-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, EbrcHHYUr7uyFTO0SEY0wPHqTG/DWIoCYkFjzR2sb0EUyUBIgORhuxqWimvX2A7z knXN4uE77cqQhmsbYHRZMQ== 0001021408-02-004538.txt : 20020415 0001021408-02-004538.hdr.sgml : 20020415 ACCESSION NUMBER: 0001021408-02-004538 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 15 CONFORMED PERIOD OF REPORT: 20011231 FILED AS OF DATE: 20020401 FILER: COMPANY DATA: COMPANY CONFORMED NAME: PINNACLE ENTERTAINMENT INC CENTRAL INDEX KEY: 0000356213 STANDARD INDUSTRIAL CLASSIFICATION: SERVICES-MISCELLANEOUS AMUSEMENT & RECREATION [7990] IRS NUMBER: 953667491 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K SEC ACT: 1934 Act SEC FILE NUMBER: 001-13641 FILM NUMBER: 02595318 BUSINESS ADDRESS: STREET 1: 330 NORTH BRAND BOULEVARD STREET 2: SUITE 1110 CITY: GLENDALE STATE: CA ZIP: 91203-2308 BUSINESS PHONE: 8186625900 MAIL ADDRESS: STREET 1: 330 NORTH BRAND BOULEVARD STREET 2: SUITE 1110 CITY: GLENDALE STATE: CA ZIP: 91203-2308 FORMER COMPANY: FORMER CONFORMED NAME: HOLLYWOOD PARK INC/NEW/ DATE OF NAME CHANGE: 19920703 10-K 1 d10k.txt FORM 10-K 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 - ---------------------- 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 - -------------------- 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 - ------------------- 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 - ------------ 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 - ------- 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 - --------------- 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 - ------------------------ 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 - -------------------- 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 - ------------------------- 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 - ---------------------- 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 - ------------ 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 - ---------- 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 - --------- privatization program to issue twelve-year exclusive concession agreements to operate existing casinos. The Company's two casinos are the only casinos in the province of Neuquen, in west central Argentina, and are located in Neuquen City and San Martin de los Andes. The casinos had previously been operated by the provincial government. The Ministry of Finance of Argentina has adopted a modified regulatory system for casinos, based somewhat on the regulatory system utilized by the State of Nevada, and such regulatory system is being administered by the Provincial Government of Neuquen. The Company cannot predict what effect the enactment of other laws, regulations or pronouncements relating to casino operations may have on the operations of Casino Magic Argentina. Federal and State Income Tax Matters The Company accounts for income taxes under Statement of Financial Accounting Standards No. 109 Accounting for Income Taxes, whereby deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases (see Notes 1 and 12 to the Notes to Consolidated Financial Statements). 24 As of December 31, 2001, the Company had federal net operating loss ("NOL") of approximately $22,326,000 comprised principally of NOL carry-forwards acquired in the acquisition of Casino Magic. The NOL carry-forwards expire on various dates through 2018. Under the provision of Internal Revenue Code (Section 382) and the regulations promulgated there-under, the utilization of NOL carry-forwards to reduce tax liability is restricted under certain circumstances. Events which cause such a limitation, include, but are not limited to, certain changes in the ownership of a corporation. The 1998 acquisition of Casino Magic resulted in such limitation and, accordingly, the Company's use of Casino Magic's NOL carry-forwards is subject to restrictions imposed by Section 382 of the Internal Revenue Code. Section 382 of the Internal Revenue Code generally provides that in each taxable year following an ownership change with respect to a corporation, the corporation (or consolidated group of which the corporation is a part) is subject to a limitation on the amount of the corporation's pre-ownership change NOLs which may be used equal to the value of the stock of the corporation (determined immediately prior to the ownership change and subject to certain adjustments) multiplied by the "long term tax exempt rate" which is in effect at the time of the ownership change. For ownership changes occurring during October 1998 (Casino Magic), the long-term tax exempt rate was 5.15%. For California tax purposes, as of December 31, 2001, the Company had approximately $9,967,000 of Los Angeles Revitalization Zone ("LARZ") tax credits. The LARZ tax credits can only be used to reduce certain California tax liabilities and cannot be used to reduce federal tax liabilities. A valuation allowance has been recorded with respect to the LARZ tax credits because the Company may not generate enough income subject to California tax to utilize the LARZ tax credits before they expire. Employees The following is a summary of the Company's employees by property at December 31, 2001: Permanent Property Staff - ------------------------- --------- Belterra 1,200 Boomtown Reno 1,100 Boomtown New Orleans 1,082 Casino Magic Biloxi 1,069 Casino Magic Bossier City 1,124 Casino Magic Argentina 256 Corporate 35 ----- Total 5,866 ===== The Company does not employ the staff at the Hollywood Park-Casino or the Crystal Park Casino. Additionally, during the busier summer months, each casino property supplements its permanent staff with part-time employees. The Company's staff is non-union. The Company believes that it has good relationships with its employees. Other Information Information concerning backlog, sources and availability of raw materials is not essential to an understanding of the Company's business. The Company does not engage in material research activities relating to development of new products or services or improvement of existing products or services. Compliance with federal, state and local provisions which have been enacted or adopted regulating the discharge of materials into the environment or otherwise relating to the protection of the environment have not had a material effect upon capital expenditures, earnings or the competitive position of the Company. 25 The Company operates two land-based casinos in Argentina. Casino Magic Argentina's contribution to the Company's net income is immaterial as compared with the contributions of the Company's domestic gaming operations. Casino Magic Argentina's assets held in Argentina were $11,376,000 at December 31, 2001, or less than 2% of the Company's consolidated assets on that date. Item 2. Properties - ------------------ The following describes the Company's principal real estate properties: Properties Pinnacle Entertainment, Inc. The Company leases approximately 10,000 square feet - --------------------------- for its corporate offices in Glendale, California under a sublease agreement that expires in May 2005. Belterra Casino Resort Belterra Casino Resort is located on approximately 315 - ---------------------- acres in Switzerland County, Indiana, of which 167 acres are owned and 148 acres are leased. The facility consists of a 15-story, 308-room hotel, a cruising riverboat casino with 1,344 slot machines and 45 table games, an 18-hole championship golf course, a 1,500-seat entertainment facility, six restaurants, retail areas and other amenities. In addition, in October 1999, the Company acquired the Ogle Haus Inn, a 54-room hotel operation in Vevay, for $2,500,000. The Company utilized the facility principally for the Belterra Casino Resort's pre-opening operations. Currently, the Ogle Haus provides housing for some employees and is being renovated to be operated as a hotel facility providing overflow capacity for the Belterra Casino Resort during peak visitation periods. The restaurant and bar at the Ogle Haus are expected to be leased, for a nominal amount, to an unrelated third party. Boomtown Reno The Company owns 569 acres in Verdi, Nevada, with current - ------------- operations presently utilizing approximately 61 acres. Of the 508 excess acres, the Company considers approximately 250 as available 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 The Company owns approximately 54 acres in Harvey, - -------------------- Louisiana which are utilized by Boomtown New Orleans. The Company owns the facilities and associated improvements at the property, including the riverboat casino. Casino Magic Biloxi Casino Magic Biloxi is located on approximately 16 acres, of - ------------------- which 4.5 acres are owned and approximately 11.5 acres are leased, inclusive of approximately 6.4 acres of submerged tidelands leased from the state of Mississippi. The tidelands are under a ten-year lease 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. Casino Magic Bossier City The Company owns 23 acres on the banks of the Red - ------------------------- River in Bossier City, Louisiana. The property contains a dockside riverboat casino, hotel, parking structure and other land-based facilities, all of which are owned by the Company. The Company also 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 casinos in west central - ---------------------- Argentina, in the cities of Neuquen and San Martin de los Andes. The Company does not own any real property at these sites. Hollywood Park-Casino As discussed in Note 11 to the Notes to Consolidated - --------------------- Financial Statements, upon the sale of the Hollywood Park-Casino to Churchill Downs, the Company entered into a 10-year leaseback agreement with Churchill Downs, and immediately subleased the facility to an unaffiliated third party tenant to 26 operate the card club casino. The Hollywood Park-Casino contains approximately 30,000 square feet of card club gaming space and 30,000 square feet of retail and restaurant space. Undeveloped Land in St. Louis, Missouri The Company owns approximately 3.5 acres - --------------------------------------- of undeveloped land in St. Louis, Missouri. The undeveloped land was acquired by Casino Magic in the event Casino Magic elected to proceed with a riverboat gaming license in Missouri. The Company has no plans to develop such property and will consider reasonable offers to sell such property. Warehouse Leases The Company leases warehouse space at various locations close - ---------------- to its operating properties. These are utilized to hold attic stock for hotel and casinos, as well as the long-term retention of its various accounting files. Properties and Assets Held For Sale The Crystal Park Casino 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, the Company actively marketed the property for sale, recorded an impairment loss of $20,358,000 on this property and reclassified the net book value to "Assets held for sale" on the Consolidated Balance Sheet (see Notes 4 and 5 to the Notes to Consolidated Financial Statements). Boomtown Belle I In the fourth quarter of 2001, under provisions of SFAS No. - ---------------- 121, the Company determined it would not be able to recover the net book value of the Boomtown Belle I, the original cruising riverboat casino operated at Boomtown New Orleans, based on recent offers to purchase the cruising riverboat casino. As such, the Company recorded an impairment write-down of $1,808,000 and reclassified the net book value of the Boomtown Belle I to "Assets held for sale" on the Consolidated Balance Sheet (see Notes 4 and 5 to the Notes to Consolidated Financial Statements). Inglewood, California The Company owns approximately 97 acres of unimproved land - --------------------- adjacent to the Hollywood Park Race Track in Inglewood, California. In April 2000, the Company announced it had entered into an agreement for the sale of the 97 acres for $63,050,000 in cash. In April 2001, the Company announced the prospective buyer had elected to terminate the agreement. The Company continues to market the property to prospective buyers and has classified the land as an "Asset held for sale" on the Consolidated Balance Sheets (see Note 5 to the Notes to Consolidated Financial Statements). Item 3. Legal Proceedings - ------------------------- Astoria Entertainment Litigation In November 1998, Astoria