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Securities and Exchange Commission
Washington, D.C. 20549
Form 10-K
[X] Annual Report Pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934
For the fiscal year ended December 31, 2001
Commission file number 0-106-619
Pinnacle Entertainment, Inc.
(Exact Name of Registrant as Specified in Its Charter)
Delaware
(State or Other Jurisdiction of
Incorporation or Organization)
95-3667491
(IRS Employer Identification No.)
330 North Brand Boulevard, Suite 1100, Glendale, California 91203
(Address of Principal Executive Offices) (Zip Code)
(818) 662-5900
(Registrant's Telephone Number, Including Area Code)
Securities registered pursuant to Section 12(b) of the Act:
Pinnacle Entertainment, Inc.
Common Stock, $.10 par value
New York Stock Exchange
Securities registered pursuant to Section 12(g) of the Act: None
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 [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ ]
The aggregate market value of the voting stock held by non-affiliates (therefore
excludes officers, directors and beneficial owners of 10% or more) of the
registrant at March 22, 2002, was $184,802,682 based on a closing price of $8.50
per common share. This determination of affiliate status is not necessarily a
conclusive determination for other purposes.
The number of outstanding shares of the registrant's common stock, as of the
close of business on March 22, 2002: 25,443,444.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Registrant's definitive 2002 proxy statement, anticipated to be
filed with the Securities and Exchange Commission within 120 days after the
close of the Registrant's fiscal year, are incorporated by reference into Part
III of this Form 10-K.
PINNACLE ENTERTAINMENT, INC.
Table of Contents
Part I
Item 1. Description of Business ..........................................................................1
General......................................................................................1
Company Overview.............................................................................3
Gaming - Continuing Operations...............................................................3
Operations Sold..............................................................................6
Expansion Plans..............................................................................7
Competition..................................................................................8
Government Regulation and Gaming Issues.....................................................11
Federal and State Income Tax Matters........................................................24
Employees...................................................................................25
Other Information...........................................................................25
Item 2. Properties.......................................................................................26
Properties..................................................................................26
Properties and Assets Held For Sale.........................................................27
Item 3. Legal Proceedings................................................................................27
Item 4. Submission of Matters to a Vote of Security Holders..............................................31
Part II
Item 5. Market for the Registrant's Common Equity and Related Stockholder Matters........................31
Item 6. Selected Financial Data..........................................................................32
Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations............34
Forward-Looking Statements..................................................................34
Risk Factors................................................................................35
Critical Accounting Policies................................................................38
Factors Affecting Future Operating Results..................................................39
Results of Operations.......................................................................41
Liquidity, Capital Resources and Other Factors Influencing Future Results...................48
Item 7A. Quantitative and Qualitative Disclosures About Market Risk.......................................50
Item 8. Financial Statements.............................................................................50
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure.............50
Part III
Item 10. Directors and Executive Officers of the Registrant
Incorporated by reference from the Registrant's definitive 2001 proxy statement.........51
Item 11. Executive Compensation
Incorporated by reference from the Registrant's definitive 2001 proxy statement.........51
Item 12. Security Ownership of Certain Beneficial Owners and Management
Incorporated by reference from the Registrant's definitive 2001 proxy statement.........51
Item 13. Certain Relationships and Related Transactions
Incorporated by reference from the Registrant's definitive 2001 proxy statement.........51
Part IV
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K.................................51
Signatures................................................................................................59
Part I
Item 1. Description of Business
-----------------------
General
Pinnacle Entertainment, Inc. (the "Company" or "Pinnacle Entertainment"), a
Delaware corporation, is a diversified gaming company that owns and operates
seven casinos (four with hotels) in Indiana, Louisiana, Mississippi, Nevada and
Argentina and is pursuing the development of a hotel and casino resort in Lake
Charles, Louisiana. The Company also receives lease income from two card club
casinos, both in the Los Angeles metropolitan area, and, until June 30, 2001,
interest income with cash flow participation from an Indian gaming facility in
Yakima, Washington. The Company's active subsidiaries at December 31, 2001 were
as follows: (1) Boomtown, Inc., which has three active subsidiaries: Boomtown
Hotel & Casino, Inc., Louisiana Gaming Enterprises, Inc. and Louisiana - I
Gaming L.P.; (2) Casino Magic Corp., which has three active subsidiaries: Biloxi
Casino Corp., Casino Magic of Louisiana, Corp. and Casino Magic Neuquen S.A.;
(3) HP/ Compton, Inc.; (4) Realty Investment Group, Inc.; and (5) Belterra
Resort Indiana, LLC.
The Company began as a gaming, sports and entertainment company engaged in the
operation of thoroughbred and greyhound racing facilities. Pinnacle
Entertainment is the successor to the Hollywood Park Turf Club, organized in
1938. Pinnacle Entertainment was incorporated in 1981 under the name Hollywood
Park Realty Enterprises, Inc.; in 1992, as part of a restructuring, was renamed
Hollywood Park, Inc.; and in February 2000, changed its name to Pinnacle
Entertainment, Inc.
In 1997, the Company began to transform itself into a major casino operator. The
Company's strategic plan is to own and operate a broad base of regionally
diversified casino entertainment facilities by developing new properties,
expanding existing facilities and making selected acquisitions. The strategic
plan anticipates the Company will establish and maintain a prominent position in
each of the markets in which it operates. In furtherance of this strategy, the
Company completed its first strategic gaming acquisition with its purchase of
Boomtown, Inc. in June 1997. Through its Boomtown, Inc. ("Boomtown") subsidiary,
the Company owns and operates land-based gaming operations in Verdi, Nevada
("Boomtown Reno") and dockside riverboat gaming operations in Harvey, Louisiana
("Boomtown New Orleans"), which riverboat has been permanently dockside since
April 1, 2001 based on legislation enacted in late March 2001 (see "Government
Regulation and Gaming Issues - Louisiana" below). In October 1998, the Company
completed its second strategic gaming acquisition with its purchase of Casino
Magic Corp. The Company currently owns and operates, through its Casino Magic
Corp. ("Casino Magic") subsidiary, dockside gaming operations in Biloxi,
Mississippi ("Casino Magic Biloxi"); dockside riverboat gaming operations in
Bossier City, Louisiana ("Casino Magic Bossier City"); and two land-based
casinos in Argentina ("Casino Magic Argentina").
In October 2000, the Company opened the Belterra Casino Resort, a hotel and
riverboat casino resort in Switzerland County, Indiana, in which the Company
owned a 97% interest, until August 2001, at which time the remaining 3% held by
a non-voting local partner was purchased by the Company (see Note 9 to the Notes
to Consolidated Financial Statements).
The Company receives lease income from two card clubs - the Hollywood
Park-Casino and Crystal Park Hotel and Casino. Since September 1999, the
Hollywood Park-Casino has been leased from Churchill Downs California Company
("Churchill Downs"), a wholly owned subsidiary of Churchill Downs Incorporated,
and subleased to an unaffiliated third party operator (see Note 11 to the Notes
to Consolidated Financial Statements). The Crystal Park Hotel and Casino
("Crystal Park Casino") is owned by the Company and is leased to an affiliate of
the card club operator that now leases and operates the Hollywood Park-Casino.
In the fourth quarter of 2001, in connection with the reclassification of the
net book value to "Assets held for sale" on the Consolidated Balance Sheet at
December 31, 2001 and reductions to rent payable to the Company from the
third-party operator, the Company wrote-down the Crystal Park Casino card club
asset to its estimated fair value (see Notes 4 and 5 to the Notes to
Consolidated Financial Statements).
1
Until June 30, 2001, the Company received interest income with cash flow
participation from the Legends Casino, an Indian gaming facility in Yakima,
Washington. In June 2001, the Company received an early pay-off of the
promissory note (which amount was approximately $6,300,000 at such time) and
related Master Lease and Sublease agreements for the cumulative amount of
approximately $8,490,000. Effective with this early termination of the
promissory note and related lease agreements, the Company no longer receives
interest income nor cash flow participation income for the sublease agreements
(see Note 6 to the Notes to Consolidated Financial Statements).
In April 2000, the Company entered into a definitive agreement with PH Casino
Resorts ("PHCR"), a newly formed subsidiary of Harveys Casino Resorts, and
Pinnacle Acquisition Corporation ("Pinnacle Acq Corp"), a newly formed
subsidiary of PHCR, pursuant to which PHCR would have acquired by merger (the
"Merger") all of the outstanding capital stock of Pinnacle Entertainment for
cash consideration (the "Merger Agreement"). Consummation of the Merger was
subject to numerous conditions, including PHCR obtaining the necessary financing
for the transaction and regulatory approvals. In January 2001, the Company
announced that it had been notified by PHCR that PHCR did not intend to further
extend the outside closing date of the Merger. Since all of the conditions to
consummation of the Merger would not be met by such date, the Company, PHCR and
Pinnacle Acq Corp mutually agreed that the Merger Agreement would be terminated
(see Note 10 to the Notes to Consolidated Financial Statements).
In August 2000, the Company completed the sale of its dockside gaming facilities
in Biloxi, Mississippi ("Boomtown Biloxi") and in Bay St. Louis, Mississippi
("Casino Magic Bay St. Louis") to subsidiaries of Penn National Gaming, Inc.; in
June 2000, completed the sale of Turf Paradise, Inc. ("Turf Paradise"), a horse
racing facility in Phoenix, Arizona, to a company owned by a private investor;
and, in September 1999, completed the disposition of the Hollywood Park Race
Track and Hollywood Park-Casino to Churchill Downs (see Note 11 to the Notes to
Consolidated Financial Statements).
The Company continues to pursue the growth strategy begun in 1997 through the
enhancement of current operations (such as the $10,000,000 renovation and
expansion of the 3rd deck of the dockside riverboat casino and pavilion building
at Boomtown New Orleans and the acquisition of new slot player marketing and
tracking systems), capital improvements at certain of its existing properties
(such as the $25,000,000 expansion and renovation of the land-based amenities
and dockside riverboat casino at Casino Magic Bossier City begun in December
2001 and expected to be substantially complete by early July 2002), and the
potential development of a casino, hotel and golf course resort complex in Lake
Charles, Louisiana (see Note 8 to the Notes to Consolidated Financial
Statements).
2
Company Overview
The following is an overview of the Company's gaming properties at December 31,
2001:
Number of
------------------------
Slot Table Hotel
Property Type of Gaming Machines Games Rooms
-------- ------------------ -------- ----- -----
Operating Properties:
Belterra Casino Resort Cruising Riverboat 1,344 45 308
Boomtown Reno Land-based 1,477 38 318
Boomtown New Orleans (a) Dockside Riverboat 1,467 44 --
Casino Magic Biloxi Dockside 1,312 35 378
Casino Magic Bossier City Dockside Riverboat 1,148 36 188
Casino Magic Argentina (b) Land-based 584 50 --
----- --- -----
Property Total 7,332 248 1,192
===== === =====
Card Clubs Leased:
Hollywood Park-Casino (c) Card Club -- 120 --
Crystal Park Casino (c) Card Club -- 21 237
----- --- -----
Card Club Total -- 141 237
===== === =====
(a) Beginning April 1, 2001, the riverboat casino has remained permanently
dockside, based on legislation enacted in late March 2001 (see "Government
Regulation and Gaming Issues - Louisiana" below).
(b) There are two separate land-based casinos in Argentina, Casino Magic Neuqen
and Casino Magic San Martin de los Andes, collectively, Casino Magic
Argentina.
(c) The Company does not operate these properties. The Company owns the Crystal
Park Casino and leases the Hollywood Park-Casino (see Note 11 to the Notes
to Consolidated Financial Statements). The Company leases/ subleases both
properties to an unaffiliated operator, for a fixed monthly rent.
