect of 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 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
36
FACTORS AFFECTING FUTURE OPERATING RESULTS
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 Companys ability to transfer funds out of Argentina. These events
have adversely affected operations in Argentina and will probably continue to do so.
The Companys 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 divisions
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 Companys assets in Argentina were $5,445,000 or less than 1% of the Companys 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
37
Casino Resorts 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 propertys casino and other existing facilities. In connection with the Companys 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
Consolidated Financial Statements).
38
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 casinos 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.
39
Item 6. Exhibits and Reports on Form 8-K
(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 Companys 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 Companys 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 Companys 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 with the quarterly report on Form 10-Q for the three months ended June 30, 2002, filed with the SEC on August 14, 2002. |
(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.
40
Other Financial Information:
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) |
|
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 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss before cumulative effect of change in accounting principle |
|
|
(6,415 |
) |
|
|
(5,287 |
) |
|
|
(8,713 |
) |
|
|
(7,408 |
) |
Cumulative effect of 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 sharebasic 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 lossbasic and diluted |
|
$ |
(0.25 |
) |
|
$ |
(0.20 |
) |
|
$ |
(2.55 |
) |
|
$ |
(0.28 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Number of sharesbasic and diluted |
|
|
25,804 |
|
|
|
25,996 |
|
|
|
25,625 |
|
|
|
26,141 |
|
41
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused Amendment No. 1 to its Quarterly Report on Form 10-Q/A to be signed on its behalf by the undersigned, thereunto duly authorized.
PINNACLE ENTERTAINMENT, INC.
(Registrant)
By: |
|
/s/ BRUCE C.
HINCKLEY
|
|
Dated: October 7, 2002 |
|
|
Bruce C. Hinckley |
|
|
|
|
Senior Vice President and Chief Financial Officer (Principal Financial and Accounting Officer) |
|
|
CERTIFICATIONS
I, Daniel R. Lee, certify that:
1. I have reviewed this Amendment No. 1 to quarterly report on Form 10-Q/A of Pinnacle Entertainment, Inc.;
2. Based on my knowledge, this Amendment No. 1 to quarterly report does not contain any untrue statement of a material fact or
omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this Amendment No. 1 to quarterly report; and
3. Based on my knowledge, the financial statements, and other financial
information included in this Amendment No. 1 to quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this Amendment
No. 1 to quarterly report.
|
|
/s/ DANIEL R.
LEE
|
|
Dated: October 7, 2002 |
|
|
Daniel R. Lee |
|
|
|
|
Chairman of the Board and Chief Executive Officer |
|
|
I, Bruce Hinckley, certify that:
1. I have reviewed this Amendment No. 1 to quarterly report on Form 10-Q/A of Pinnacle
Entertainment, Inc.;
2. Based on my knowledge, this Amendment No. 1
to quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to
the period covered by this Amendment No. 1 to quarterly report; and
3. Based on my knowledge, the financial statements, and other financial information included in this Amendment No. 1 to quarterly report, fairly present in all material respects the financial condition,
results of operations and cash flows of the registrant as of, and for, the periods presented in this Amendment No. 1 to quarterly report.
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/s/ BRUCE C.
HINCKLEY
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Dated: October 7, 2002 |
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Bruce C. Hinckley |
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Chief Financial Officer |
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