Entertainment, Inc. - -------------------------------- filed a complaint in the United States District Court for the Eastern District of Louisiana. Astoria, an unsuccessful applicant for a license to operate a riverboat casino in Louisiana, attempted to assert a claim under the Racketeer Influenced and Corrupt Organizations ("RICO") statutes, seeking damages allegedly resulting from its failure to obtain a license. Astoria named several companies and individuals as defendants, including Hollywood Park, Inc. (the predecessor to Pinnacle Entertainment), Louisiana Gaming Enterprises, Inc. ("LGE"), and an employee of Boomtown, Inc. The Company believed the RICO claim against it had no merit and, indeed, Astoria voluntarily dismissed its RICO claim against Hollywood Park, LGE, and the Boomtown employee. On March 1, 2001, Astoria amended its complaint. Astoria's amended complaint added new legal claims, and named Boomtown, Inc. and LGE as defendants. Astoria claims that the defendants (i) conspired to corrupt the process for awarding licenses to operate riverboat casinos in Louisiana, (ii) succeeded in corrupting the process, (iii) violated federal and Louisiana antitrust laws, and (iv) violated the Louisiana Unfair Trade Practices Act. The amended complaint asserts that Astoria would have obtained a license to operate a riverboat casino in Louisiana, but for these alleged improper acts. On August 21, 2001, the court dismissed Astoria's federal 27 claims with prejudice and its state claims without prejudice. On September 21, 2001, Astoria appealed those dismissals to the U.S. Court of Appeals for the Fifth Circuit. On October 3, 2001, Boomtown, Inc. and LGE filed a cross-appeal on the grounds that the state claims should have been dismissed with prejudice. Astoria subsequently voluntarily dismissed its appeal. Boomtown, Inc.'s and LGE's appeal is currently pending before the court. Poulos Lawsuit A class action lawsuit was filed on April 26, 1994, in the United - -------------- States District Court, Middle District of Florida (the "Poulos Lawsuit"), naming as defendants 41 manufacturers, distributors and casino operators of video poker and electronic slot machines, including Casino Magic. The lawsuit alleges that the defendants have engaged in a course of fraudulent and misleading conduct intended to induce people to play such games based on false beliefs concerning the operation of the gaming machines and the extent to which there is an opportunity to win. The suit alleges violations of the Racketeer Influenced and Corrupt Organization Act ("RICO"), as well as claims of common law fraud, unjust enrichment and negligent misrepresentation, and seeks damages in excess of $6 billion. On May 10, 1994, a second class action lawsuit was filed in the United States District Court, Middle District of Florida (the "Ahern Lawsuit"), naming as defendants the same defendants who were named in the Poulos Lawsuit and adding as defendants the owners of certain casino operations in Puerto Rico and the Bahamas, who were not named as defendants in the Poulos Lawsuit. The claims in the Ahern Lawsuit are identical to the claims in the Poulos Lawsuit. Because of the similarity of parties and claims, the Poulos Lawsuit and Ahern Lawsuit were consolidated into one case file (the "Poulos/Ahern Lawsuit") in the United States District Court, Middle District of Florida. On December 9, 1994 a motion by the defendants for change of venue was granted, transferring the case to the United States District Court for the District of Nevada, in Las Vegas. In an order dated April 17, 1996, the court granted motions to dismiss filed by Casino Magic and other defendants and dismissed the Complaint without prejudice. The plaintiffs then filed an amended Complaint on May 31, 1996 seeking damages against Casino Magic and other defendants in excess of $1 billion and punitive damages for violations of RICO and for state common law claims for fraud, unjust enrichment and negligent misrepresentation. At a December 13, 1996 status conference, the Poulos/Ahern Lawsuit was consolidated with two other class action lawsuits (one on behalf of a smaller, more defined class of plaintiffs and one against additional defendants) involving allegations substantially identical to those in the Poulos/Ahern Lawsuit (collectively, the "Consolidated Lawsuits") and all pending motions in the Consolidated Lawsuits were deemed withdrawn without prejudice. The plaintiffs in the Consolidated Lawsuits filed a consolidated amended complaint on February 14, 1997, which the defendants moved to dismiss. On December 19, 1997, the court granted the defendants' motion to dismiss certain allegations in the RICO claim, but denied the motion as to the remainder of such claim; granted the defendants' motion to strike certain parts of the consolidated amended complaint; denied the defendants' remaining motions to dismiss and to stay or abstain; and permitted the plaintiffs to substitute one of the class representatives. On January 9, 1998, the plaintiffs filed a second consolidated amended complaint containing claims nearly identical to those in the previously dismissed complaints. The defendants answered, denying the substantive allegations of the second consolidated amended complaint. On March 19, 1998, the magistrate judge granted the defendants' motion to bifurcate discovery into "class" and "merits" phases. "Class" discovery was completed on July 17, 1998. The magistrate judge recommended denial of the plaintiffs' motion to compel further discovery from the defendants, and the court affirmed in part. "Merits" discovery is stayed until the court decides the motion for class certification filed by the plaintiffs on March 18, 1998, which motion the defendants opposed. In January 2001, the plaintiffs filed a supplement to their motion for class certification. On March 29, 2001, defendants filed their response to plaintiffs' supplement to motion for class certification. The hearing on plaintiffs' Motion for Class Certification was held November 15, 2001. The Court has not issued a ruling on this motion. The claims are not covered under the Company's insurance policies. While the Company cannot predict the outcome of this litigation, management believes that the claims are without merit and does not expect that the lawsuit will have a materially adverse effect on the financial condition or results of operations of the Company. Casino America Litigation On or about September 6, 1996, Casino America, Inc. - ------------------------- commenced litigation in the Chancery Court of Harrison County, Mississippi, Second Judicial District, against Casino Magic Corp., and 28 James Edward Ernst, its then Chief Executive Officer. In the complaint, as amended, the plaintiff claims, among other things, that the defendants (i) breached the terms of an agreement they had with the plaintiff; (ii) tortuously interfered with certain of the plaintiff's contracts and business relations; and (iii) breached covenants of good faith and fair dealing they allegedly owed to the plaintiff, and seeks compensatory damages in an amount to be proven at trial as well as punitive damages. On or about October 8, 1996, the defendants interposed an answer, denying the allegations contained in the Complaint. On June 26, 1998, defendants filed a motion for summary judgment, as well as a motion for partial summary judgment on damages issues. Thereafter, the plaintiff, in July of 1998, filed a motion to reopen discovery. The court granted the plaintiff's motion, in part, allowing the parties to conduct additional limited discovery. On November 30, 1999, the matter was transferred to the Circuit Court for the Second Judicial District for Harrison County, Mississippi. On October 19, 2001, the Court denied defendant's motion for summary judgment. On October 22, 2001, the Court granted defendant's motion for partial summary judgment, in part, requiring plaintiff to modify its method of calculating damages. On October 24, 2001, the defendants were granted a continuance in order to allow additional discovery to be conducted on plaintiff's revised damage claims. The trial has been set for November 12, 2002. The Company's insurer has essentially denied coverage of the claim against Mr. Ernst under the Company's directors and officers insurance policy, but has reserved its right to review the matter as to tortious interference at or following trial. The Company believes that the insurer should not be permitted to deny coverage, although no assurances can be given that the insurer will change its position. While the Company cannot predict the outcome of this action, management believes the lawsuit will not have a material adverse effect and intends to vigorously defend this action. Skrmetta Lawsuit A suit was filed on August 14, 1998 in the Circuit Court of - ---------------- Harrison County, Mississippi by the ground lessor of property underlying the Boomtown Biloxi land based improvements in Biloxi, Mississippi (the "Project"). The lawsuit alleged that the plaintiff agreed to exchange the first two years' ground rentals for an equity position in the Project based upon defendants' purported assurances that a hotel would be constructed as a component of the Project. Plaintiff sought recovery in excess of $4,000,000 plus punitive damages. At trial of the matter in March 2000, the judge granted the Company's motion to dismiss the case. On April 26, 2000, plaintiff appealed the court's dismissal to the Mississippi Supreme Court. On February 7, 2002, the Mississippi Supreme Court affirmed the judgment of the lower court. Casino Magic Biloxi Patron Shooting Incident On January 13, 2001, three Casino - -------------------------------------------- Magic Biloxi patrons were shot, sustaining serious injuries as a result of a shooting incident involving another Casino Magic Biloxi patron, who then killed himself. Several other patrons sustained minor injuries while attempting to exit the casino. On August 1, 2001, two of the casino patrons shot during the January 13, 2001 incident filed a complaint in the Circuit Court of Harrison County, Mississippi, Second Judicial District. The complaint alleges that Biloxi Casino Corp. failed to exercise reasonable care to keep its patrons safe from foreseeable criminal acts of third persons and seeks unspecified compensatory and punitive damages. The Plaintiffs filed an amended complaint on August 17, 2001. The amended complaint added an allegation that Biloxi Casino Corp. violated a Mississippi statute by serving alcoholic beverages to the perpetrator who was allegedly visibly intoxicated and that Biloxi Casino Corp.'s violation of the statute was the proximate cause of or contributing cause to Plaintiffs' injuries. While the Company cannot predict the outcome of the litigation, the Company believes that Biloxi Casino Corp. is not liable for any damages arising from the incident and the Company, together with its applicable insurers, intends to vigorously defend this lawsuit. Actions by Greek Authorities In 1995, a Dutch subsidiary of Casino Magic Corp., - ---------------------------- Casino Magic Europe B.V. ("CME"), performed management services for Porto Carras Casino, S.A. ("PCC"), a joint venture in which CME had a minority interest. Effective December 31, 1995, CME with the approval of PCC, assigned its interests and obligations under the PCC management agreement to a Greek subsidiary, Casino Magic Hellas S.A. "(Hellas"). Hellas issued invoices to PCC for management fees which accrued during 1995, but had not been billed by CME. In September 1996, local Greek tax authorities in Thessaloniki assessed a penalty of approximately $3,500,000 against Hellas, and an equal amount against PCC, arising out of the presentation and payment of the 29 invoices. The Thessaloniki tax authorities asserted that the Hellas invoices were fictitious, representing an effort to reduce the taxable income of PCC. PCC and Hellas each appealed their respective assessments. The assessment of the fine against PCC was overturned by the Administrative court of Thessaloniki on December 11, 2000. The court determined that the actions taken by Hellas and PCC were not fictitious but constituted a legitimate business transaction and accordingly overturned the assessment of the fine. The taxing authorities may appeal the court's decision. Hellas's