Gaming - Continuing Operations
Belterra Casino Resort Belterra Casino Resort opened on October 27, 2000 on 315
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acres of land adjacent to the Ohio River near Vevay, Indiana, approximately 45
miles southwest of downtown Cincinnati, Ohio. Belterra is the closest gaming
facility to portions of northeast Kentucky and southeast Indiana.
The property features a cruising riverboat casino, the Miss Belterra, with
38,000 square feet of casino space, 1,344 slot machines and 45 table games. The
property also features a 15-story, 308-room hotel with 11 suites, six
restaurants, retail area, a 1,500-seat entertainment showroom, a spa and a Tom
Fazio designed 18-hole championship golf course (which opened in July 2001). The
property provides 2,000 parking spaces, most of which are in a multi-level
parking structure.
Prior to August 2001, the Company owned a 97% interest in the Belterra Casino
Resort, with the remaining 3% held by a non-voting local partner. In November
2000, the Company entered into an agreement with the local partner whereby the
local partner had the right to require the Company to purchase, for a purchase
price determined in accordance with the agreement, its entire ownership interest
in the Belterra Casino Resort at any time on or after January 1, 2001. A
$100,000 deposit toward such ultimate purchase price was made by the Company to
the partner at that time. In July 2001, the local partner exercised the right to
require the Company to purchase the remaining 3% ownership interest held by the
partner for approximately $1,600,000 as calculated in accordance with the
agreement. In August 2001, the remaining payment of approximately $1,500,000 was
made to the partner and, as such, the Belterra Casino Resort is now wholly owned
by the Company.
Boomtown Reno The Company's Boomtown subsidiary operates two Boomtown
- -------------
properties: Boomtown Reno and Boomtown New Orleans. Boomtown Reno is a
land-based facility that has been operating for over 30 years on 569 acres near
Verdi, Nevada, directly off Interstate 80, the primary highway connecting
northern Nevada to northern California. Depending on the direction of travel,
Boomtown Reno is either the first or the last casino and hotel complex in Nevada
seen when traveling on Interstate 80.
3
The hotel features 318 rooms, and the 45,000 square foot casino contains 1,477
slot machines and 38 table games. In the second quarter of 1999, the Company
completed a $30,000,000 expansion and renovation project at Boomtown Reno that
added 196 hotel rooms, including 24 luxury suites, and over 10,000 square feet
of new convention space, as well as the renovation of major portions of the
casino space and certain restaurants. The property features four restaurants, an
80-seat lounge, a 25,000 square foot amusement center, 10,250 square feet of
meeting space and an indoor pool. In addition to the casino/ hotel, the property
also includes a full-service truck stop, a gas station/ mini-mart, a 203-space
RV park and 1,351 parking spaces.
The Company owns the 569 acres in Verdi, Nevada on which Boomtown Reno is
located, with current operations of Boomtown Reno presently utilizing
approximately 61 acres. Of the 508 excess acres, the Company considers
approximately 250 acres suitable for development. The Company may seek to sell
such excess acreage to interested developers or investors. The Company owns all
of the improvements and facilities at the property, including the casino, hotel,
truck stop, recreational vehicle park and service station, along with the
related water rights.
Boomtown New Orleans Boomtown New Orleans opened in Harvey, Louisiana in August
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1994 on a 54-acre site located approximately ten miles from downtown New Orleans
in the West Bank suburban area. Boomtown New Orleans is a dockside riverboat
gaming facility that features a riverboat, the Boomtown Belle II, containing
1,467 slot machines and 44 table games and a land-based pavilion comprised of
88,000 square feet and features two restaurants, a deli, a 350-seat nightclub,
21,000 square feet of meeting space, a banquet facility and an amusement center.
The facility also provides 1,729 parking spaces.
In 2001, in response to the legislation enacted in April 2001 enabling all
riverboat casinos in southern Louisiana to remain dockside at all times (see
"Government Regulations and Gaming Issues - Louisiana" below), the Company
commenced a $10,000,000 capital expenditure project, which included the
renovation of the pavilion building and the 3rd deck of the dockside riverboat
casino. Such renovation also included adding 300 new slot machines and the
construction of a high-limit table games area on the 3rd deck of the riverboat
casino and the renovation of various food and beverage outlets in the pavilion
building adjacent to the dockside riverboat casino. Such construction is
expected to be completed by or near the end of the first quarter of 2002.
The Company owns the 54 acres in Harvey, Louisiana, the riverboat and land based
facilities which are utilized by Boomtown New Orleans.
Casino Magic Biloxi Casino Magic Biloxi is a dockside barge located on 16 acres
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on the Mississippi Gulf Coast and features a dockside casino barge. The facility
began operation in June 1993. The property is situated on the beach of the Gulf
of Mexico, in the center of a cluster of three casinos known as "Casino Row". In
1998, the Company opened a 378-room hotel, including 86 suites, at the property.
The property features a 49,260 square foot casino providing 1,312 slot machines
and 35 table games. The facility also contains four restaurants, 6,600 square
feet of convention space and a health club. The property currently provides
1,315 parking spaces. In early 2001, the Company evaluated plans to build a
parking garage on the property, but elected to defer such project indefinitely.
Of the 16 acres on which Casino Magic Biloxi is located, the Company owns
approximately 4.5 acres and leases approximately 11.5 acres, including
approximately 6.4 acres of submerged tidelands leased from the state of
Mississippi. The tidelands are under a ten-year lease that expires on May 31,
2003, with an option to extend the term for five years under the same terms and
conditions, subject to the renegotiation of annual rent. The remaining leased
land is leased pursuant to leases that expire on June 30, 2003, each with
options to extend the terms thereof for additional five-year periods. The
Company owns the barge on which the casino is located and all of the land-based
facilities, including the hotel.
4
Casino Magic Bossier City Casino Magic Bossier City is a dockside facility
- -------------------------
located in Bossier City, Louisiana. The property opened in October 1996 on a
site directly off, and highly visible from, Interstate 20, a major thoroughfare
connecting Shreveport/Bossier City to Dallas/Fort Worth, a three-hour drive
away.
Gaming is conducted on a dockside riverboat casino that does not cruise. The
dockside riverboat casino provides 1,148 slot machines and 36 table games. In
December 1998, the Company opened a 188-room hotel, including four master suites
and 88 junior suites, adjacent to the land-based pavilion. The facility provides
2,100 parking spaces.
In the third quarter of 2001, based on continued competitive market conditions
and the slower than anticipated growth of the Shreveport/ Bossier City gaming
market, the Company elected to downsize its prior $110,000,000 expansion plans
for the Casino Magic Bossier City facility. Such construction now consists of a
$25,000,000 renovation and expansion project and includes remodeling of the
existing pavilion building and dockside riverboat casino, all new restaurants
and a new multi-purpose showroom. Such renovation and expansion commenced in
December 2001 and is expected to be substantially complete in early July 2002.
Concurrently with the completion of the renovation and expansion project, the
Company anticipates re-branding the facility to "Boomtown Bossier City".
Casino Magic Bossier City is located on 23 acres of land owned by the Company,
adjacent to the Red River in Bossier City, Louisiana. The Company owns the 23
acres of land, dockside riverboat casino, hotel, parking structure and other
land-based facilities on the property. The Company leases approximately one acre
of water bottoms from the state of Louisiana pursuant to a lease due to expire
in September 2006.
Casino Magic Argentina The Company operates two land-based casinos in the cities
- ----------------------
of Neuquen and San Martin de los Andes in the Province of Neuquen, Argentina.
The larger of the two casinos is located in the city of Neuquen and contains 38
table games, 484 slot machines and a 384-seat bingo facility. The smaller
facility, located in San Martin de los Andes, has 12 table games and 100 slot
machines. The Company does not own any real property at these sites.
The casinos opened in 1995 and are operated under a 12-year concession agreement
with the Province that expires in December 2006. In August 2001, the Company and
the Province entered into an agreement whereby the concession contract will be
extended for an additional fifteen years if Casino Magic Argentina invests in
the development of a new casino facility and related amenities in accordance
with the terms of the agreement. Due to recent political and economic
instability in Argentina, including the currency devaluation in January 2002
(see Note 3 to the Notes to Consolidated Financial Statements), the Company is
considering its long-term options regarding Argentina and therefore, there are
no assurances the Company will invest additional capital in Casino Magic
Argentina.
The Province of Neuquen is located in west-central Argentina and is the gateway
to the well-established tour destinations and ski resorts of the Andes
Mountains. There are no other gaming casino facilities within the Province;
however, in the Province of Rio Negro (which is immediately adjacent to the
Province of Neuquen), there is a casino smaller than Casino Magic Argentina's
Neuquen facility approximately 10 miles from such facility.
California Card Club Leases The Company receives lease income from two card
- ---------------------------
clubs in the Los Angeles, California area: the Hollywood Park-Casino and the
Crystal Park Casino. The Company leases the Hollywood Park-Casino from Churchill
Downs California Company, a wholly owned subsidiary of Churchill Downs
Incorporated, and subleases it to an unaffiliated third party operator. The
Crystal Park Casino is owned by the Company and is leased to an affiliate of the
card club operator that leases and operates the Hollywood Park-Casino. The
Hollywood Park-Casino and Crystal Park Casino are not operated by the Company
because public corporations that are not qualified California Racetrack
Associations may not directly operate gambling enterprises in California (see
"Government Regulation and Gaming Issues - California").
5
The Hollywood Park-Casino is located in Inglewood, California, and is part of
the complex which includes the Hollywood Park Race Track. The Hollywood
Park-Casino contains approximately 30,000 square feet of card club gaming space,
offering 120 table games, and 30,000 square feet of retail and restaurant space.
Since September 1999, the Hollywood Park-Casino has been leased from Churchill
Downs California Company, a wholly owned subsidiary of Churchill Downs
Incorporated, and is subleased to an unaffiliated third party operator (see Note
11 to the Notes to Consolidated Financial Statements).
The Crystal Park Casino, located on twenty acres in Compton, California, opened
in October 1996. The Crystal Park Casino contains approximately 40,000 square
feet of gaming and banquet space with 21 gaming tables. The adjoining hotel
contains 237 rooms, including 32 suites. The Company owns the approximately
twenty acres on which the casino facility, adjoining hotel and parking is
located. Prior to February 2001, the Company leased the adjoining hotel and
approximate 35 acres of unimproved land from the city of Compton under a 50-year
lease. In February 2001, in order to obtain full title to the property, the
Company purchased the hotel tower and approximately 14 acres of the leased land
for approximately $3,400,000. In the fourth quarter of 2001, in connection with
the reclassification of the net book value to "Assets held for sale" on the
Consolidated Balance Sheet at December 31, 2001 and reductions to rent payable
to the Company from the third-party operator, the Company wrote-down the Crystal
Park Casino card club asset to its estimated fair value (see Note 5 to the Notes
to Consolidated Financial Statements).
Other Gaming In 1998, the Company, through its wholly owned subsidiary HP
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Yakama, Inc. ("HP Yakama"), loaned approximately $9,618,000 to the Yakama Tribal
Gaming Corporation (the "Tribal Corporation") to construct the Legends Casino in
Yakima, Washington. The Tribal Corporation gave HP Yakama a promissory note for
the $9,618,000, payable in 84 equal monthly installments at a 10% rate of
interest.
Pursuant to a seven year Master Lease between HP Yakama and the Confederated
Tribes and Bands of the Yakama Indian Nation (the "Tribes"), HP Yakama was
required to pay the Tribes monthly rent of $1,000. HP Yakama and the Tribal
Corporation concurrently entered into a corresponding seven-year Sublease, under
which the Tribal Corporation owed rent to HP Yakama. Such rent under the
Sublease was initially set at 28% of Net Revenues (as defined in the relevant
agreements), and decreased to 22% over the seven-year term of the lease.