appeal was dismissed for technical procedural failures and has not been reinstated; presumably, however, the rationale of the court in the PCC fine matter would apply equally to the Hellas fine matter. Under Greek law, shareholders are not liable for the liabilities of a Greek company in which they hold shares, even if the entity is later liquidated or dissolved, and assessments such as these generally are treated as liabilities of the company. Additionally, all of PCC's stock was sold to an unrelated company in December of 1996, and the buyer assumed all of PCC's liabilities. Therefore, management does not expect that this matter will have a materially adverse effect on the financial condition or results of operations of the Company. In June 2000, Greek authorities issued a warrant to appear at a September 29, 2000 criminal proceeding to Marlin Torguson (a member of the Company's board of directors and Chairman of the Board of Casino Magic since its inception) and Robert Callaway (former Associate General Counsel for the Company and, prior to its acquisition by the Company, Casino Magic's General Counsel). They were charged under Greek law, and convicted in absentia, as being culpable criminally for corporate misconduct based solely on their status as alleged executive board members of PCC. The Company is advised that they are not, and have never been, managing (active) executive directors of PCC. Accordingly, the Company believes that they were improperly named in the proceedings. The defendants have a right of appeal for a de novo trial under Greek law. Upon being notified of the convictions, the Company's compliance committee suspended Mr. Callaway and Mr. Torguson from their respective duties, other than to assist in the investigation of actions described above, and sought the resignation of Mr. Torguson from the Company board of directors. At the time that the Greek court overturned the PCC fine, and based upon: (1) the determination of the court that the Hellas/PCC transaction was a legitimate transaction and (2) the fact that neither Mr. Torguson nor Mr. Callaway were properly named, the compliance committee reinstated Messsrs. Torguson and Callaway. In February 2001, Mr. Callaway left the employ of the Company. During the first quarter of 2001, the Greek taxing authorities appealed the December 11, 2000 decision by the Administrative Court of Thessaloniki overturning the assessment of the fine against PCC. No hearing date on such appeal has been set. On March 30, 2001, appeals on behalf of Marlin Torguson and Robert Callaway were filed. The hearing before the three-member Court of Misdemeanors of Thessaloniki has been set for October 24, 2002. The Company has been advised that the resolution of the related civil penalties may sometimes resolve criminal issues in Greece. The Company is actively working to resolve the civil and criminal actions related to this matter. The Company is party to a number of other pending legal proceedings, though management does not expect that the outcome of such proceedings, either individually or in the aggregate, will have a material effect on the Company's financial results. 30 Item 4. Submission of Matters to a Vote of Security Holders - ----------------------------------------------------------- None Part II ------- Item 5. Market for the Registrant's Common Equity and Related Stockholder - ------------------------------------------------------------------------- Matters ------- The Company's common stock is listed on the New York Stock Exchange and is traded under the name Pinnacle Entertainment, Inc., identified by the symbol "PNK". Prior to February 28, 2000, the Company's common stock was traded on the New York Stock Exchange under the name Hollywood Park, Inc., identified by the symbol "HPK". The following table sets forth the high and low closing sales prices per common share of the Company's common stock on the New York Stock Exchange. Price Range ---------------------- High Low ------ ------ 2001 ---- First Quarter $13.81 $ 9.70 Second Quarter 10.60 7.35 Third Quarter 8.99 5.95 Fourth Quarter 7.23 5.50 2000 ---- First Quarter $23.50 $16.63 Second Quarter 20.81 18.63 Third Quarter 22.06 19.38 Fourth Quarter 22.81 12.69 As of March 22, 2002, there were 2,929 stockholders of record of the Company's common stock. Dividends The Company did not pay any dividends in 2001 or 2000. Payments of future dividends would be at the discretion of the Company's Board of Directors and would depend upon, among other things, future earnings, operational and capital requirements, the overall financial condition of the Company and general business conditions. The Board of Directors does not anticipate paying any cash dividends on the Company's common stock in the foreseeable future. 31 Item 6. Selected Financial Data - ------------------------------- The following selected financial information for the years 1997 through 2001 was derived from the consolidated financial statements of the Company. In December 2001, the Company incurred asset impairment charges, primarily related to the write-down of the Crystal Park Casino and Boomtown Belle I (see Notes 4 and 5 to the Notes to Consolidated Financial statements). The Belterra Casino Resort was built by the Company and opened in October 2000. Boomtown Biloxi and Casino Magic Bay St. Louis were sold in August 2000, Turf Paradise was sold in June 2000, surplus land was sold in March 2000 and the Hollywood Park Race Track and Hollywood Park-Casino were disposed of in September 1999 (see Note 11 to the Notes to Consolidated Financial Statements). The Company leased the Hollywood Park-Casino back from Churchill Downs California Company ("Churchill Downs"), a wholly owned subsidiary of Churchill Downs Incorporated, and immediately subleased the facility to an unaffiliated third party. Casino Magic was acquired in October 1998 and Boomtown was acquired in June 1997, with both acquisitions accounted for under the purchase method of accounting for a business combination, and therefore Casino Magic's and Boomtown's financial results were not included in periods prior to their respective acquisitions (see Note 9 to the Notes to Consolidated Financial Statements). The information set forth below should be read in conjunction with "Management's Discussion and Analysis of Financial Condition and Results of Operations", the financial statements and related notes thereto. Included in the table is a presentation of earnings before interest, taxes, depreciation, amortization and non-recurring items ("EBITDA"). EBITDA is not a measure of financial performance under accounting principles generally accepted in the United States ("GAAP"), but is used by some investors to determine a company's ability to service or incur indebtedness. EBITDA is not calculated in the same manner by all entities and accordingly, may not be an appropriate measure of comparable performance. EBITDA should not be considered in isolation from, or as a substitute for, net income (loss), cash flows from operations or cash flow data prepared in accordance with GAAP. EBITDA is calculated by adding income taxes, minority interests, net interest expense, depreciation and amortization, extraordinary items and non-recurring items to net income (loss). Non-recurring items include: a) the asset impairment write-downs recorded in the years ended December 31, 2001 and 1999; b) the gain (loss) on disposition of assets recorded in the years ended December 31, 2001, 2000, 1999 and 1998; c) the pre-opening expenses for Belterra Casino Resort recorded in the years ended December 31, 2001, 2000, 1999 and 1998; d) the terminated merger costs recorded in the years ended December 31, 2001 and 2000; e) the extraordinary item for the early extinguishment of the Casino Magic 13% Notes (see Note 14 to the Notes to Consolidated Financial Statements), net of income tax benefit, in the year ended December 31, 2000; f) the Casino Magic Argentina minority interest in the years ended December 31, 1999, 1998 and 1997; and g) the REIT restructuring expenses recorded in the years ended December 31, 1998 and 1997. 32 Pinnacle Entertainment, Inc. Selected Financial Data
For the years ended December 31, --------------------------------------------------------------- 2001 2000 1999 1998 1997 --------- --------- ---------- --------- -------- (in thousands, except per share data) Statement of Operations Data: Revenues: Gaming $ 442,089 $ 461,901 $ 536,661 $ 277,593 $125,030 Food and beverage 30,952 31,920 39,817 30,510 19,894 Hotel, truck stop and service station 35,167 34,512 29,381 17,575 9,570 Other (including racing) 20,433 34,792 80,133 85,825 81,005 --------- --------- ---------- --------- -------- 528,641 563,125 685,992 411,503 235,499 --------- --------- ---------- --------- -------- Expenses: Gaming 259,573 258,346 288,643 146,085 62,104 Food and beverage 38,799 35,180 46,558 38,860 25,745 Hotel, truck stop and service station 28,872 26,963 22,219 14,492 8,325 General, administrative, racing and other 134,494 122,689 171,485 132,400 99,349 Depreciation and amortization 49,450 46,102 51,924 32,121 18,157 (Gain) loss on disposition of assets (500) (118,816) (62,507) 2,221 0 Asset impairment write-down 23,530 0 20,446 0 0 Pre-opening costs, Belterra Casino Resort 610 15,030 3,020 821 0 Terminated merger costs (464) 5,727 0 0 0 --------- --------- ---------- --------- ------- 534,364 391,221 541,788 367,000 213,680 --------- --------- ---------- --------- ------- Operating (loss) income (5,723) 171,904 144,204 44,503 21,819 Interest expense, net 44,832 40,016 57,544 22,518 7,302 --------- --------- ---------- --------- ------- (Loss) income before income taxes, minority interest and extraordinary item (50,555) 131,888 86,660 21,985 14,517 Minority interest 0 0 1,687 374 (3) Income tax (benefit) expense (21,906) 52,396 40,926 8,442 5,850 --------- --------- ---------- --------- ------- Net (loss) income before extraordinary item (28,649) 79,492 44,047 13,169 8,670 Extraordinary item, net of income tax benefit 0 2,653 0 0 0 --------- --------- ---------- --------- ------- Net (loss) income ($28,649) $ 76,839 $ 44,047 $ 13,169 $ 8,670 ========= ========= ========== ========= ======= =============================================================================================================== Dividends on convertible preferred stock $ 0 $ 0 $ 0 $ 0 $ 1,520 --------- --------- ---------- --------- -------- Net (loss) income (allocated) available to common stockholders ($28,649) $ 76,839 $ 44,047 $ 13,169 $ 7,150 ========= ========= ========== ========= ======== Net (loss) income per common share: Basic ($1.11) $ 2.92 $ 1.70 $ 0.50 $ 0.33 Diluted ($1.11) $ 2.80 $ 1.67 $ 0.50 $ 0.32 Other Data: EBITDA (see definition at prior page) $ 66,903 $ 119,947 $ 157,087 $ 80,085 $ 42,459 Cash flows (used in) provided by: Operating activities $ 36,065 ($25,484) $ 74,207 $ 37,224 $ 14,365 Investing activities (43,304) 193,277 (51,063) (136,532) (16,226) Financing activities (12,442) (118,287) 55,984 119,386 9,609 Capital expenditures 51,783 194,627 58,321 54,605 32,505 Balance Sheet Data (at December 31,): Cash, cash equivalents and short-term investments $ 156,639(a) $ 172,868 $ 246,790 $ 47,413 $ 24,156 Total assets 919,349 961,475 1,045,408 891,339 419,029 Current liabilities 83,654 93,375 145,008 128,592 57,317 Long term notes payable 493,493 497,162 618,698 527,619 132,102 Total liabilities 599,833 600,299 764,532 656,611 195,729 Stockholders' equity 319,516 361,176 280,876 230,976 221,354
(a) Includes $3,452 of cash in Argentina, which at December 31, 2001 could not be transferred out of Argentina. 33 Item 7. Management's Discussion and Analysis of Financial Condition and Results ----------------------------------------------------------------------- of Operations ------------- The following discussion and analysis of financial condition, results of operations, liquidity and capital resources should be read in conjunction with the Company's audited Consolidated Financial Statements and the notes thereto. Forward-Looking Statements Except for the historical information contained herein, the matters addressed in this Annual Report on Form 10-K may constitute "forward-looking statements" within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities and Exchange Act of 1934, as amended. Words such as, but not limited to, "believes," "expects," "anticipates," "estimates," "intends," "plans," and similar expressions are intended to identify forward-looking statements. Such forward-looking statements, which may include, without limitation, statements regarding the Company's expansion plans, cash needs, cash reserves, liquidity, operating and capital expenses, financing options, expense reductions and operating results, are subject to a variety of risks and uncertainties that could cause actual results to differ materially from those anticipated by the Company's management. Factors that may cause actual performance of the Company to differ materially from that contemplated by such forward-looking statements include, among others: . approval of the Calcasieu parish referendum for the Lake Charles project, compliance with the conditions negotiated with the Louisiana Gaming Control Board, completion of the project on time and on budget and the effect of expanded Indian gaming in Louisiana on the Company's decision to proceed with the Lake Charles project (see Note 8 to the Notes to Consolidated Financial Statements); . the effectiveness of management at the Belterra Casino Resort in containing costs without negatively affecting revenues, customer service or efforts to expand the number of customers visiting the property; . changes in gaming legislation in each of the states in which the Company operates; . changes in gaming laws and regulations, including the expansion of casino gaming in states in which the Company operates (or in states bordering the states in which the Company operates), such as the expansion of Indian gaming in California and Louisiana and the introduction of casino gaming in Kentucky, Ohio or Arkansas; . the effectiveness of the planned capital improvements at Casino Magic Bossier City in drawing additional customers to the property despite significant competition in the local market (see Note 8 to the Notes to Consolidated Financial Statements); . the effect of current and future weather conditions and other natural events affecting the key markets in which the Company operates; . the effect of current and future political and economic instability in Argentina on the operations of Casino Magic Argentina and related currency matters (see Note 3 to the Notes to Consolidated Financial Statements); . the amount and effect of future impairment charges under SFAS No. 142 and SFAS No. 144 (see Note 1 to the Notes to Consolidated Financial Statements); . overall economic conditions, including the effects of the September 11, 2001 terrorist attacks (and any future terrorist attacks) on travel and leisure expenditures by the Company's customers, as well as increased costs of insurance and higher self-insurance reserves; . the failure to sell any of the assets held for sale (see Note 5 to the Notes to Consolidated Financial Statements); 34 . the failure to obtain adequate financing to meet strategic goals, including financing for the Lake Charles project; . the failure to obtain or retain gaming licenses or regulatory approvals; . risks associated with substantial indebtedness, leverage, debt service and liquidation; . loss or retirement of any key executives; . risks related to pending litigation; . increased competition by casino operators who have more resources and have built or are building competitive casino properties; . increases in existing taxes or the imposition of new taxes on gaming revenues or gaming devices; . other adverse changes in the gaming markets in which Pinnacle Entertainment, Inc. operates; . the other risks described or referred to in "-Risk Factors" and "-Factors Affecting Future Operating Results". The Private Securities Litigation Reform Act of 1995 (the "Act") provides certain "safe harbor" provisions for forward-looking statements. All forward-looking statements made in this Annual Report on Form 10-K are made pursuant to the Act. For more information on the potential factors which could affect the Company's financial results, please see "-Risk Factors" and "-Factors Affecting Future Operating Results" below and review the Company's filings with the Securities and Exchange Commission. Risk Factors In addition to the other information set forth in this Annual Report on Form 10-K for the fiscal year ended December 31, 2001, one should carefully consider the following factors. All of the Company's properties are dependent upon retaining existing and attracting new customers within their respective geographical markets. The Company is continually developing new and different marketing programs to retain existing and attract new customers to its properties. Such programs include mailing coupons and other direct mail offers to customers, providing complimentary rooms, food and beverage based on the amount wagered in the casino to frequent players, sponsoring gaming tournaments that provide significant rewards to the winners, and other offers that both provide incentives to existing customers and attract new customers. The cost of such programs can be significant and can reduce the overall profitability of the specific location and the Company as a whole. In addition, certain programs may not generate incremental revenue if the customer merely takes advantage of the marketing program for the short-term and does not become a frequent customer. In addition to competing with other gaming operators in the various markets the Company operates, the Company is competing for customers, and their available discretionary spending resources, with other entertainment and leisure companies and attractions. Such companies and attractions may also offer rewards and incentives that would reduce the number of visits to and/ or the amount spent by new and existing customers at the Company's properties. Finally, further terrorist attacks on the United States or its interests, such as that of September 11, 2001, could have a material adverse effect on the desire of existing and future customers to want to travel and frequent the Company's facilities. 35 There can be no assurance that the Company will be able to continue to attract a sufficient number of customers necessary to make its operations profitable. The Company faces intense competition in all the markets which it operates. See "Item 1 - Description of Business/ Competition" for a description of competition faced by the Company. Loss of land-based, riverboat or dockside facilities from service would adversely affect the Company's operations. The Company's riverboat and dockside gaming facilities in Indiana, Louisiana and Mississippi, as well as any additional riverboat casino properties that might be developed or acquired, are subject to risks in addition to those associated with land-based casinos, including loss of service due to casualty, mechanical failure, extended or extraordinary maintenance, flood, hurricane, snow and ice storms or other severe weather conditions. For cruising riverboats there are additional risks associated with the movement of vessels on waterways, including risks of casualty due to river turbulence and severe weather conditions. In addition, the Company's Boomtown Reno, Nevada facility is subject to severe winter weather conditions that can cause the closure of Interstate 80 and reduce the amount of customers visiting the property. Finally, the Company's Casino Magic Argentina operation is subject to continued political and economic instability. In July 2000, the Miss Belterra was struck by a barge while en route to Vevay, Indiana. The incident caused the opening of the Belterra Casino Resort to be delayed from August 2000 to October 2000. There can be no assurance that the Company's water-based facilities will not be struck by other vessels while on the waterways. In September 1998, a hurricane struck the Gulf Coast region and Boomtown Biloxi, Boomtown New Orleans, Casino Magic Biloxi, and Casino Magic Bay St. Louis were forced to shut down operations for approximately one week, though none of the properties sustained significant damage. If any of the Company's casinos, be it riverboat, dockside or land-based, cease operations for any period of time, it could adversely affect the Company's results of operations. Although the Company carries property and business interruption insurance for these types of items, there can be no assurances similar, or other, events will not occur in the future that could cause the loss of service of the Company's facilities. The substantial amount of debt of the Company could materially adversely affect the Company's business. As of December 31, 2001, the Company had $497,147,000 of debt, including $350,000,000 of unsecured 9.25% Notes due February 2007 and $125,000,000 of unsecured 9.5% Notes due August 2007 (see Note 14 to the Notes to Consolidated Financial Statements). In 2001, cash flow to service the Company's debt was $45,720,000 (see Note 2 to the Notes to Consolidated Financial Statements), including $44,250,000 related to the 9.25% and 9.5% Notes. While the Company currently believes that there are sufficient cash and cash-generating resources to meet its debt service obligations during the next year, there can be no assurance that in the future the Company will generate sufficient cash flow from operations or through asset sales to meet its long-term debt service obligations. No assurance can be given that the Company will be able to refinance any of its indebtedness on terms favorable to the Company, or at all. Such debt and the related debt service obligations could have important adverse consequences to the Company, including but not limited to: a) limiting the Company's ability to obtain additional financing; b) requiring a substantial portion of the Company's cash flow from operations to be used for payments on the debt and related interest; c) reducing the Company's ability to use cash flow to fund working capital, capital expenditures and general 36 corporate requirements; d) limiting the Company's flexibility in planning for, or reacting to, changes in the business and the industry; and, e) restricting the Company's activities compared to those of competitors with less debt or greater resources. Limited operating history at the Belterra Casino Resort does not allow the Company to effectively measure various improvements the Company has implemented at the facility. The Belterra Casino Resort opened in October 2000 and, through December 31, 2001, has generated a net loss in excess of $24,500,000, including an EBITDA loss in excess of $9,300,000 (see "Item 6 - Selected Financial Data" for a definition of EBITDA). The Company attributes the poor performance to, among other things: a) a location that is not easily accessible from local interstate freeways, b) over-staffing in anticipation of higher revenue and a greater number of customers frequenting the property than did in fact visit the facility, c) additional marketing costs to promote the facility (which is customary for new gaming facilities), d) opening the property in October 2000, which is traditionally the slowest period of the year, and e) severe winter weather conditions in the fourth quarter of 2000 and first quarter of 2001. In an attempt to improve the overall financial performance of the facility, during the fourth quarter of 2001, the Company undertook an aggressive cost containment program at the property, including reducing the property's labor levels (including management positions) to be more consistent with its business levels, eliminating certain marketing programs and reducing operating costs by eliminating and/ or combining certain operations. In addition, changes were made in the casino, including the slot machine mix, to become more appealing to the customer. Results of these efforts appear to be positive, however, there can be no assurances such actions will materially improve the long-term profitability of the Belterra Casino Resort. In addition, there is currently planned the construction of a 3.5 mile roadway from Interstate 71, a main thoroughfare in northern Kentucky, to the Ohio river, which ending point would be approximately 1 mile from the Belterra Casino Resort. It is anticipated the construction would begin in 2003 and be completed in 2004. The cost of the construction is to be borne by the state of Kentucky, which currently has the funds set aside for such construction. In the event the construction is completed, the Company believes this roadway will improve access to its facility; however, there can be no assurances the roadway will be constructed, and if constructed, that such roadway would materially increase the number of customers visiting the Belterra Casino Resort, and therefore improve the financial results of the property. Development of the Lake Charles project could exhaust all of the Company's available capital and not provide for a sufficient return. The Company has been selected to receive the fifteenth and final gaming license for a proposed project in Lake Charles, Louisiana. 