In June 2001, the Company received an early pay-off of the promissory note
(which amount was approximately $6,300,000 at such time) and related Master
Lease and Sublease agreements for a cumulative amount of approximately
$8,490,000. After deducting for cash participation receivables through June 30,
2001, and certain closing costs, the Company's pre-tax gain from the transaction
(which was recorded in the second quarter of 2001) was approximately $639,000.
Effective with this early termination of the promissory note and related lease
agreements, the Company no longer receives interest income nor cash flow
participation income for the sublease agreements.
General For a discussion of risk factors related to the Company's business and
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operations, see "Item 7 Management's Discussion and Analysis of Financial
Condition and Results of Operations - Forward-Looking Statements," "-Risk
Factors" and "-Factors Affecting Future Operating Results".
Operations Sold
Boomtown Biloxi Boomtown Biloxi, located in Biloxi, Mississippi, was sold to a
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subsidiary of Penn National Gaming in August 2000 (see Note 11 to the Notes to
Consolidated Financial Statements). The Company has granted Penn National a
license to use the "Boomtown" name and trademark for its Biloxi location only,
subject to certain restrictions. The license is until the later of August 1,
2003 or two years following the date on which the Company notifies Penn National
of its intent to abandon the "Casino Magic" name. If the Company decides to
abandon all use of the "Boomtown" name, Penn National has a right to acquire the
name for a two-year period from the Company's notice of intent to abandon.
Currently, the Company does not anticipate abandoning either the "Boomtown" or
"Casino Magic" names.
6
Casino Magic Bay St. Louis Casino Magic Bay St. Louis, located in Bay St. Louis,
- --------------------------
Mississippi, was sold to a subsidiary of Penn National Gaming in August 2000
(see Note 11 to the Notes to Consolidated Financial Statements). The Company has
granted Penn National a perpetual license to use the "Casino Magic" name and
trademark for its Bay St. Louis location only, subject to certain restrictions.
If the Company decides to abandon all use of the "Casino Magic" name, Penn
National has a right to acquire the name for a two-year period from the
Company's notice of intent to abandon.
Turf Paradise Race Track Turf Paradise, located in Phoenix, Arizona, was sold in
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June 2000 (see Note 11 to the Notes to Consolidated Financial Statements). The
property, as operated by the Company, conducted one continuous live thoroughbred
race meet from September through May.
Hollywood Park Race Track and Hollywood Park-Casino The Hollywood Park Race
- ---------------------------------------------------
Track, at which the Company conducted live thoroughbred racing meets, and the
adjacent Hollywood Park-Casino, located in Inglewood, California, were sold in
September 1999 and the Hollywood Park-Casino was then leased back to the Company
(see Note 11 to the Notes to Consolidated Financial Statements).
Expansion Plans
The following is a summary of the property enhancements and expansion projects
that the Company undertook, or is undertaking, with respect to its properties.
Boomtown New Orleans During 2001, the Company commenced a $10,000,000 renovation
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and expansion project at Boomtown New Orleans that included the addition of 300
new slot machines and a new high-limit table games area on the 3rd deck of the
dockside riverboat casino and renovation of various food and beverage outlets
and other amenities within the pavilion building adjacent to the riverboat
casino. Such construction is expected to be completed by or near the end of the
first quarter of 2002.
Casino Magic Bossier City In December 2001, Casino Magic Bossier City commenced
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a $25,000,000 renovation and expansion project that includes remodeling of the
existing pavilion building and dockside riverboat casino, all new restaurants
and a new multi-purpose showroom. Such renovation and expansion commenced in
December 2001 and is expected to be substantially completed in early July 2002.
Concurrently with the completion of the renovation and expansion project, the
Company anticipates re-branding the facility to "Boomtown Bossier City".
Belterra Casino Resort In October 2000, the Company completed construction of
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and opened the Belterra Casino Resort, a hotel and casino resort in southern
Indiana. The property, located on 315 acres adjacent to the Ohio River in
Switzerland County, Indiana, (which is approximately 45 miles southwest of
downtown Cincinnati, Ohio), features a 15-story, 308-room hotel, a cruising
riverboat casino (the Miss Belterra) with 1,344 slot machines and 45 table
games, an 18-hole Tom Fazio-designed championship golf course (which opened July
2001), six restaurants, a 1,500-seat entertainment showroom, a spa, retail areas
and other amenities.
Lake Charles In November 1999, the Company filed an application for the
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fifteenth and final gaming license to be issued by the Louisiana Gaming Control
Board (the "Gaming Control Board"). In July 2000, the Company was one of three
groups that presented their proposed projects to the Gaming Control Board. On
October 16, 2001, the Company was selected by the Gaming Control Board to
receive the license. Issuance of the license is subject to a number of
conditions, which conditions were finalized by the Company and the Gaming
Control Board in November 2001 (the "Lake Charles Conditions"). The Lake Charles
Conditions include, but are not limited to, the approval of the voters of
Calcasieu Parish, where the Lake Charles project is located, currently scheduled
for April 6, 2002. There are no assurances that the Company will be successful
in such referendum.
In addition to the April 6, 2002 Calcasieu Parish vote noted above, other Lake
Charles Conditions include, but are not limited to, building a facility
consistent with the July 2000 presentation, meeting certain construction
milestone dates and satisfying the financing requirements to complete the
project (including segregating
7
$22,500,000 in a refundable "escrow" account upon the voter approval of the
project in Calcasieu Parish and demonstrating the financial resources in cash
and available credit facility access for the full project amount of $225,000,000
once construction commences in the second half of 2002). The Company anticipates
it will continue to meet each of the Lake Charles Conditions, however there can
be no assurances the Company will do so, in which event the Company would not be
licensed to operate a casino in Lake Charles, Louisiana.
The proposed project is the construction and operation of a $225,000,000
(excluding capitalized interest) dockside riverboat casino, hotel and golf
course resort complex in Lake Charles, Louisiana. The Company is considering
various financing options for the development of the proposed project (and
therefore compliance with the financing requirement of the Lake Charles
Conditions), including, but not limited to, utilizing the Company's existing
credit facility (see Note 14 to the Notes to Consolidated Financial Statements),
a new credit facility or other senior debt and joint venture arrangements. The
Company anticipates building a facility similar in design and scope to that of
Belterra Casino Resort. See "Competition-Lake Charles Market" below for a
discussion of competition in the Lake Charles market and the possible impact on
an expansion of Indian gaming in Louisiana on the Company's decision to proceed
with this project.
There can be no assurance that the Company will be successful in completing any
currently contemplated or future expansion projects or, even if they are
completed, that the projects will be successful. Numerous factors, including
regulatory or financial constraints, could intervene and cause the Company to
alter, delay or abandon expansion plans. Such risks include an inability to
secure required financing or required local gaming approvals or other permits
and approvals, as well as risks typically associated with any construction
project, including possible shortages of materials or skilled labor, unforeseen
engineering, environmental or geological problems, work stoppages, weather
interference and unanticipated costs overruns. In addition, the Company is
subject to state and local laws and regulations, ordinances and similar
provisions relating to zoning and other matters that may restrict the possible
uses of the Company's land and other assets. Any additional development of the
Company's land, including the expansion plans described above, may require
approval of such items as environmental impact reports or other similar
certifications. There can be no assurance that other requisite approvals would
be obtained.
Competition
The Company faces significant competition in each of the jurisdictions in which
it has established gaming operations, and such competition is expected to
intensify in some of these jurisdictions as new gaming operations enter these
markets and existing competitors expand their operations. The Company's
properties compete directly with other gaming properties in Indiana, Louisiana,
Mississippi, Nevada, and Argentina, as well as in states adjacent to the
Company's properties. To a lesser extent, the Company also competes for
customers with other casino operators in North American markets, including
casinos located on Indian reservations, and other forms of gaming such as
lotteries and internet gaming. Many of the Company's competitors are larger,
have substantially greater name recognition and marketing resources as well as
access to lower cost sources of financing. Moreover, consolidation of companies
in the gaming industry could increase the concentration of large gaming
companies in the markets in which the Company operates, and may result in the
Company's competitors having even greater resources, name recognition and
licensing prospects than such competitors currently enjoy.
Ohio River Valley Market The Company operates the Belterra Casino Resort in the
- ------------------------
Ohio River Valley market, which competes with four other cruising riverboats.
The primary competitors are the Grand Victoria riverboat casino in Rising Sun,
operated by Hyatt, the Caesar's riverboat casino in Harrison County, operated by
Park Place Entertainment, and the Argosy riverboat casino in Lawrenceburg. Gross
gaming revenues in 2001 from the five riverboats in this market grew 11.6% over
year 2000.
In addition to competition from existing riverboats in southern Indiana, the
property is at risk from the possible legislative approval of casino type gaming
in Kentucky. Northern Kentucky is a significant feeder market to the Ohio River
Valley riverboat casino operators. Currently legislation is being discussed in
Kentucky which would approve the installation and operation of slot machines at
thoroughbred race tracks in the state, including
8
Turfway Park in nearby Florence, Kentucky and other horse racing tracks in the
Lexington and Louisville, Kentucky areas. In the event Kentucky were to approve
such an expansion of casino type gaming, it would, in all probability, have a
material adverse impact on the Company's operations at Belterra Casino Resort.
Bossier City/Shreveport Market The Company operates Casino Magic Bossier City in
- ------------------------------
this market. The property competes directly with four other dockside riverboat
gaming facilities, one of which, the Hollywood Casino, opened in December 2000,
and another of which, Harrah's Casino, opened a new 500-room hotel tower in
January 2001. The largest and most successful is Horseshoe Casino, which has a
606-room luxury hotel and has the largest riverboat, at 62,400 square feet
(though all of the casinos in Louisiana are limited to 30,000 square feet of
gaming space). Isle of Capri Casinos completed construction of a 305-room hotel
in mid-1999. Competition is negatively affecting the Company in this market
since the market did not grow as initially anticipated following the opening of
the new Hollywood Casino in late 2000 and the new Harrah's hotel tower in early
2001. As such, the additional competition in the market, without the benefit of
substantial growth, has caused operators in the market to pursue and draw from
the existing customer base and effectively reduce Casino Magic Bossier City's
market share. Additionally, if gaming were legalized in jurisdictions near the
property where gaming currently is not permitted, the Company could face
additional competition. For example, the Arkansas Attorney General certified for
the November 2000 general election ballot at least three ballot initiatives,
including a proposed constitutional amendment that would have permitted casino
gambling in Arkansas. Although none of the initiatives were approved in the
November 2000 election, there can be no assurance that similar initiatives will
not be proposed in the future. The Bossier City property could be negatively
impacted by the existence of gaming in Arkansas.
New Orleans Market The Company operates its Boomtown New Orleans property in
- ------------------
Harvey, Louisiana, approximately ten miles from downtown New Orleans, on the
"Westbank" in Jefferson Parish. Boomtown New Orleans directly competes with two
other dockside riverboat casinos, Bally's and Treasure Chest, and Harrah's Jazz
land-based casino and entertainment facility in downtown New Orleans. The
Harrah's Jazz casino has over 100,000 square feet of gaming space and over 3,600
gaming positions compared with Boomtown New Orleans, which has less than 30,000
square feet gaming space and 1,775 gaming positions. Dockside riverboat casinos,
including Boomtown New Orleans, are restricted by Louisiana gaming regulations
from expanding the gaming space beyond 30,000 square feet.
Lake Charles Market The Company is contemplating the development and operation
- -------------------
of a dockside riverboat casino in Lake Charles, Louisiana. In February 2002, it
was announced that the Governor of Louisiana signed a compact with the Jena Band
of Choctaw Indians (the "Choctaw Indians") to allow for the development and
operation of a land-based casino in the city of Vinton, Louisiana (which city is
in Calcasieu Parish and is 20 miles closer to Houston, Texas, the major
marketing area for casinos in Lake Charles, than the Company's proposed Lake
Charles project). In March 2002, such compact was disapproved by the U.S.