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 such referendum will not be delayed beyond April 2002, and if held, that it will pass. 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 $22,500,000 in a refundable "escrow" account upon the voter approval of the project in Calcasieu Parish and demonstrating the Company has available financial resources in cash and credit facility access for the full project amount of $225,000,000 once construction commences). Construction is scheduled to commence in late 2002. The Company anticipates it will continue to meet each of the Lake Charles Conditions, however 37 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, leasing arrangements and joint venture arrangements. In February 2002, 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 the event the Company elects to proceed with the Lake Charles project, the capital required to complete the project is significant. Depending on the source of funding to develop the project (credit facility, leasing arrangements, joint venture partner, etc.), such capital requirement to the Company may exhaust all available capital of the Company. There can be no assurance that, in the event the project is commenced, there will be sufficient capital for other business activities of the Company. In addition, there are risks that, once completed, the revenue generated from the new development is not sufficient to pay its expenses, and the Company is required to infuse cash to pay its bills. There can be no assurance such new facility will be able to cover its own cash flow requirements. Adverse regulatory changes or changes in the gaming environment in any of the jurisdictions could have a material adverse effect on the Company's operations. See "Item 1 - Description of Business/ Government Regulation and Gaming Issues" and "- / Competition". For more information on the potential factors which could affect the Company's financial results, please see "-Forward-Looking Statements" and "-Factors Affecting Future Operating Results" and review the Company's filings with the Securities and Exchange Commission. Critical Accounting Policies The Company's significant accounting policies are discussed in Note 1 to the Notes to Consolidated Financial Statements. The preparation of consolidated financial statements in conformity with accounting principles generally accepted in the United States requires management to apply significant judgment in defining the estimates and assumptions. Our accounting policies that require significant judgment in determining the appropriate assumptions include policies for insurance reserves, asset disposition reserves, allowances for doubtful accounts, asset impairment and other reserves; valuation of goodwill and long-lived assets; depreciable lives of various assets and the calculation of income tax liabilities. These judgments are subject to an inherent degree of uncertainty. The Company's judgments are based on historical experience of the Company, terms of various past and present agreements and contracts, industry trends, and information available from other sources, as appropriate. There can be no assurance that actual results will not differ from the estimates. 38 Factors Affecting Future Operating Results Goodwill Amortization In June 2001, the Financial Accounting Standards Board issued Statements of Financial Accounting Standards No. 141 "Business Combinations" ("SFAS No. 141") and No. 142 "Goodwill and Other Intangible Assets" ("SFAS No. 142") which are effective July 1, 2001 and January 1, 2002, respectively, for the Company (see Note 1 - "Goodwill" to the Notes to Consolidated Financial Statements). SFAS 141 requires that the purchase method of accounting be used for all business combinations initiated after June 30, 2001. With the adoption of SFAS No. 142 on January 1, 2002 (earlier adoption is not permitted), goodwill is no longer amortized over its estimated useful life, which, for the years ended December 31, 2001, 2000 and 1999, was $2,846,000, $3,030,000 and $2,859,000, respectively. Rather, goodwill will be subject to at least an annual assessment for impairment by applying a fair-value-based test. The Company is in the process of completing its evaluation of the financial statement impact of adoption of SFAS No. 142 and anticipates there will be an impairment charge recorded in the first quarter of 2002 related to its Casino Magic locations (which unamortized goodwill was $49,169,000 as of December 31, 2001 - see Note 1 - "Goodwill" to the Notes to Consolidated Financial Statements). In accordance with SFAS No. 142, any such transition related impairment charge would be classified as a cumulative effect of a change in accounting principle. In addition, under the new rules, any future acquired intangible asset will be separately recognized if the benefit of the intangible is obtained through contractual or other legal rights, or if the intangible asset can be sold, transferred, licensed, rented, or exchanged, regardless of the acquirer's intent to do so. Intangible assets with definitive lives will be amortized over their useful lives. Argentina During the second half of 2001, the political and economic condition of Argentina deteriorated, including an increase in the risk of being unable to repatriate funds out of the country, the fall of international reserves, continuous fiscal imbalance, and a decrease in the financial system deposits. In December 2001, these events culminated in the resignation of the then President of the country, the imposition of restrictions on cash withdrawals, the delaying of payment of wages to government employees, and the closing of the banking system from late December to early January 2002. In an effort to stabilize the country, the new government of Argentina decided to devalue the Argentine Peso in early January 2002 (which had been pegged to the U.S. dollar for over ten years), as well as stop all transfers of U.S. dollars out of the country. As a result of the actions taken, pursuant to Statement of Financial Accounting Standards No. 52 Foreign Currency Translation ("SFAS No. 52"), the Company recorded a translation loss in a separate component of stockholders' equity in the amount of $4,430,000 as of December 31, 2001 (see Note 3 to the Notes to Consolidated Financial Statements). At December 31, 2001, total assets of the Company in Argentina were $11,376,000 or less than 2% of the Company's consolidated assets. The Company anticipates the cumulative translation loss will fluctuate in the future based on changes in the currency exchange rate between the U.S. dollar and the Argentine peso. In addition, the Company reclassified the cash ($3,452,000) maintained in Argentina as restricted cash at December 31, 2001, until such time as the Argentine government amends its position regarding transferring funds out of the country, as such cash can only be utilized by Casino Magic Argentina and not by Pinnacle Entertainment or any of its other subsidiaries. In February 2002, the government authorized the Central Bank of Argentina to review and approve transfers of cash (after converting pesos to U.S. dollars). There is no assurance the Central Bank will continue to authorize such transfers for Casino Magic Argentina. The impact of these events to Casino Magic Argentina include a significant reduction in revenue resulting from a decline in customer counts and lower discretionary spending by customers. The Company anticipates the economic instability will continue in 2002 and will therefore continue to adversely impact Casino Magic Argentina operating results in 2002. Belterra Casino Resort In October 2000, the Company opened the Belterra Casino Resort located on 315 acres adjacent to the Ohio River in Switzerland County, Indiana, which is approximately 45 miles southwest of downtown Cincinnati, Ohio. The Belterra Casino Resort features a 15-story, 308-room hotel, a cruising riverboat casino (the "Miss Belterra") with 1,344 slot machines and 45 table games, an 18-hole Tom Fazio- 39 designed championship golf course, which opened in July 2001, six restaurants, a 1,500-seat entertainment venue, a spa, retail areas and other amenities. Prior to August 2001, the Company owned a 97% interest in the Belterra Casino Resort, with the remaining 3% held by a non-voting local partner. In November 2000, the Company entered into an agreement with the local partner whereby the local partner had the right to require the Company to purchase, for a purchase price determined in accordance with the agreement, its entire ownership interest in the Belterra Casino Resort at any time on or after January 1, 2001. A $100,000 deposit toward such ultimate purchase price was made by the Company to the partner at that time. In July 2001, the local partner exercised the right to require the Company to purchase the remaining 3% ownership 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 the Belterra Casino Resort is now wholly owned by the Company. Legislation Regarding Dockside Gaming in Louisiana In March 2001, the state legislature passed a law enabling riverboat casinos to remain dockside at all times and increased the gaming taxes paid to the state of Louisiana from 18.5% to 21.5% of net gaming proceeds effective April 1, 2001 for the nine riverboats in the southern region of the state, including the Company's Boomtown New Orleans property. The gaming tax increase to 21.5% of net gaming proceeds will be phased in over an approximately two-year period for the riverboats operating in parishes bordering the Red River, including the Company's Casino Magic Bossier City property. The phase in included a 1% increase on April 1, 2001, with another 1% on each of April 1, 2002 and 2003. The Company believes this change in the law will benefit its Boomtown New Orleans operations in the long-term, as increased revenues are expected from casino patrons who will no longer be required to arrange their plans to coincide with a cruising schedule. The Company also believes the new legislation would benefit the proposed Lake Charles project (see below), as it would enable the Company to build a riverboat casino that would remain dockside at all times and thus compete more effectively with existing operators. Finally, during the nine months ended December 31, 2001, the Company believes the increased gaming taxes had a negative impact at Casino Magic Bossier City, as gaming was already being conducted on a dockside riverboat casino prior to the new legislation. Lake Charles In November 1999, the Company filed an application for the fifteenth and final gaming license to be issued by the Louisiana Gaming Control Board (the "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. In connection with the 1999 application, Pinnacle Entertainment entered into an option agreement with the Lake Charles Harbor and Terminal District (the "District") to lease 225 acres of unimproved land from the District upon which such resort complex would be constructed. The initial lease option was for a six-month period ending January 2000, with three six-month renewal options (all of which have been exercised), at a cost of $62,500 per six-month renewal option. In June 2001 and again in January 2002, the District agreed to extend the option period for additional six-month terms at a cost of $62,500 per six-month term. In the event the local referendum noted above is not held prior to the expiration of the current option extension, the Company anticipates requesting an additional lease option extension from the District. These lease option payments are expensed over the option periods. If the lease option were exercised, the annual rental payment would be $815,000, with a maximum annual increase of 5%, commencing upon opening of the facility. The term of the lease would be for a total of up to 70 years, with an initial term of 10 years and six consecutive renewal options of 10 years each. The lease would require the Company to develop certain on- and off-site improvements at the location. All costs incurred by the Company related to obtaining this license have been expensed as incurred. Assets Held for Sale Assets held for sale of $18,285,000 at December 31, 2001 consist primarily of 97 acres of surplus land in Inglewood, California and the Crystal Park Casino card club casino in Compton, California (see "California Card Clubs" below and Note 5 to the Notes to Consolidated Financial Statements). Assets held for sale at December 31, 2000 consist of the 97 acres of surplus land. The Company is marketing the properties to prospective buyers. 40 California Card Clubs By California state law, a corporation may operate a gambling enterprise in California only if every officer, director and shareholder holds a state gambling license. Only 5% or greater shareholders of a publicly traded racing association, however, must hold a state gambling license. As a practical matter, therefore, public corporations that are not qualified racing associations may not operate gambling enterprises in California. As a result, the Hollywood Park-Casino and Crystal Park Casino, are leased to, and operated by, an unrelated third party. In May 2001, the California Senate passed a bill, the effect of which would have been to permit the Company to operate the Hollywood Park-Casino in Inglewood, California, which was subsequently passed by the California State Assembly. The bill was vetoed by the Governor of California in October 2001. Therefore, the Company anticipates leasing the Hollywood Park-Casino and the Crystal Park Casino to the current operator for the foreseeable future. In November 2001, the operator of the Crystal Park Casino requested, and the Company granted, a reduction in rent to $20,000 per month from $100,000 per month, due to increased card club competition and the overall slowdown in the U.S. economy. In addition, in the fourth quarter 2001, the Company began aggressively seeking buyers for the facility; and accordingly, reclassified the assets as held for sale (see Note 5 to the Notes to Consolidated Financial Statements). Overall U.S. Economic Conditions During the year ended December 31, 2001, the U.S. economy experienced a significant economic slowdown. These economic conditions were further impacted by the tragic events of September 11, 2001. The impact of these adverse conditions to the Company's operations includes fewer guests visiting the properties and spending less while visiting. The Company developed cost control programs at its various locations, including labor and marketing spending reductions, and began implementing those programs in late 2001 at the various locations. Results of Operations Accounting for Customer "Cash-back" Loyalty Programs In January 2001, the Emerging Issues Task Force ("EITF") reached consensus on Issue 3 addressed in Issue No. 00-22 Accounting for "Points" and Certain Other Time-Based Sales Incentive Offers, and Offers for Free Products or Services to Be Delivered in the Future. This EITF pronouncement requires that the cost of the cash back component of the Company's customer loyalty programs be treated as a reduction in revenues. The Company rewards customers with cash, based upon their level of play on certain casino games (primarily slot machines). These costs were previously recorded as a casino expense. The consensus reached on Issue 3 is effective beginning in fiscal quarters ending after February 15, 2001 and was adopted by the Company in the quarter ended March 31, 2001. In connection with the adoption of Issue 3, the Company reclassified (i.e., reduced gaming revenue and gaming expenses) the cash back component of its customer loyalty programs in the amount of $21,497,000 and $20,865,000 related to the year ended December 31, 2000 and 1999, respectively, to be consistent with the year ended December 31, 2001. Terminated Merger Agreement On April 17, 2000, the Company entered into a definitive agreement with PH Casino Resorts ("PHCR"), a newly formed subsidiary of Harveys Casino Resorts, and Pinnacle Acquisition Corporation ("Pinnacle Acq Corp"), a newly formed subsidiary of PHCR, pursuant to which PHCR would have acquired by merger (the "Merger") all of the outstanding capital stock of Pinnacle Entertainment 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, as well as other conditions. On January 23, 2001, the Company announced that it had been notified by PHCR that PHCR did not intend to extend further the outside closing date (previously extended to January 31, 2001) of the Merger. Since all of the conditions to consummation of the Merger would not be met by such date, the Company, PHCR and Pinnacle Acq Corp mutually agreed that the Merger Agreement would be terminated. The Company does not expect to incur additional costs relating to the terminated Merger Agreement. Redemption of Casino Magic 13% Notes and Extraordinary Item On August 15, 2000, the Company redeemed all $112,875,000 in aggregate principal amount of its then outstanding Casino Magic 13% Notes at 41 the redemption price of 106.5%. Upon deposit of principal, premium and accrued interest for such redemption, Casino Magic Bossier City satisfied all conditions required to discharge its obligations under the indenture. In connection with the redemption, the Company recorded an extraordinary loss, net of federal and state income taxes, of $2,653,000. The extraordinary loss represents the payment of the redemption premium and the write-off of deferred finance and premium costs, net of the related federal and state income tax benefits (see Note 14 to the Notes to Consolidated Financial Statements). Assets Sold On August 8, 2000, the Company completed the sale of Casino Magic Bay St. Louis and Boomtown Biloxi (the "Mississippi Casinos") and on June 13, 2000, the Company completed the sale of Turf Paradise (see Note 11 to the Notes to Consolidate Financial Statements). The results of operations of the Mississippi Casinos and Turf Paradise are included in the results of operations only until such respective dates. Revenue, operating results and interest expense has been and will continue to be materially different following the sale of the Mississippi Casinos and Turf Paradise, the redemption of the Casino Magic 13% Notes, the opening of the Belterra Casino Resort and the early termination of the HP Yakama promissory note and related lease agreements. Year ended December 31, 2001 compared to the year ended December 31, 2000 ------------------------------------------------------------------------- Revenues Total revenues for the year ended December 31, 2001 decreased by - -------- $34,484,000, or 6.1%, as compared to the year ended December 31, 2000. Contribution to revenues in the year ended December 31, 2000 from the Mississippi Casinos and Turf Paradise properties sold in 2000 was $104,333,000. When excluding such revenue for the year ended December 31, 2000, total revenues in the year ended December 31, 2001 increased by $69,849,000, or 15.2%, when compared to the year ended December 31, 2000 due primarily to the revenue at the Belterra Casino Resort, which did not open until late October 2000. Gaming revenues decreased $19,812,000, or 4.3%, including $81,305,000 due to the timing of the sale of the Mississippi Casinos in August 2000. When excluding the results of the Mississippi Casinos from the year-ended December 31, 2000 results, gaming revenues increased by $61,493,000, or 16.2%. Gaming revenues increased at Belterra Casino Resort by $79,850,000 and at Boomtown New Orleans by $6,182,000, while gaming revenues declined at Boomtown Reno by $2,291,000, at Casino Magic Biloxi by $1,577,000, at Casino Magic Bossier City by $18,875,000 and at Casino Magic Argentina by $1,796,000. The increase in gaming revenues at Belterra Casino Resort is due to the opening of the property in late October 2000 and therefore just over 2 months of operations in the prior year. The increase in gaming revenues at Boomtown New Orleans is primarily attributed to increased coin-in (volume of slot play) and resultant slot revenue in the year ended December 31, 2001, compared to the prior year. During 2001, Boomtown New Orleans renovated the 3rd deck of its dockside riverboat casino and installed 300 new slot machines, and built a new high limit table games area; as well as benefited from dockside legislation that became effective April 1, 2001, which no longer requires the customers to coordinate their schedules with the cruising times of the boat. The decrease in gaming revenue at Boomtown Reno is primarily attributed to an overall reduction in customer volume for the year (including a substantial reduction in September 2001 due to the adverse impact of September 11, 2001 to the Reno market), combined with a reduction in guest spending while visiting the property (although hotel occupancy and food covers were not substantially lower). The decrease in Casino Magic Bossier City gaming revenue is due primarily to lower guest counts, which translated into lower table game drop (volume of table game play) and slot coin-in levels. The reduced guests counts are due primarily to: i) increased competition from the opening of a new casino hotel in December 2000 and the opening of a new hotel tower at another competitor in January 2001; ii) severe winter rainfall in late February and early March, which flooded the first level of the property's multi-level parking garage until mid-May 2001; and iii) construction disruption to its casino operations from the installation of new slot machines. The decrease in gaming revenue at Casino Magic Argentina is primarily due to the economic and political instability that began in the third quarter of 2001 and culminated in December 2001 with the resignation of the then President of the country, the imposition of restrictions on cash withdrawals by its citizens and the delaying of payment of wages to government employees. These factors, as well as other adverse economic conditions in Argentina, severely impacted the 42 operations in the fourth quarter of 2001 for Casino Magic Argentina, as fewer customers visited the facility and spent less while visiting. Food and beverage revenues decreased by $968,000, or 3.0%, including $7,242,000 due to the timing of the sale of the Mississippi Casinos and Turf Paradise. When excluding the results of the sold operations from the December 31, 2000 year-end results, food and beverage revenue increased $6,274,000, or 25.4%. Food and beverage revenues increased at Belterra Casino Resort by $7,055,000, offset by reduced revenues at other of the casino properties due to lower guest counts the various properties experienced. Truck stop and service station revenue generated at Boomtown Reno decreased by $1,592,000, or 7.3%, primarily due to a decrease in fuel prices and lower volume in diesel fuel sold in the twelve-month period of 2001 compared to the same period of 2000. Hotel and recreational vehicle park revenues increased by $2,247,000, or 17.7%. Contributing to hotel and recreational vehicle park revenues in the December 31, 2000 year-end results was $1,273,000 due to the timing of the sale of Casino Magic Bay St. Louis in August 2000. When excluding the results of Casino Magic Bay St. Louis from the December 31, 2000 year-end results, hotel and recreational vehicle park revenues increased $3,520,000, or 30.7%. A majority of the increase, $3,316,000, is attributed to a full twelve months of operations at the Belterra Casino Resort, which did not open until late October 2000. Other income decreased by $4,907,000, or 19.4%, including $5,061,000 due to the timing of the sale of the Mississippi Casinos and Turf Paradise. When excluding the results of the sold operations from the December 31, 2000 year-end results, other income increased by $154,000, or less than 1.0%. Racing revenues declined by $9,452,000, or 100%, entirely due to the sale of Turf Paradise in June 2000. Expenses Total expenses for the year ended December 31, 2001 increased by - -------- $143,143,000, or 36.6%, as compared to the year ended December 31, 2000. Included in the total expenses for the year ended December 31, 2001 are asset impairment