Department of the Interior. There can be no assurances the Choctaw Indians will
not seek to amend the compact, negotiate a revised compact with the state of
Louisiana and seek to resubmit with the Department of the Interior. In the event
the Choctaw Indians are successful in obtaining the approval of the Department
of the Interior for a new compact for their site in Vinton, Louisiana, the
Company believes such facility would have a material adverse effect upon the
Company's decision to develop it's proposed Lake Charles project. In the absence
of an additional Indian gaming facility in Calcasieu Parish (as one currently
exists to the east of the Company's proposed Lake Charles project), the Company
anticipates building a facility similar in design and scope to that of Belterra
Casino Resort.
In addition to the existing Indian gaming facility located to the east of the
Company's proposed Lake Charles project, there are four dockside riverboat
gaming licenses in the Lake Charles market, operated by two different companies
(each company operating two of the dockside riverboat casinos). The Company
believes its proposed Lake Charles casino and resort, if developed to the size
and scope initially contemplated, would be superior to the existing dockside
riverboat casino facilities.
Finally, competing in the Lake Charles gaming market is a horse race track
facility ("Delta Downs") that was recently renovated to accommodate
approximately 1,500 slot machines and various food and beverage
9
outlets. Delta Downs is closer to the Texas border than the Company's proposed
site, yet is not located immediately off Interstate 10, the main thoroughfare
between the Lake Charles area and the Houston, Texas market. Although Delta
Downs is closer to the main feeder market for the Lake Charles gaming market,
the Company believes its proposed Lake Charles project, if developed to the size
and scope initially contemplated, would be superior in design and scope to Delta
Downs.
Gulf Coast Market The Company operates Casino Magic Biloxi in the Gulf Coast
- -----------------
Market. The Mississippi gaming industry is ranked third in the United States,
behind Nevada and New Jersey. The Gulf Coast Market for 2001 was estimated to
have generated gaming revenues of $1.15 billion, which was approximately 43% of
the revenue generated by the entire Mississippi gaming market. One of the major
reasons for the growth was the entry of MGM/Mirage Resorts Beau Rivage Resort,
which opened in March 1999. Currently, Mississippi law does not limit the number
of gaming licenses that may be granted. Competition is negatively affecting the
Company in this market, as operators in the market, including the Company's
Casino Magic Biloxi property, are aggressively marketing their properties to
existing and prospective customers. Such marketing programs by competitors have
eroded some of Casino Magic Biloxi's revenues. These same programs implemented
by Casino Magic Biloxi can affect such revenue erosion, but do increase the
overall marketing expense of the property.
Reno Markets and California, Proposition 1A In Nevada, the Company operates
- -------------------------------------------
Boomtown Reno and in California, leases the Hollywood Park-Casino and the
Crystal Park Casino (both of which are California card clubs) to a third party
operator. Indian tribes have operated casinos in California for approximately
ten years, and currently there are approximately 40 Indian tribes operating
gambling halls, though most are significantly smaller than the typical Las Vegas
casino. In March 2000, California voters passed Proposition 1A, a ballot
initiative that allows Indian tribes to conduct various gaming activities
including horse race wagering, gaming devices (including slot machines), banked
card games (as in traditional Las Vegas card games) and lotteries. As a result
of the passage of Proposition 1A in California, additional Indian gaming casinos
have begun to open, and the Company expects additional Indian gaming casinos
will open in the future. Such new competition has begun to impact the Reno
market, including the Company's Boomtown Reno location, although the property
has faired better than most other operators in the market due to its location
immediately off of Interstate 80, the main thoroughfare between northern
California and northern Nevada. The Company expects further market pressures to
affect both the Reno market and Boomtown Reno in the future as more Indian
gaming casinos open, which may lower future revenue and cause increased
marketing costs to retain and attract customers for Reno gaming facilities,
including Boomtown Reno.
Card Clubs The Hollywood Park-Casino and the Crystal Park Casino face
- ----------
significant competition from other card club casinos in neighboring cities, as
well as competition from other forms of gaming around southern California,
including horse racing and Indian gaming.
Argentina The Company's current concession agreement with the Province of
- ---------
Neuquen provides for the exclusive operation of casinos in the province.
However, in the Province of Rio Negro, immediately adjacent to the Province of
Neuquen, there is a casino approximately 10 miles from Casino Magic Argentina's
Neuquen operations. Although such facility is smaller than Casino Magic
Argentina's Neuquen facility, there can be no assurance such facility will not
expand its facility and draw additional customers from the Company's casino.
General While the Company believes that it has been able to adequately compete
- -------
in these markets to date, increasing competition may adversely affect gaming
operations in the future. The Company believes that increased legalized gaming
in other states, particularly in areas close to its existing gaming properties,
such as in Texas, Alabama, Arkansas, Ohio or Kentucky, or the expansion of
Indian gaming in or near the states in which the Company operates, could create
additional competition for the Company and could adversely affect its
operations.
10
Government Regulation and Gaming Issues
Indiana The ownership and operation of riverboat casinos at Indiana-based sites
- -------
are subject to extensive state regulation under the Indiana Riverboat Gaming Act
("Indiana Act"), as well as regulations which the Indiana Gaming Commission (the
"Indiana Commission") has adopted pertaining to the Indiana Act. The Indiana Act
and regulations are significant to the Company's prospects for successfully
operating the Belterra facility.
The Indiana Act grants broad and pervasive regulatory powers and authority to
the Indiana Commission. Comprehensive regulations have been adopted covering
ownership and reporting for licensed riverboat casinos together with "rules of
the game" governing riverboat casino operations. The Indiana Commission has also
adopted a set of regulations under the Indiana Act which govern a series of
operational matters for Indiana riverboat casinos.
Among the regulations adopted by the Indiana Commission is one dealing with
riverboat excursions, routes and public safety. The Indiana Act requires
licensed riverboat casinos to be cruising vessels, and the regulations carry out
the legislative intent by requiring cruising with appropriate recognition of
public safety needs. The regulations explicitly preclude "dockside gambling".
Riverboat gaming excursions are limited to a maximum duration of four hours
unless otherwise expressly approved by the Indiana Commission. Excursion routes
and schedules are subject to the approval of the Indiana Commission. No gaming
may be conducted while the boat is docked except: (1) for thirty-minute
embarkment and disembarkment periods at the beginning and end of a cruise; (2)
if the master of the riverboat reasonably determines that specific weather or
water conditions present a danger to the riverboat, its passengers and crew; (3)
if either the vessel or the docking facility is undergoing mechanical or
structural repair; (4) if water traffic conditions present a danger to the
riverboat, riverboat passengers and crew, or to other vessels on the water, or
(5) if the master has been notified that a condition exists that would cause a
violation of Federal law if the riverboat were to cruise.
For Ohio River excursions, such as those Belterra conducts from its Switzerland
County development, "full excursions" must be conducted at all times during the
year unless the master determines otherwise, for the above-stated reasons. A
"full excursion" is a cruise on the Ohio River. The Ohio River has waters in
both Indiana and Kentucky. The cruise route employed by Belterra is completely
in Indiana waters on the Ohio River with no need or likelihood of entering
Kentucky waters. Therefore, Kentucky laws precluding any kind of casino gaming
have no impact on the Belterra operations.
An Indiana riverboat owner's license has an initial effective period of five
years; thereafter, a license is subject to annual renewal. The Indiana
Commission has broad discretion over the initial issuance of licenses and over
the renewal, revocation, suspension and control of riverboat owner's licenses.
Belterra will be subject to a reinvestigation in 2003 to ensure it continues to
be in compliance with the Indiana Act. Officers, directors and principal owners
of the actual license holder and employees who are to work on the riverboat are
subject to substantial disclosure requirements as a part of securing and
maintaining necessary licenses. Significant contracts to which Belterra is party
are subject to disclosure and approval processes imposed by the regulations. A
riverboat owner's licensee may not enter into or perform any contract or
transaction in which it transfers or receives consideration which is not
commercially reasonable or which does not reflect the fair market value of the
goods or services rendered or received. All contracts are subject to disapproval
by the Indiana Commission. Suppliers of gaming equipment and materials must also
be licensed under the Indiana Act.
Licensees are statutorily required to disclose to the Indiana Commission the
identity of all directors, officers and persons holding direct or indirect
beneficial interests of 1% or greater. The Indiana Commission also requires a
broad and comprehensive disclosure of financial and operating information on
licensees and their principal officers, and their parent corporations and other
upstream owners. The Company and Belterra have provided full information and
documentation to the Indiana Commission, and they must continue to do so
throughout the period of licensure. The Indiana Act prohibits contributions to a
candidate for a state, legislative, or local
11
office, or to a candidate's committee or to a regular party committee by the
holder of a riverboat owner's license or a supplier's license, by an officer of
a licensee, by an officer of a person that holds at least a 1% interest in the
licensee or by a person holding at least a 1% interest in the licensee. The
Indiana Commission has promulgated a rule requiring quarterly reporting by such
licensees, officers, and persons.
Adjusted gross receipts from gambling games authorized under the Indiana Act are
subject to a tax at the rate of 20%. "Adjusted gross receipts" means the total
of all cash and property received from gaming operations less cash paid out as
winnings and uncollectible gaming receivables (not to exceed 2%). The Indiana
Act also prescribes an additional tax for admissions, based upon $3 per person
per excursion. Real Property taxes are imposed on riverboats at rates determined
by local taxing authorities. Income to the Company from Belterra is subject to
the Indiana gross income tax, the Indiana adjusted gross income tax and the
Indiana supplemental corporate net income tax. Sales on a riverboat and at
related resort facilities are subject to applicable use, excise and retail
taxes. The Indiana Act requires a riverboat owner licensee to directly reimburse
the Indiana Commission for the costs of inspectors and agents required to be
present while authorized gaming is conducted.
Through the establishment of purchasing "goals," the Indiana Act encourages
minority and women's business enterprise participation in the riverboat gaming
industry. Each riverboat licensee must establish goals of at least 10% of total
dollar value of the licensee's contracts for goods and services with minority
business enterprises and 5% with women business enterprises. The Indiana
Commission may suspend, limit or revoke the owner's license or impose a fine for
failure to comply with the statutory requirements. The Indiana Commission has
indicated it will be vigilant in monitoring attainment of these goals. The
Company is currently in compliance with such purchasing goals, but has failed to
achieve such goals at various times in the past.
Minimum and maximum wagers on games on the riverboat are left to the discretion
of the licensee. Wagering may not be conducted with money or other negotiable
currency. There are no statutory restrictions on extending credit to patrons;
however, the matter of credit continues to be a matter of potential legislative
action.
If an institutional investor acquires 5% or more of any class of voting
securities of a holding company of a licensee, the investor is required to
notify the Indiana Commission and to provide additional information, and may be
subject to a finding of suitability. Institutional investors who acquire 15% or
more of any class of voting securities are subject to a finding of suitability.
Any other person who acquired 5% or more of any class of voting securities of a
holding company of a licensee is required to apply to the Indiana Commission for
a finding of suitability. A riverboat licensee or an affiliate may not enter
into a debt transaction of $1,000,000 or more without approval of the Indiana
Commission. The Indiana Commission has taken the position that a "debt
transaction" includes increases in maximum amount available under reducing
revolving credit facilities. A riverboat owner's license is a revocable
privilege and is not a property right under the Indiana Act. A riverboat owner
licensee or any other person may not lease, hypothecate, borrow money against or
loan money against or otherwise securitize a riverboat owner's license.