losses of $23,530,000 and asset disposition gains of $500,000, while included in total expenses for the year ended December 31, 2000 is a gain on the sale of the Mississippi Casinos, Turf Paradise and land in Inglewood, California (see Note 11 to the Condensed Notes to Consolidated Financial Statements) of $118,816,000. In addition, included in total expenses in 2000 are expenses of the Mississippi Casinos and Turf Paradise of $84,045,000. Excluding such items from both periods, total expenses for the year ended December 31, 2001 increased by $85,342,000, or 20.0%, as compared to the year ended December 31, 2000, due primarily to expenses at Belterra Casino Resort, which did not open until late October 2000. Gaming expenses increased by $1,227,000, or less than 1.0%. Contributing to the gaming expenses in the December 31, 2000 results was $43,981,000 due to the timing of the sale of the Mississippi Casinos in August 2000. When excluding the results of the Mississippi Casinos from the results of operations for the December 31, 2000 year-end, gaming expenses increased by $45,208,000, or 21.1%. Gaming expenses increased $42,505,000 at Belterra Casino Resort, $5,187,000 at Boomtown New Orleans and $1,034,000 at Casino Magic Bossier City, while gaming expenses decreased at Boomtown Reno by $1,168,000, at Casino Magic Biloxi by $1,553,000 and at Casino Magic Argentina by $797,000. The increase in gaming expenses at Belterra Casino Resort is due to the property opening in late October 2000, and therefore just over two months of operations in the year ended December 31, 2000. The increase in gaming expenses at Boomtown New Orleans is consistent with the increased gaming revenues beginning on April 1, 2001, increased gaming taxes (see Note 7 to the Notes to Consolidated Financial Statements) and increased marketing expenses. The increase in gaming expenses at Casino Magic Bossier City is due primarily to the additional marketing costs associated with the intense competition noted above. The decrease in gaming expenses at Boomtown Reno is due primarily to reduced revenue and marketing costs, while the decrease in gaming expenses at Casino Magic Biloxi is consistent with a reduction in gaming revenue, as well as a reduction of approximately 160 employees in the fourth quarter of 2001. The reduction in gaming expenses at Casino Magic Argentina is due primarily to the reduced taxes from the reduced gaming revenue. 43 Food and beverage expenses increased by $3,619,000, or 10.3%. Contributing to food and beverage expenses in the year ended December 31, 2000 was $7,690,000 due to the timing of the sale of the Mississippi Casinos and Turf Paradise. When excluding the results of the sold operations from the results of operations for the year ended December 31, 2000, food and beverage expenses increased $11,309,000, or 41.1%. Food and beverage expenses increased at Belterra Casino Resort by $12,913,000 due to the opening of the property in late October 2000, partially offset by decreases at the Company's other casinos. Truck stop and service station expenses at Boomtown Reno decreased by $1,597,000, or 7.9%, due primarily to fewer gallons of gasoline and diesel fuel purchased in the period, as well as reduced fuel costs. Hotel and recreational vehicle park expenses increased by $3,506,000, or 52.6%, including $710,000 due to the timing of the sale of Casino Magic Bay St. Louis. When excluding the results of Casino Magic Bay St. Louis from the results of operations for the year ended December 31, 2000, hotel and recreational vehicle park expenses increased by $4,216,000, or 70.8%, the majority of which is attributed to Belterra Casino Resort, which opened in late October 2000. Racing expenses decreased by $4,133,000, or 100%, entirely due to the sale of Turf Paradise in June 2000. Selling, general and administrative expenses increased by $12,357,000, or 11.4%. Contributing to general and administrative expenses in the year ended December 31, 2000 was $19,440,000 due to the timing of the sale of the Mississippi Casinos and Turf Paradise. When excluding the results of the sold operations from the results of operations for year ended December 31, 2000, selling, general and administrative expenses increased $31,797,000, or 35.9%, of which, $27,563,000, is attributed to Belterra Casino Resort and $4,664,000 was attributed to Casino Magic Bossier City. During the second quarter of 2001, Casino Magic Bossier City took a charge of approximately $2,600,000 for certain reserves and write-downs related to inventory, accounts receivable and other working capital valuation matters. Depreciation and amortization increased by $3,348,000, or 7.3%, due primarily to additional depreciation expense from Belterra Casino Resort, which opened in late October 2000, offset by reduced depreciation expense from the sale of the Mississippi Casinos and Turf Paradise in 2000. Other operating expenses increased $3,581,000, or 33.9%, including $2,501,000 due to the timing of the sale of the Mississippi Casinos and Turf Paradise in 2000. When excluding the results of the sold operations from the results of operations for the year ended December 31, 2000, other operating expenses increased $6,082,000, or 57.5%, including $5,669,000 related to the Belterra Casino Resort. Pre-opening expenses decreased by $14,420,000, or 95.9%, for the year ended December 31, 2001 from the same period in 2000. Pre-opening costs in 2001 for the Belterra Casino Resort were due to the continuing construction of the Tom Fazio-designed championship golf course, which opened in July 2001. The gain on disposition of assets of $500,000 for the year ended December 31, 2001 includes the gain from the early pay-off of the HP Yakama promissory note of $639,000 (see Note 6 to the Notes to Consolidated Financial Statements), offset by the loss on disposition of other assets in the period. The gain on disposition of assets of $118,816,000 for the year ended December 31, 2000 is due primarily to the sale of the Mississippi Casinos in August 2000, Turf Paradise Race Track in June 2000 and the land sales in March 2000 (see Note 11 to the Notes to Consolidated Financial Statements). The asset impairment loss of $23,530,000 for the year ended December 31, 2001 is due primarily to the write down of the Crystal Park Casino card club assets of $20,358,000, the write down of the Boomtown Belle I riverboat casino of $1,800,000 and assets at Casino Magic Biloxi of $1,372,000 (see Note 4 to the Notes to Consolidated Financial Statements). The net book values of these assets are classified as "Assets held for sale" on the Consolidated Balance Sheet at December 31, 2001. 44 Terminated merger costs of $5,727,000 for the year ended December 31, 2000 relate to the terminated merger with PHCR (see Note 10 to the Notes to Consolidated Financial Statements). Purported class action lawsuits related to the terminated merger were settled in the second quarter of 2001 resulting in a reversal of accrued expenses of $464,000 for these lawsuits in the year ended December 31, 2001. Interest income decreased by $7,583,000, or 60.2%, primarily due to lower investable funds and lower interest rates during the year ended December 31, 2001 compared to the same period of 2000. Interest expense, net of capitalized interest decreased by $2,767,000, or 5.3%, due primarily to the redemption of the Casino Magic 13% Notes in August 2000 (see Note 14 to the Notes to Consolidated Financial Statements). Capitalized interest was $482,000 in the year ended December 31, 2001 compared to $8,148,000 in the year ended December 31, 2000, a decrease of $7,666,000, or 94.1%, due primarily to the completion of the Belterra Casino Resort in October 2000, while the golf course at Belterra Casino Resort was not completed until early July 2001. Due to the pre-tax losses for the year ended December 31, 2001, as well as the settlement of certain U.S. Federal income tax matters that were under examination by the I.R.S. relating to Casino Magic and its subsidiaries prior to 1997, resulting in the recording of an income tax benefit of approximately $3,700,000 in the third quarter 2001, the Company recorded an income tax benefit of $21,906,000, compared to an income tax expense of $52,396,000 for the year ended December 31, 2000 (which 2000 amount includes taxes associated with the asset dispositions in 2000 - see Note 11 to the Notes to Consolidated Financial Statements). The extraordinary loss of $2,653,000 recorded for the year ended December 31, 2000 related to the early redemption of the Casino Magic 13% Notes (see Note 14 to the Notes to Consolidated Financial Statements). Year ended December 31, 2000, compared to the year ended December 31, 1999 -------------------------------------------------------------------------- Revenues Total revenues for the year ended December 31, 2000 decreased by - -------- $122,867,000, or 17.93%, as compared to the year ended December 31, 1999. Contribution to revenues in the year ended December 31, 2000 from the Mississippi Casinos and Turf Paradise was $107,868,000. Contribution to revenues in the year ended December 31, 1999 from the Mississippi Casinos, Turf Paradise, Hollywood Park Race Track and Hollywood Park-Casino was $260,615,000. When excluding such revenues for both periods, total revenues in the year ended December 31, 2000 increased by $30,060,000, or 6.8%, when compared to the year ended December 31, 1999. Gaming revenues decreased by $74,760,000, or 13.9%, including a decrease of $87,338,000 due to the timing of the various casino dispositions in 2000 and 1999. When excluding the results of the casino properties sold, gaming revenues increased by $12,578,000, or 2.8%. Gaming revenues increased at Belterra Casino Resort by $13,614,000, at Boomtown Reno by $6,000,000 and at Casino Magic Bossier City by $2,663,000, while gaming revenues declined at Boomtown New Orleans by $5,766,000 and at Casino Magic Biloxi by $3,210,000. The increase in gaming revenue at Belterra Casino Resort is due to the opening of the property in October 2000. Boomtown Reno's higher gaming revenue was primarily due to increased hotel occupancy (occupancy was 87% in 2000 compared to 66% in 1999) and new marketing programs, which translated into an increase in slot coin-in (volume of slot play) and table game drop (volume of table game play), as well as the better than normal winter weather (less snow and fewer road closures due to snow conditions) during the first and fourth quarters of 2000. Casino Magic Bossier City's gaming revenue improved in the first three quarters of the year, primarily due to upgrading the slot machine product mix and to a change in the overall marketing programs at the property. However, gaming revenue at Casino Magic Bossier City declined in the fourth quarter of 2000, primarily due to severe winter storms. The decline in gaming revenues at the New Orleans and Biloxi locations reflects new competition in October 1999 and March 1999, respectively, in each of the markets. At Boomtown New Orleans, gaming revenue was down for the first three quarters of 2000 compared to 1999. However, gaming revenue increased in the fourth quarter of 2000 compared to the fourth quarter of 1999, primarily due to improved slot revenue from recapturing market share lost to competition. Casino Magic Biloxi gaming revenues were down primarily due to table game drop and slot coin-in being down 6.8% and 3.7%, respectively, in 2000 compared to 1999. 