Louisiana The ownership and operation of a riverboat gaming vessel is subject to
- ---------
the Louisiana Riverboat Economic Development and Gaming Control Act (the
"Louisiana Act"). As of May 1, 1996, gaming activities are regulated by the
Louisiana Gaming Control Board (the "Board"). The Board is responsible for
issuing the gaming license and enforcing the laws, rules and regulations
relative to riverboat gaming activities. The Board is empowered to issue up to
fifteen licenses to conduct gaming activities on a riverboat of new construction
in accordance with applicable law. However, no more than six licenses may be
granted to riverboats operating from any one designated waterway.
An initial license to conduct gaming operations is valid for a term of five
years. The Louisiana Act provides for successive five year renewals after the
initial five year term.
The laws and regulations of Louisiana seek to: (i) prevent unsavory or
unsuitable persons from having any direct or indirect involvement with gaming at
any time or in any capacity; (ii) establish and maintain
12
responsible accounting practices and procedures; (iii) maintain effective
control over the financial practices of licensees, including establishing
procedures for reliable record keeping and making periodic reports to the Board;
(iv) prevent cheating and fraudulent practices; (v) provide a source of state
and local revenues through fees; and (vi) ensure that gaming licensees, to the
extent practicable, employ and contract with Louisiana residents, women and
minorities.
The Louisiana Act specifies certain restrictions and conditions relating to the
operation of riverboat gaming, including, but not limited to, the following: (i)
in parishes bordering the Red River, such as the Company's Casino Magic property
in Bossier, gaming may be conducted dockside; however, prior to the passage of
legislation legalizing dockside gaming effective April 1, 2001 in the 2001
Special Session of the Louisiana Legislature, in all other authorized locations
such as Boomtown New Orleans, gaming is not permitted while a riverboat is
docked, other than for forty-five minutes between excursions, unless dangerous
weather or water conditions exist; (ii) prior to the passage of legislation
legalizing dockside gaming effective April 1, 2001 in the 2001 Special Session
of the Louisiana Legislature, each round trip riverboat cruise may not be less
than three nor more than eight hours in duration, subject to specified
exceptions; (iii) agents of the Board are permitted on board at any time during
gaming operations; (iv) gaming devices, equipment and supplies may be purchased
or leased from permitted suppliers; (v) gaming may only take place in the
designated river or waterway; (vi) gaming equipment may not be possessed,
maintained, or exhibited by any person on a riverboat except in the specifically
designated gaming area, or a secure area used for inspection, repair, or storage
of such equipment; (vii) wagers may be received only from a person present on a
licensed riverboat; (viii) persons under 21 are not permitted in designated
gaming areas; (ix) except for slot machine play, wagers may be made only with
tokens, chips, or electronic cards purchased from the licensee aboard a
riverboat; (x) licensees may only use docking facilities and routes for which
they are licensed and may only board and discharge passengers at the riverboat's
licensed berth; (xi) licensees must have adequate protection and indemnity
insurance; (xii) licensees must have all necessary federal and state licenses,
certificates and other regulatory approvals prior to operating a riverboat; and
(xiii) gaming may only be conducted in accordance with the terms of the license
and the rules and regulations adopted by the Board.
No person may receive any percentage of the profits from the Company's
operations in Louisiana without first being found suitable. In March 1994,
Boomtown New Orleans, its officers, key personnel, partners and persons holding
a 5% or greater interest in the partnership were found suitable by the
predecessor to the Board. In April 1996, the Board's predecessor confirmed that
Casino Magic Bossier's officers, key personnel, partners and persons holding a
5% or greater interest in the corporation were suitable and authorized to
acquire an existing licensee. In July 1999, the Board renewed Boomtown New
Orleans' license to conduct gaming operations. In May 2001, the Board renewed
Casino Magic Bossier's license to conduct gaming operations. A gaming license is
deemed to be a privilege under Louisiana law and as such may be denied, revoked,
suspended, conditioned or limited at any time by the Board. In issuing a
license, the Board must find that the applicant is a person of good character,
honesty and integrity and the applicant is a person whose prior activities,
criminal record, if any, reputation, habits and associations do not pose a
threat to the public interest of the State of Louisiana or to the effective
regulation and control of gaming, or create or enhance the dangers of
unsuitable, unfair or illegal practices, methods, and activities in the conduct
of gaming or the carrying on of business and financial arrangements in
connection therewith. The Board will not grant any licenses unless it finds
that: (i) the applicant is capable of conducting gaming operations, which means
that the applicant can demonstrate the capability, either through training,
education, business experience, or a combination of the above, to operate a
gaming casino; (ii) the proposed financing of the riverboat and the gaming
operations is adequate for the nature of the proposed operation and from a
source suitable and acceptable to the Board; (iii) the applicant demonstrates a
proven ability to operate a vessel of comparable size, capacity and complexity
to a riverboat in its application for a license; (v) the applicant designates
the docking facilities to be used by the riverboat; (vi) the applicant shows
adequate financial ability to construct and maintain a riverboat; (vii) the
applicant has a good faith plan to recruit, train and upgrade minorities in all
employment classifications; and (viii) the applicant is of good moral character.
The Board may not award a license to any applicant who fails to provide
information and documentation to reveal any fact material to qualification or
who supplies information which is untrue or misleading as to a
13
material fact pertaining to the qualification criteria; who has been convicted
of or pled nolo contendere to an offense punishable by imprisonment of more than
one year; who is currently being prosecuted for or regarding whom charges are
pending in any jurisdiction of an offense punishable by more than one year
imprisonment; if any holder of 5% or more in the profits and losses of the
applicant has been convicted of or pled guilty or nolo contendere to an offense
which at the time of conviction is punishable as a felony.
The transfer of a license is prohibited; however, the sale, assignment,
transfer, pledge, or disposition of securities which represent 5% or more of the
total outstanding shares issued by a holder of a license may be transferred,
subject to prior Board approval. A security issued by a holder of a license must
generally disclose these restrictions.
Section 2501 of the regulations enacted by the Louisiana State Police Riverboat
Gaming Division pursuant to the Louisiana Act (the "Regulations") requires prior
written approval of the Board of all persons involved in the sale, purchase,
assignment, lease, grant or foreclosure of a security interest, hypothecation,
transfer, conveyance or acquisition of an ownership interest (other than in a
corporation) or economic interest of five percent (5%) or more in any licensee.
Section 2523 of the Regulations requires notification to and prior approval from
the Board of the: (a) application for, receipt, acceptance or modification of a
loan, the (b) use of any cash, property, credit, loan or line of credit, or the
(c) guarantee or granting of other forms of security for a loan by a licensee or
person acting on a licensee's behalf. Exceptions to prior written approval
include, without limitation, any transaction for less than $2,500,000 in which
all of the lending institutions are federally regulated, the transaction
modifies the terms of an existing, previously approved loan transaction, or if
the transaction involves publicly registered debt and securities sold pursuant
to a firm underwriting agreement.
The failure of a licensee to comply with the requirements set forth above may
result in the suspension or revocation of that licensee's gaming license.
Additionally, if the Board finds that the individual owner or holder of a
security of a corporate license or intermediary company or any person with an
economic interest in a licensee is not qualified under the Louisiana Act, the
Board may require, under penalty of suspension or revocation of the license,
that the person not: (a) receive dividends or interest on securities of the
corporation, (b) exercise directly or indirectly a right conferred by securities
of the corporation, (c) receive remuneration or economic benefit from the
licensee, or (d) continue in an ownership or economic interest in the licensee.
A licensee must periodically report the following information to the Board,
which is not confidential and is to be available for public inspection: (a) the
licensee's net gaming proceeds from all authorized games; (b) the amount of net
gaming proceeds tax paid; and, (c) all quarterly and annual financial statements
presenting historical data that are submitted to the Board, including annual
financial statements that have been audited by an independent certified public
accountant.
The Louisiana Act restricts gaming space on riverboats to no more than 30,000
square feet. The Board has adopted rules governing the method for approval of
the area of operations and the rules and odds of authorized games and devices
permitted, and prescribing grounds and procedures for the revocation, limitation
or suspension of licenses and permits.
On April 19, 1996, the Louisiana legislature adopted legislation requiring
statewide local elections on a parish-by-parish basis to determine whether to
prohibit or continue to permit licensed riverboat gaming, licensed video poker
gaming, and licensed land-based gaming in Orleans Parish. The applicable local
election took place on November 5, 1996, and the voters in the parishes of
Boomtown New Orleans and Casino Magic Bossier voted to continue licensed
riverboat and video poker gaming. However, it is noteworthy that the current
legislation does not provide for any moratorium on future local elections on
gaming.
Prior to the passage of legislation in the 2001 Special Session of the Louisiana
Legislature, fees to the state of Louisiana for conducting gaming activities on
a riverboat include: (i) $50,000 per riverboat for the first year of operation
and $100,000 per year, per riverboat thereafter, plus (ii) 18.5% of net gaming
proceeds. In the 2001
14
Special Session of the Louisiana Legislature, a law was passed legalizing
dockside gaming and increasing the fees paid to the state of Louisiana to 21.5%
of net gaming proceeds effective April 1, 2001 for the nine riverboats in the
southern region of the state, including the Company's Boomtown New Orleans
property, while the fee increase to 21.5% of net gaming proceeds will be phased
in over an approximately two year period for the riverboats operating in
parishes bordering the Red River, including the Company's Casino Magic Bossier
City property.
Mississippi The ownership and operation of casino facilities in Mississippi are
- -----------
subject to extensive state and local regulation, but primarily the licensing and
regulatory control of the Mississippi Gaming Commission (the "Mississippi
Commission") and the Mississippi State Tax Commission (the "Mississippi Gaming
Authorities").
The Mississippi Gaming Control Act (the "Mississippi Act"), which legalized
dockside casino gaming in Mississippi, was enacted June 29, 1990. Although not
identical, the Mississippi Act is similar to the Nevada Gaming Control Act. The
Mississippi Commission adopted regulations which are also similar in many
respects to the Nevada gaming regulations.
The laws, regulations and supervisory procedures of Mississippi and the
Mississippi Commission seek to: (i) prevent unsavory or unsuitable persons from
having any direct or indirect involvement with gaming at any time or in any
capacity; (ii) establish and maintain responsible accounting practices and
procedures; (iii) maintain effective control over the financial practices of
licensees, including establishing minimum procedures for internal fiscal affairs
and safeguarding of assets and revenues, providing reliable record keeping and
making periodic reports to the Mississippi Commission; (iv) prevent cheating and
fraudulent practices; (v) provide a source of state and local revenues through
taxation and licensing fees; and (vi) ensure that gaming licensees, to the
extent practicable, employ Mississippi residents. The regulations are subject to
amendment and interpretation by the Mississippi Commission. Changes in
Mississippi laws or regulations may limit or otherwise materially affect the
types of gaming that may be conducted and such changes, if enacted, could have
an adverse effect on the Company and the Company's Mississippi gaming operation.
The Mississippi Act provides for legalized dockside gaming at the discretion of
the fourteen counties that border the Gulf Coast or the Mississippi River, but
only if the voters in such counties have not voted to prohibit gaming in that
county. In recent years, certain anti-gaming groups proposed for adoption
through the initiative and referendum process certain amendments to the
Mississippi Constitution, which would prohibit gaming in the state. The
proposals were declared illegal by Mississippi courts on constitutional and
procedural grounds. The latest ruling was appealed to the Mississippi Supreme
Court, which affirmed the decision of the lower court. If another such proposal
were to be offered and if a sufficient number of signatures were to be gathered
to place a legal initiative on the ballot, it is possible for the voters of
Mississippi to consider such a proposal in November of 2003. As of January 1,
2002, dockside gaming was permissible in nine of the fourteen eligible counties
in the state and gaming operations had commenced in Adams, Coahoma, Hancock,
Harrison, Tunica, Warren and Washington counties. Under Mississippi law, gaming
vessels must be located on the Mississippi River or on navigable waters in
eligible counties along the Mississippi River or in the waters lying south of
the counties along the Mississippi Gulf Coast. The law permits unlimited stakes
gaming on permanently moored vessels on a 24-hour basis and does not restrict
the percentage of space which may be utilized for gaming. There are no
limitations on the number of gaming licenses which may be issued in Mississippi.
The Mississippi Act permits substantially all traditional casino games and
gaming devices, and, on August 11, 1997, a Mississippi Circuit Court judge
issued a ruling that the Mississippi Act permits race books on the premises of
licensed casinos. The Mississippi Commission appealed the decision to the
Mississippi Supreme Court, which has not yet rendered a decision.
The Company and Biloxi Casino Corp (the "Mississippi Gaming Subsidiary") which
operates Casino Magic Biloxi, is subject to the licensing and regulatory control
of the Mississippi Commission. The Company must be registered under the
Mississippi Act as a publicly traded holding company for the Mississippi Gaming
Subsidiary and is required periodically to submit detailed financial and
operating reports to the Mississippi
15
Commission and furnish any other information which the Mississippi Commission
may require. If the Company is unable to continue to satisfy the registration
requirements of the Mississippi Act, the Company and its Mississippi Gaming
Subsidiary cannot own or operate gaming facilities in Mississippi.
The Mississippi Gaming Subsidiary must maintain a gaming license from the
Mississippi Commission to operate a casino in Mississippi. Such licenses are
issued by the Mississippi Commission subject to certain conditions, including
continued compliance with all applicable state laws and regulations. Gaming
licenses are not transferable, are issued for a three-year period and must be
renewed periodically thereafter. Casino Magic Biloxi's license is due to expire
in January 2004. No person may become a stockholder of or receive any percentage
of profits from a licensed subsidiary of a registered holding company without
first obtaining licenses and approvals from the Mississippi Commission. The
Company has obtained such approvals in connection with the licensing of its
Mississippi Gaming Subsidiary, and the registration of the Company as a
publicly-traded holding company.
Certain officers and employees of the Company and the officers, directors and
certain key employees of the Company's Mississippi Gaming Subsidiary must be
found suitable to be licensed by the Mississippi Commission. The Company
believes that it has obtained, applied for or is in the process of applying for
all necessary findings of suitability with respect to such persons associated
with the Company or its Mississippi Gaming Subsidiary, although the Mississippi
Commission in its discretion may require additional persons to file applications
for findings of suitability. In addition, any person having a material
relationship or involvement with the Company or its Mississippi Gaming
Subsidiary may be required to be found suitable, in which case those persons
must pay the costs and fees associated with such investigation. The Mississippi
Commission may deny an application for a finding of suitability for any cause
that it deems reasonable. Changes in certain licensed positions must be reported
to the Mississippi Commission. In addition to its authority to deny an
application for a finding of suitability, the Mississippi Commission has
jurisdiction to disapprove a change in a person's corporate position or title
and such changes must be reported to the Mississippi Commission. The Mississippi
Commission has the power to require the Mississippi Gaming Subsidiary and the
Company to suspend or dismiss officers, directors and other key employees or
sever relationships with other persons who refuse to file appropriate
applications or whom the authorities find unsuitable to act in such capacities.
Employees associated with gaming must obtain work permits that are subject to
immediate suspension under certain circumstances. The Mississippi Commission
shall refuse to issue a work permit to a person convicted of a felony and it may
refuse to issue a work permit to a gaming employee if the employee has committed
certain misdemeanors, or knowingly violated the Mississippi Act, or for any
other reasonable cause.
At any time, the Mississippi Commission has the power to investigate and require
the finding of suitability of any record or beneficial stockholder of the
Company. Mississippi law requires any person who acquires more than 5% of the
common stock of a publicly traded corporation registered with the Mississippi
Commission to report the acquisition to the Mississippi Commission, and such
person may be required to be found suitable. Also, any person who becomes a
beneficial owner of more than 10% of the common stock of such a company, as
reported to the Securities and Exchange Commission, must apply for a finding of
suitability by the Mississippi Commission and must pay the costs and fees that
the Mississippi Commission incurs in conducting the investigation. The
Mississippi Commission has generally exercised its discretion to require a
finding of suitability of any beneficial owner of more than 5% of a registered
publicly-traded holding company's common stock. However, pursuant to Mississippi
Gaming Commission Policy on Findings of Suitability of Institutional
Shareholders dated January 20, 2000, an "institutional investor", as defined by
the policy, which acquires more than 10%, but not more than 15%, of a registered
publicly-traded holding company's voting securities may apply to the Mississippi
Commission for a waiver of finding of suitability if such institutional investor
holds the voting securities for investment purposes only. An institutional
investor shall not be deemed to hold voting securities for investment purposes
only unless the voting securities were acquired and are held in the ordinary
course of business as an institutional investor and not for the purpose of
causing, directly or indirectly, the election of a majority of the members of
the board of directors, any change in the corporate charter, bylaws, management,
policies or operations of the registered publicly-traded holding company or any
of its affiliates, or any other action which the Mississippi Commission finds to
be inconsistent with investment purposes only.
16
The following activities shall not be deemed to be inconsistent with holding
voting securities for investment purposes only: (i) voting, directly or
indirectly through the delivery of a proxy furnished by the board of directors,
on all matters voted upon by the holders of such voting securities; (ii) serving
as a member of any committee of creditors or security holders; (iii) nominating
any candidate for election or appointment to the board of directors in
connection with a debt restructuring; (iv) accepting appointment or election (or
having a representative accept appointment or election) as a member of the board
of directors in connection with a debt restructuring and serving in that
capacity until the conclusion of the member's term; (v) making financial and
other inquiries of management of the type normally made by securities analysts
for informational purposes and not to cause a change in its management, policies
or operations; and (vi) such other activities as the Mississippi Commission may
determine to be consistent with such investment intent. If a stockholder who
must be found suitable is a corporation, partnership or trust, it must submit
detailed business and financial information, including a list of beneficial
owners.
Any person who fails or refuses to apply for a finding of suitability or a
license within 30 days after being ordered to do so by the Mississippi
Commission may be found unsuitable. The same restrictions apply to a record
owner, if the record owner, after request, fails to identify the beneficial
owner. Management believes that compliance by the Company with the licensing
procedures and regulatory requirements of the Mississippi Commission will not
affect the marketability of the Company's securities. Any person found
unsuitable and who holds, directly or indirectly, any beneficial ownership of
the securities of the Company beyond such time as the Mississippi Commission
prescribes, may be guilty of a misdemeanor. The Company is subject to
disciplinary action if, after receiving notice that a person is unsuitable to be
a stockholder or to have any other relationship with the Company or its
Mississippi Gaming Subsidiary, the Company: (i) pays the unsuitable person any
dividend or other distribution upon the voting securities of the Company; (ii)
recognizes the exercise, directly or indirectly, of any voting rights conferred
by securities of the Company held by the unsuitable person; (iii) pays the
unsuitable person any remuneration in any form for services rendered or
otherwise, except in certain limited and specific circumstances; or (iv) fails
to pursue all lawful efforts to require the unsuitable person to divest himself
of the securities, including, if necessary, the immediate purchase of the
securities for cash at a fair market value.
The Company may be required to disclose to the Mississippi Commission, upon
request, the identities of the holders of any of the Company's debt or other
securities. In addition, under the Mississippi Act the Mississippi Commission
may, in its discretion: (i) require holders of securities of registered
corporations, including debt securities such as the Company's 9.5% Notes and the
9.25% Notes, to file applications, (ii) investigate such holders, and (iii)
require such holders to be found suitable to own such securities. If the
Mississippi Commission determines that a person is unsuitable to own such
security, then the issuer may be sanctioned, including the loss of its
approvals, if without the prior approval of the Mississippi Commission, it (i)
pays to the unsuitable person any dividend, interest, or any distribution
whatsoever; (ii) recognizes any voting right by such unsuitable person in
connection with such securities; (iii) pays the unsuitable person remuneration
in any form; or (iv) makes any payment to the unsuitable person by way of
principal, redemption, conversion, exchange, liquidation, or similar
transaction. Although the Mississippi Commission generally does not require the
individual holders of obligations such as the Notes to be investigated and found
suitable, the Mississippi Commission retains the discretion to do so for any
reason, including but not limited to a default, or where the holder of the debt
instrument exercises a material influence over the gaming operations of the
entity in question. Any holder of debt securities required to apply for a
finding of suitability must pay all investigative fees and costs of the
Mississippi Commission in connection with such an investigation.
The Mississippi Gaming Subsidiary must maintain in Mississippi a current ledger
with respect to ownership of its equity securities, and the Company must
maintain in Mississippi a current list of stockholders of the Company which must
reflect the record ownership of each outstanding share of any class of equity
security issued by the Company. The ledger and stockholder lists must be
available for inspection by the Mississippi Commission at any time. If any
securities of the Company are held in trust by an agent or by a nominee, the
record holder may be required to disclose the identity of the beneficial owner
to the Mississippi Commission. A failure to make such disclosure may be grounds
for finding the record holder unsuitable. The Company must also render maximum
assistance in determining the identity of the beneficial owners.
17
The Mississippi Act requires that the certificates representing securities of a
publicly-traded corporation bear a legend to the general effect that such
securities are subject to the Mississippi Act and the regulations of the
Mississippi Commission. The Company has received from the Mississippi Commission
a waiver from this legend requirement. The Mississippi Commission has the power
to impose additional restrictions on the holders of the Company's securities at
any time.
Substantially all loans, leases, sales of securities and similar financing
transactions by the Mississippi Gaming Subsidiary must be reported to or
approved by the Mississippi Commission. The Mississippi Gaming Subsidiary may
not make a public offering of its securities, but may pledge or mortgage casino
facilities. The Company may not make a public offering of its securities without
the prior approval of the Mississippi Commission if any part of the proceeds of
the offering is to be used to finance the construction, acquisition or operation
of gaming facilities in Mississippi or to retire or extend obligations incurred
for one or more such purposes. Such approval, if given, does not constitute a
recommendation or approval of the investment merits of the securities subject to
the offering.
Under the regulations of the Mississippi Commission, a gaming licensee may not
guarantee a security issued by an affiliate company pursuant to a public
offering, or pledge its assets to secure payment or performance of the
obligations evidenced by the security issued by the affiliated company, without
the prior approval of the Mississippi Commission. A pledge of stock of a gaming
licensee and the foreclosure of such a pledge are ineffective without the prior
approval of the Mississippi Commission. Moreover, restrictions on the transfer
of an equity security issued by a Mississippi licensee and agreements not to
encumber such securities are ineffective without the prior approval of the
Mississippi Commission.
Changes in control of the Company through merger, consolidation, acquisition of
assets, management or consulting agreements or any form of takeover, cannot
occur without the prior approval of the Mississippi Commission. The Mississippi
Commission may also require controlling stockholders, officers, directors and
other persons having a material relationship or involvement with the entity
proposing to acquire control, to be investigated and licensed as part of the
approval process relating to the transaction.
The Mississippi legislature has declared that some corporate acquisitions
opposed by management, repurchases of voting securities and other corporate
defense tactics that affect corporate gaming licensees in Mississippi and
corporations whose stock is publicly traded that are affiliated with those
licensees, may be injurious to stable and productive corporate gaming. The
Mississippi Commission has established a regulatory scheme to ameliorate the
potentially adverse effects of these business practices upon Mississippi's
gaming industry and to further Mississippi's policy to: (i) assure the financial
stability of corporate gaming operators and their affiliates; (ii) preserve the
beneficial aspects of conducting business in the corporate form; and (iii)
promote a neutral environment for the orderly governance of corporate affairs.
Approvals are, in certain circumstances, required from the Mississippi
Commission before the Company may make exceptional repurchases of voting
securities in excess of the current market price of its common stock (commonly
called "greenmail") or before a corporate acquisition opposed by management may
be consummated. Mississippi's gaming regulations will also require prior
approval by the Mississippi Commission if the Company adopts a plan of
recapitalization proposed by its Board of Directors opposing a tender offer made
directly to the shareholders for the purpose of acquiring control of the
Company.
Neither the Company nor any subsidiary may engage in gaming activities in
Mississippi while also conducting gaming operations outside of Mississippi
without approval of the Mississippi Commission. The Mississippi Commission may
require determinations that, among other things, there are means for the
Mississippi Commission to have access to information concerning the out-of-state
gaming operations of the Company and its affiliates. The Mississippi Commission
has approved the Company's current operations in other jurisdictions but must
approve the Company's future gaming operations in any new jurisdictions.
If the Mississippi Commission decides that the Mississippi Gaming Subsidiary
violated a gaming law or regulation, the Mississippi Commission could limit,
condition, suspend or revoke the license of the Mississippi
18
Gaming Subsidiary, subject to compliance with certain statutory and regulatory
procedures. In addition, the Mississippi Gaming Subsidiary, the Company and the
persons involved could be subject to substantial fines for each separate
violation. Because of such a violation, the Mississippi Commission could attempt
to appoint a supervisor to operate the casino facilities. Limitation,
conditioning or suspension of any gaming license or the appointment of a
supervisor could (and revocation of any gaming license would) materially
adversely affect the Company, the Mississippi Gaming Subsidiary's gaming
operations and the Company's results of operations.
License fees and taxes, computed in various ways depending on the type of gaming
involved, are payable to the State of Mississippi and to the counties and cities
in which the Mississippi Gaming Subsidiary's respective operations will be
conducted. Depending upon the particular fee or tax involved, these fees and
taxes are payable either monthly, quarterly or annually and are based upon (i) a
percentage of the gross gaming revenues received by the casino operation, (ii)
the number of slot machines operated by the casino, or (iii) the number of table
games operated by the casino. The license fee payable to the State of
Mississippi is based upon "gaming receipts" (generally defined as gross receipts
less pay outs to customers as winnings) and equals 4% of gaming receipts of
$50,000 or less per month, 6% of gaming receipts over $50,000 and less than
$134,000 per month, and 8% of gaming receipts over $134,000. The foregoing
license fees are allowed as a credit against the licensee's Mississippi income
tax liability for the year paid. The gross revenue fee imposed by the
Mississippi communities in, which the Company's casino operations are located,
equals approximately 4% of the gaming receipts.
In October 1994, the Mississippi Commission adopted two new regulations. Under
the first regulation, as a condition of licensure or license renewal, casino
vessels on the Mississippi Gulf Coast that are not self-propelled must be moored
to withstand a Category 4 hurricane with 155 mile-per-hour winds and 15-foot
tidal surge. The Company believes that the Mississippi Gaming Subsidiary
currently meets this requirement. The second regulation requires as a condition
of licensure or license renewal that a gaming establishment's plan include a
500-car parking facility in close proximity to the casino complex and
infrastructure facilities, the expenditures for which will amount to at least
25% of the casino cost. Such facilities shall include any of the following: a
250-room hotel of at least a two-star rating as defined by the current edition
of the Mobil Travel Guide, a theme park, golf courses, marinas, tennis complex,
entertainment facilities, or any other such facility as approved by the
Mississippi Commission as infrastructure. Parking facilities, roads, sewage and
water systems, or facilities normally provided by cities and/or counties are
excluded. The Mississippi Commission may in its discretion reduce the number of
rooms required, where it is shown to the Commission's satisfaction that
sufficient rooms are available to accommodate the anticipated visitor load. The
Company believes that the Mississippi Gaming Subsidiary currently meets such
requirements. The Mississippi Commission has recently adopted amendments to the
regulation that increase the infrastructure development requirement from 25% to
100% for new casinos (or upon acquisition of a closed casino), but grandfather
existing licensees.
The sale of food or alcoholic beverages at the Mississippi Gaming Subsidiary is
subject to licensing, control and regulation by the applicable state and local
authorities. The agencies involved have full power to limit, condition, suspend
or revoke any such license, and any such disciplinary action could (and
revocation would) have a materially adverse effect upon the operations of the
affected casino or casinos. Certain officers and managers of the Company and the
Mississippi Gaming Subsidiary must be investigated by the Alcoholic Beverage
Control Division of the State Tax Commission (the "ABC") in connection with the
Mississippi Gaming Subsidiary's liquor permits. Changes in licensed positions
must be approved by the ABC.
Mississippi Anti-Gaming Initiative In 1998, two referenda were proposed which,
- ----------------------------------
if approved, would have amended the Mississippi Constitution to ban gaming in
Mississippi and would have required all currently legal gaming entities to cease
operations within two years of the ban. A Mississippi State Circuit Court judge
ruled that the first of the proposed referenda was illegal because, among other
reasons, it failed to include required information regarding its anticipated
effect on government revenues. The Mississippi Supreme Court affirmed the
Circuit Court ruling, but only on procedural grounds. The second referendum
proposal included the same language on government revenues as the first
referendum and was struck down by another Mississippi State Circuit Court judge
on the same grounds as the first.
19
On March 22, 1999, another such referendum was filed with the Mississippi
Secretary of State. The Circuit Court of Hinds County struck down this third
referendum on May 6, 1999 because the initiative failed once again to include
language pertaining to the initiative's negative economic impact. The latest
ruling was appealed to the Mississippi Supreme Court, which affirmed the
decision of the lower court. Any such referendum must be approved by the
Mississippi Secretary of State and signatures of approximately 98,000 registered
voters must be gathered and certified in order for such a proposal to be
included on a statewide ballot for consideration by the voters. The next
election, for which the proponents could attempt such a proposal on the ballot,
would be November 2003. It is likely at some point that a revised initiative
will be filed which would adequately address the issues regarding the effect on
government revenues of prohibition of gaming in Mississippi. However, while it
is too early in the process for the Company to make any predictions with respect
to whether such a referendum will appear on a ballot or the likelihood of such a
referendum being approved by the voters, if such a referendum were passed and
gaming were prohibited in Mississippi, it would have a materially adverse effect
on the Company.
Nevada The ownership and operation of casino gaming facilities in Nevada are
- ------
subject to: (i) the Nevada Gaming Control Act and the regulations promulgated
there under (collectively, "Nevada Act"); and (ii) various local regulations.
The Company's gaming operations are subject to the licensing and regulatory
control of the Nevada Gaming Commission ("Nevada Commission"), the Nevada State
Gaming Control Board ("Nevada Board") and Washoe County. The Nevada Commission,
the Nevada Board and Washoe County are collectively referred to as the "Nevada
Gaming Authorities."
The laws, regulations and supervisory procedures of the Nevada Gaming
Authorities are based upon declarations of public policy which are concerned
with, among other things: (i) the prevention of unsavory or unsuitable persons
from having a direct or indirect involvement with gaming at any time or in any
capacity; (ii) the establishment and maintenance of responsible accounting
practices and procedures; (iii) the maintenance of effective controls over the
financial practices of licensees, including the establishment of minimum
procedures for internal fiscal affairs and the safeguarding of assets and
revenues, providing reliable record keeping and requiring the filing of periodic
reports with the Nevada Gaming Authorities; (iv) the prevention of cheating and
fraudulent practices; and (v) providing a source of state and local revenues
through taxation and licensing fees. Changes in such laws, regulations and
procedures could have an adverse effect on Boomtown Reno's gaming operations.
Boomtown Hotel & Casino, Inc. (the "Gaming Subsidiary"), which operates Boomtown
Reno and two other gaming operations with slot machines only, is required to be
licensed by the Nevada Gaming Authorities. The gaming licenses require the
periodic payment of fees and taxes and are not transferable. The Company is
currently registered by the Nevada Commission as a publicly traded corporation
(a "Registered Corporation") and has been found suitable to own the stock of
Boomtown, which is registered as an intermediary company ("Intermediary
Company"). Boomtown has been found suitable to own the stock of the Gaming
Subsidiary, which is a corporate licensee (a "Corporate Licensee") under the
terms of the Nevada Act. As a Registered Corporation, the Company is required
periodically to submit detailed financial and operating reports to the Nevada
Commission and furnish any other information which the Nevada Commission may
require. No person may become a stockholder of, or holder of an interest of, or
receive any percentage of profits from an Intermediary Company or a Corporate
Licensee without first obtaining licenses and approvals from the Nevada Gaming
Authorities. The Company, Boomtown and the Gaming Subsidiary have obtained from
the Nevada Gaming Authorities the various registrations, findings of
suitability, approvals, permits and licenses required in order to engage in
gaming activities in Nevada.
The Nevada Gaming Authorities may investigate any individual who has a material
relationship to, or material involvement with, the Company, Boomtown or the
Gaming Subsidiary in order to determine whether such individual is suitable or
should be licensed as a business associate of a gaming licensee. Officers,
directors and certain key employees of the Company, Boomtown and the Gaming
Subsidiary must file applications with the Nevada Gaming Authorities and may be
required to be licensed or found suitable by the Nevada Gaming Authorities.
Officers, directors and key employees of the Company and Boomtown who are
actively and
20
directly involved in gaming activities of the Gaming Subsidiary may be required
to be licensed or found suitable by the Nevada Gaming Authorities. The Nevada
Gaming Authorities may deny an application for licensing for any cause which
they deem reasonable. A finding of suitability is comparable to licensing, and
both require submission of detailed personal and financial information followed
by a thorough investigation. The applicant for licensing or a finding of
suitability must pay all the costs of the investigation. Changes in licensed
positions must be reported to the Nevada Gaming Authorities and, in addition to
their authority to deny an application for a finding of suitability or
licensure, the Nevada Gaming Authorities have jurisdiction to disapprove a
change in a corporate position.
If the Nevada Gaming Authorities were to find an officer, director or key
employee unsuitable for licensing or unsuitable to continue having a
relationship with the Company, Boomtown or the Gaming Subsidiary, the companies
involved would have to sever all relationships with such person. In addition,
the Nevada Commission may require the Company, Boomtown or the Gaming Subsidiary
to terminate the employment of any person who refuses to file appropriate
applications. Determinations of suitability or of questions pertaining to
licensing are not subject to judicial review in Nevada.
The Company and the Gaming Subsidiary are required to submit detailed financial
and operating reports to the Nevada Commission. Substantially all material
loans, leases, sales of securities and similar financing transactions by the
Company, Boomtown and the Gaming Subsidiary must be reported to or approved by
the Nevada Commission.
If it were determined that the Nevada Act was violated by the Gaming Subsidiary,
the gaming licenses it holds could be limited, conditioned, suspended or
revoked, subject to compliance with certain statutory and regulatory procedures.
In addition, the Company, Boomtown, the Gaming Subsidiary and the persons
involved could be subject to substantial fines for each separate violation of
the Nevada Act at the discretion of the Nevada Commission. Further, a supervisor
could be appointed by the Nevada Commission to operate Boomtown Reno and, under
certain circumstances, earnings generated during the supervisor's appointment
(except for reasonable rental value of the casino) could be forfeited to the
State of Nevada. Limitation, conditioning or suspension of the gaming licenses
of the Gaming Subsidiary or the appointment of a supervisor could (and
revocation of any gaming license would) materially adversely affect the
Company's gaming operations.
Any beneficial holder of the Company's voting securities, regardless of the
number of shares owned, may be required to file an application, be investigated,
and be found suitable as a beneficial holder of the Company's voting securities
if the Nevada Commission has reason to believe that such ownership would
otherwise be inconsistent with the declared policies of the State of Nevada. The
applicant must pay all costs of investigation incurred by the Nevada Gaming
Authorities in conducting any such investigation.
The Nevada Act requires any person who acquires beneficial ownership of more
than 5% of a Registered Corporation's voting securities to report the
acquisition to the Nevada Commission. The Nevada Act requires that beneficial
owners of more than 10% of a Registered Corporation's voting securities apply to
the Nevada Commission for a finding of suitability within thirty days after the
Chairman of the Nevada Board mails the written notice requiring such filing.
Under certain circumstances, an "institutional investor," as defined in the
Nevada Act, which acquires more than 10%, but not more than 15%, of a Registered
Corporation's voting securities may apply to the Nevada Commission for a waiver
of such finding of suitability if such institutional investor holds the voting
securities for investment purposes only. An institutional investor shall not be
deemed to hold voting securities for investment purposes unless the voting
securities were acquired and are held in the ordinary course of business as an
institutional investor and not for the purpose of causing, directly or
indirectly, the election of a majority of the members of the board of directors
of the Registered Corporation, any change in the Registered Corporation's
corporate charter, bylaws, management, policies or operations of the Registered
Corporation, or any of its gaming affiliates, or any other action which the
Nevada Commission finds to be inconsistent with holding the Registered
Corporation's voting securities for investment purposes only. Activities which
are not deemed to be inconsistent with holding voting securities for investment
purposes only include: (i) voting on all matters voted on by stockholders; (ii)
making financial and other inquiries of
21
management of the type normally made by securities analysts for informational
purposes and not to cause a change in its management, policies or operations;
and (iii) such other activities as the Nevada Commission may determine to be
consistent with such investment intent. If the beneficial holder of voting
securities who must be found suitable is a corporation, partnership or trust, it
must submit detailed business and financial information, including a list of
beneficial owners. The applicant is required to pay all costs of investigation.
Any person who fails or refuses to apply for a finding of suitability or a
license within thirty days after being ordered to do so by the Nevada Commission
or the Chairman of the Nevada Board, may be found unsuitable. The same
restrictions apply to a record owner if the record owner, after request, fails
to identify the beneficial owner. Any stockholder found unsuitable and who
holds, directly or indirectly, any beneficial ownership of the common stock
beyond such period of time as may be prescribed by the Nevada Commission may be
guilty of a criminal offense. The Company is subject to disciplinary action if,
after it receives notice that a person is unsuitable to be a stockholder or to
have any other relationship with the Company, Boomtown or the Gaming Subsidiary,
the Company: (i) pays that person any dividend or interest upon voting
securities of the Company, (ii) allows that person to exercise, directly or
indirectly, any voting right conferred through securities held by that person,
(iii) pays remuneration in any form to that person for services rendered or
otherwise, or (iv) fails to pursue all lawful efforts to require such unsuitable
person to relinquish his voting securities including, if necessary, the
immediate purchase of said voting securities for cash at fair market value.
The Nevada Commission may, in its discretion, require the holder of any debt
security of a Registered Corporation to file applications, be investigated and
be found suitable to own the debt security of a Registered Corporation. If the
Nevada Commission determines that a person is unsuitable to own such security,
then pursuant to the Nevada Act, the Registered Corporation can be sanctioned,
including the loss of its approvals, if without the prior approval of the Nevada
Commission, it: (i) pays to the unsuitable person any dividend, interest, or any
distribution whatsoever; (ii) recognizes any voting right by such unsuitable
person in connection with such securities; (iii) pays the unsuitable person
remuneration in any form; or (iv) makes any payment to the unsuitable person by
way of principal, redemption, conversion, exchange, liquidation, or similar
transaction.
The Company is required to maintain a current stock ledger in Nevada which may
be examined by the Nevada Gaming Authorities at any time. If any securities are
held in trust by an agent or by a nominee, the record holder may be required to
disclose the identity of the beneficial owner to the Nevada Gaming Authorities.
A failure to make such disclosure may be grounds for finding the record holder
unsuitable. The Company is also required to render maximum assistance in
determining the identity of the beneficial owner. The Nevada Commission has the
power to require that the Company's stock certificates bear a legend indicating
that the securities are subject to the Nevada Act. However, to date the Nevada
Commission has not imposed such a requirement on the Company.
The Company is not permitted to make a public offering of its securities without
the prior approval of the Nevada Commission if the securities or the proceeds
there from are intended to be used to construct, acquire or finance gaming
facilities in Nevada, or to retire or extend obligations incurred for such
purposes. On March 22, 2001, the Nevada Commission granted the Company prior
approval to make public offerings for a period of two years, subject to certain
conditions (the "Shelf Approval"). The Shelf Approval also applies to any
affiliated company wholly owned by the Company (an "Affiliate"), which is a
publicly traded corporation or would thereby become a publicly traded
corporation pursuant to a public offering. The Shelf Approval also includes
approval for Boomtown and the Gaming Subsidiary to guarantee any security issued
by, and for the Gaming Subsidiary to hypothecate its assets to secure the
payment or performance of any obligations evidenced by a security issued by the
Company or an Affiliate in a public offering under the Shelf Approval. The Shelf
Approval also includes approval to place restrictions upon the transfer of and
enter into agreements not to encumber the equity securities of Boomtown and the
Gaming Subsidiary. The Shelf Approval, however, may be rescinded for good cause
without prior notice upon the issuance of an interlocutory stop order by the
Chairman of the Nevada Board. The Shelf Approval does not constitute a finding,
recommendation or approval of the Nevada Gaming Authorities as to the accuracy
or the adequacy of the prospectus or the investment merits of the securities
offered thereby. Any representation to the contrary is unlawful.
22
Changes in control of a Registered Corporation through merger, consolidation,
stock or asset acquisitions, management or consulting agreements, or any act or
conduct by a person whereby he obtains control, may not occur without the prior
approval of the Nevada Commission. Entities seeking to acquire control of a
Registered Corporation must satisfy the Nevada Board and Nevada Commission in a
variety of stringent standards prior to assuming control of such Registered
Corporation. The Nevada Commission may also require controlling stockholders,
officers, directors and other persons having a material relationship or
involvement with the entity proposing to acquire control to be investigated and
licensed as part of the approval process relating to the transaction.
The Nevada legislature has declared that some corporate acquisitions opposed by
management, repurchases of voting securities and corporate defense tactics
affecting Nevada corporate gaming licensees, and Registered Corporations that
are affiliated with those operations, may be injurious to stable and productive
corporate gaming. The Nevada Commission has established a regulatory scheme to
ameliorate the potentially adverse effects of these business practices upon
Nevada's gaming industry and to further Nevada's policy to: (i) assure the
financial stability of corporate gaming licensees and their affiliates; (ii)
preserve the beneficial aspects of conducting business in the corporate form;
and (iii) promote a neutral environment for the orderly governance of corporate
affairs. Approvals are, in certain circumstances, required from the Nevada
Commission before the Registered Corporation can make exceptional repurchases of
voting securities above the current market price thereof and before a corporate
acquisition opposed by management can be consummated. The Nevada Act also
requires prior approval of a plan of recapitalization proposed by the Registered
Corporation's Board of Directors in response to a tender offer made directly to
the Registered Corporation's stockholders for the purposes of acquiring control
of the Registered Corporation.
License fees and taxes, computed in various ways depending on the type of gaming
or activity involved, are payable to the State of Nevada and to Washoe County,
in which the Gaming Subsidiary's operations are conducted. Depending upon the
particular fee or tax involved, these fees and taxes are payable either monthly,
quarterly or annually and are based upon either: (i) a percentage of the gross
revenues received; (ii) the number of gaming devices operated; or (iii) the
number of table games operated. A casino entertainment tax is also paid by
casino operations where entertainment is furnished in a cabaret, nightclub,
cocktail lounge or casino showroom in connection with the serving or selling of
food or refreshments, or the selling of any merchandise.
Any person who is licensed, required to be licensed, registered, required to be
registered, or is under common control with such persons (collectively,
"Licensees"), and who proposes to become involved in a gaming venture outside of
Nevada, is required to deposit with the Nevada Board, and thereafter maintain, a
revolving fund in the amount of $10,000 to pay the expenses of investigation by
the Nevada Board of such Licensee's participation in such foreign gaming. The
revolving fund is subject to increase or decrease in the discretion of the
Nevada Commission. Thereafter, Licensees are required to comply with certain
reporting requirements imposed by the Nevada Act. Licensees are also subject to
disciplinary action by the Nevada Commission if they knowingly violate any laws
of the foreign jurisdiction pertaining to the foreign gaming operation, fail to
conduct the foreign gaming operation in accordance with the standards of honesty
and integrity required of Nevada gaming operations, engage in activities or
enter into associations that are harmful to the State of Nevada or its ability
to collect gaming taxes and fees, or employ, contract with, or associate with a
person in the foreign operation who has been denied a license or finding of
suitability in Nevada on the ground of unsuitability.
California Operation of California card club casinos such as the Hollywood
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Park-Casino and the Crystal Park Casino is governed by the Gambling Control Act
(the "GCA") and is subject to the oversight of the California Attorney General
and the California Gambling Control Commission. Under the GCA, a California card
club casino may only offer certain forms of card games, including Poker, Pai
Gow, and California Blackjack. A card club casino may not offer many of the card
games and other games of chance permitted in Nevada and other jurisdictions
where the Company conducts business.
23
Although the California Attorney General takes the position that, under the GCA,
only individuals, partnerships or privately-held companies (as opposed to
publicly-traded companies such as the Company) are eligible to operate card club
casinos, the enactment of California Senate Bill 100 ("SB-100") in 1995, and the
subsequent enactment of Senate Bill-8 permit a publicly-owned racing association
to own and operate a card club casino if it also owns and operates a race track
on the same premises.
In September 1995, the Attorney General granted the Company a provisional
registration under SB-100 to operate the Hollywood Park-Casino, which
provisional registration was renewed effective January 1, 1999. Pursuant to the
GCA, on September 10, 1999, in connection with the sale of the Hollywood Park
Race Track (see Note 11 to the Notes to Consolidated Financial Statements), the
Company was no longer eligible to operate the Hollywood Park-Casino and
therefore entered into a sublease arrangement of the Hollywood Park-Casino with
the same third party operator which leases the Crystal Park Casino. In the event
the GCA were to be amended to permit publicly-traded companies such as the
Company to operate card clubs, the Company, and its officers, directors and
certain stockholders, would likely have to file the necessary licensing
applications with the Attorney General, if it wished to operate the Hollywood
Park-Casino or the Crystal Park Casino.
Pursuant to the GCA, the operator of a card club casino, and its officers,
directors and certain stockholders are required to be registered by the Attorney
General and licensed by the municipality in which it is located. A permanent
registration will not be granted until the California Department of Justice
completes its review of the applications of the Company and its corporate
officers and directors. The Attorney General has broad discretion to deny a
gaming registration and may impose reasonably necessary conditions upon the
granting of a gaming registration. Grounds for denial include felony
convictions, criminal acts, convictions involving dishonesty, illegal gambling
activities, and false statements on a gaming application. Such grounds also
generally include having a financial interest in a business or organization that
engages in gaming activities that are illegal under California law. In addition,
the Attorney General possesses broad authority to suspend or revoke a gaming
registration on any of the foregoing grounds, as well as for violation of any
federal, state or local gambling law, failure to take reasonable steps to
prevent dishonest acts or illegal activities on the premises of the card club
casino, failure to cooperate with the Attorney General in its oversight of the
card club casino and failure to comply with any condition of the registration.
The City of Inglewood and the City of Compton have granted the operator of the
Hollywood Park-Casino and the Crystal Park Casino all municipal gaming licenses
necessary for operation of such facilities, and the operator has received
provisional registrations for both locations from the California Department of
Justice.
Argentina The Provincial Government of Neuquen, Argentina enacted a casino
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privatization program to issue twelve-year exclusive concession agreements to
operate existing casinos. The Company's two casinos are the only casinos in the
province of Neuquen, in west central Argentina, and are located in Neuquen City
and San Martin de los Andes