45 Food and beverage revenues decreased by $7,897,000, or 19.8%, including a decrease of $12,720,000 due to the timing of the various casino and race track dispositions in 2000 and 1999. When excluding the results of the casino and race track properties disposed of, food and beverage revenues increased by $4,823,000, or 24.3%. Food and beverage revenues increased at Belterra Casino Resort by $1,444,000, at Boomtown Reno by $2,516,000 and Casino Magic Biloxi by $1,008,000, while food and beverage revenue decreased at Casino Magic Bossier City by $442,000. The increase in food and beverage revenue at Belterra Casino Resorts is due to the property opening in October 2000. The increase in food and beverage revenue at Boomtown Reno is attributed to the improved hotel occupancy, as well as remodels to certain of the restaurants at the property. The increase in food and beverage revenue at Casino Magic Biloxi is attributed to increased volume from the addition of a deli restaurant in May 2000, to the refurbishing of an existing venue in May 2000 and to some pricing increases. The decline in food and beverage revenue at Casino Magic Bossier City is primarily due to the overall change in marketing programs, including new programs which increased the amount of complimentary food and beverage provided to customers. Truck stop and service station revenue at Boomtown Reno increased by $4,138,000, or 23.5%, primarily due to increased fuel prices. Hotel and recreational vehicle park revenues increased by $993,000, or 8.5%, including a decrease of $524,000 due to the timing of the sale of Casino Magic Bay St. Louis. Hotel and recreational vehicle park revenue increased by $480,000 at the Belterra Casino Resort (which property opened in October 2000), by $399,000 at Boomtown Reno (consistent with improved hotel occupancy noted above) and by $1,062,000 at Casino Magic Biloxi (hotel occupancy increased to 86% in 2000 compared to 82% in 1999), while such revenues decreased by $424,000 at Casino Magic Bossier City. The decline in hotel revenue at Casino Magic Bossier City is primarily due to the overall change in marketing programs, which new programs increased the number of complimentary hotel rooms provided to customers. Other income increased by $416,000, or 1.7%, including a decrease of $3,268,000 due to the timing of the various casino and race track dispositions in 2000 and 1999. When excluding the results of the casino and race track properties disposed of, other income increased by $3,684,000, or 22.2%, primarily due to an increase in the percentage of net revenues (as defined in the relevant agreements between the Company and the Yakama Indian Nation) received from the Yakama Indian Nation, as well as to proceeds from the settlement of a 1998 business interruption insurance claim. Racing revenues declined by $45,757,000, or 82.9%, entirely due to the disposition of Turf Paradise in June 2000 and Hollywood Park Race Track in September 1999. Expenses Total expenses for the year ended December 31, 2000 decreased by - -------- $150,567,000, or 26.8%, as compared to the year ended December 31, 1999. Included in total expenses for the twelve months ended December 31, 2000, is a gain on the disposition of assets of $118,816,000 (see Note 11 to the Notes to Consolidated Financial Statements), as well as expenses of $87,580,000 associated with the operations of such assets sold. Included in total expenses for the twelve months ended December 31, 1999, is a gain on the disposition of assets of $62,507,000, an impairment loss of $20,446,000 (see Note 11 to the Notes to Consolidated Financial Statements) and expenses of $214,529,000 associated with the operations of the properties sold or disposed of in 2000 and 1999. When excluding such gains, impairment write-down and other expenses, total expenses for the twelve months ended December 31, 2000 increased by $53,137,000, or 14.4%, as compared to the twelve months ended December 31, 1999. Gaming expenses decreased by $30,297,000, or 10.5%, including $47,537,000 due to the timing of the various casino dispositions in 2000 and 1999. When excluding the gaming expenses attributed to such casino properties disposed of, gaming expenses increased $17,240,000, or 7.2%. Gaming expenses increased at the Belterra Casino Resort by $9,421,000, at Boomtown Reno by $2,622,000, at Casino Magic Bossier City by $3,068,000, at Casino Magic Biloxi by $1,558,000 and at Boomtown New Orleans by $1,011,000. The increased gaming expense at Belterra Casino Resort reflects the opening of the facility in October 2000, while 46 at Boomtown Reno and Casino Magic Bossier City, the increases are consistent with the increased gaming revenue. The increased gaming expenses at Casino Magic Biloxi and Boomtown New Orleans reflect the competitive environments within which each operate, and the costs to compete in their respective markets. Food and beverage expenses decreased by $11,378,000, or 24.4%, including $16,269,000 due to the timing of the various casino and race track dispositions in 2000 and 1999. When excluding food and beverage expenses attributed to such casino and race track properties disposed of, food and beverage expenses increased by $4,891,000, or 21.6%. Food and beverage expenses increased at Belterra Casino Resort by $2,842,000 (consistent with the October 2000 opening of the property) and at Boomtown Reno by $1,296,000, consistent with the overall increase in food and beverage revenue. At Casino Magic Biloxi, food and beverage expenses increased by $1,197,000, primarily due to the overall increase in revenue, as well as an increase in marketing costs to compete in the Biloxi gaming market. At Casino Magic Bossier City, food and beverage costs declined $627,000, which was primarily due to the lower food and beverage revenue. Truck stop and service station expenses at Boomtown Reno increased by $4,004,000, or 24.6%, primarily due to increased fuel costs. Hotel and recreational vehicle park expenses increased by $740,000, or 12.5%, primarily due to increased costs at Belterra Casino Resort of $1,169,000 (which property opened in October 2000), offset by reduced costs at Casino Magic Bossier City of $354,000, consistent with the lower hotel revenue. Racing expenses decreased by $18,561,000, or 81.8%, entirely due to the disposition of Turf Paradise in June 2000 and Hollywood Park Race Track in September 1999. Selling, general and administrative expenses decreased by $26,892,000, or 19.9%, including a reduction in expenses of $32,674,000 due to the timing of the various casino and race track dispositions in 2000 and 1999. When excluding selling, general and administrative expenses attributed to such casino and race track dispositions in 2000 and 1999, selling, general and administrative expenses increased $5,782,000, or 7.0%, including $6,113,000 attributed to the Belterra Casino Resort, which opened in October 2000. Depreciation and amortization decreased by $5,822,000, or 11.2%, including $8,304,000 due to the timing of the various casino and race track dispositions in 2000 and 1999. When excluding such casino and race track properties from depreciation and amortization expenses, depreciation and amortization increased by $2,482,000, or 6.5%, including $2,294,000 attributed to the Belterra Casino Resort. Other operating expenses decreased by $3,343,000, or 24.0%, including a reduction in other operating expenses of $3,420,000 due to the timing of the various casino and race track dispositions in 2000 and 1999. Pre-opening costs for the Belterra Casino Resort increased $12,010,000, from $3,020,000 to $15,030,000, primarily due to the pre-opening costs incurred for a new gaming facility, including hiring and training employees and marketing costs. The gain on disposition of assets of $118,816,000 in 2000 is primarily due to the sale of the Mississippi Casinos in August 2000, the sale of Turf Paradise in June 2000 and the sale of surplus land in March 2000 (see Note 11 to the Notes to Consolidated Financial Statements), partially offset by a loss of $902,000 on the disposition of assets. The gain on disposition of assets of $62,507,000 and impairment write-down of $20,446,000 in the year ended December 31, 1999 is primarily due to the disposition of the Hollywood Park Race Track and Hollywood Park-Casino in September 1999 (see Note 11 to the Notes to Consolidated Financial Statements). Terminated merger costs of $5,727,000 relate to the terminated merger with PHCR including the proposed settlement of litigation relating to the merger (see Note 10 to the Notes to Consolidated Financial Statements). Interest income increased by $4,677,000, or 59.0%, primarily due to higher investable funds and higher interest rates during the year ended December 31, 2000 compared to the same period of 1999. Interest 47 expense, net of capitalized interest, decreased by $12,851,000, or 19.6%, due primarily to additional capitalized interest in 2000 for Belterra Casino Resort and lower interest expense in 2000 from the redemption of the Casino Magic 13% Notes in August 2000 (see Note 14 to the Notes to Consolidated Financial Statements). Income tax expense increased $11,470,000, or 28.0%, including income tax of approximately $48,021,000 recorded in 2000 associated with asset dispositions, compared to income tax of approximately $22,000,000 recorded in 1999 associated with asset dispositions (see Note 11 to the Notes to Consolidated Financial Statements). The extraordinary loss of $2,653,000 for the year ended December 31, 2000 relates to the redemption of the Casino Magic 13% Notes in August 2000 (see Note 14 to the Notes to Consolidated Financial Statements). Liquidity, Capital Resources and Other Factors Influencing Future Results At December 31, 2001, the Company had cash and cash equivalents, all of which had original maturities of less than ninety days, of $153,187,000 compared to $172,868,000 at December 31, 2000. The Consolidated Statements of Cash Flows detailing changes in the cash balances is on page 66. Operating activities generated net cash of $36,065,000 in the year ended December 31, 2001 compared with net cash uses of $25,484,000 in the twelve months of 2000. In the twelve-month period ending December 31, 2001, the net cash flow from operations was generated primarily from: i) earnings before interest, taxes, depreciation, amortization and non-recurring items ("EBITDA" see "Item 6 - Selected Financial Data" for a definition of EBITDA) of $66,903,000, ii) cash income tax refunds in excess of $24,000,000, and iii) cash provided by receivables, prepaids and other assets of $4,542,000; offset by uses of cash for: i) interest payments on the 9.5% and 9.25% Notes of approximately $44,250,000, ii) the restriction of cash in Argentina of $3,452,000 (see Note 3 to the Notes to Consolidated Financial Statements), and iii) cash used for accounts payable and accrued liabilities of $12,735,000. In the same twelve-month period last year, the cash used in operations was $25,484,000, which included additional EBITDA from operations sold in 2000 (see Note 11 to the Notes to Consolidated Financial Statements), offset by cash interest payments (the 9.5% Notes, 9.25% Notes and Casino Magic Bossier City 13% Notes - see Note 14 to the Notes to Consolidated Financial Statements), income taxes in 2000 and 1999 on asset dispositions, pre-opening costs attributed to Belterra Casino Resort (which opened in October 2000) and terminated merger costs. Net cash used by investing activities of $43,304,000 in the year ended December 31, 2001 is primarily attributed to the addition of property, plant and equipment of $51,783,000. The additions during the year ended December 31, 2001 include completion of the Tom Fazio-championship golf course at Belterra Casino Resort (which opened in July 2001), construction costs associated with the build out of the high-limit table games area, purchase of new slot machines and remodeling of the pavilion building at Boomtown New Orleans, purchase of player tracking systems at various of the Company properties and the purchase of approximately 14 acres of leased land at Crystal Park Casino. Net cash provided by investing activities of $193,277,000 in the year ended December 31, 2000 includes proceeds of $123,428,000 from the maturity of short term investments and the receipt of $266,925,000 from the sale of property, plant and equipment (such receipts primarily from the various asset sales in 2000 - see Note 11 to the Notes to Consolidated Financial Statements), offset by the use of cash of $194,627,000 for the additions of property, plant and equipment (the primary additions attributed to the Belterra Casino Resort, which opened in October 2000). Net cash used in financing activities of $12,442,000 in the year ended December 31, 2001 is due primarily to the payment of $9,820,000 for the purchase of the Company's common stock (in August 1998, the Company announced its intention to repurchase and retire up to 20%, or approximately 5,256,000 shares, of its then issued and outstanding common stock on the open market or in negotiated transactions; in February 2001, the Company announced its intention to continue to make purchases under this program - see Note 3 to the Notes to Consolidated Financial Statements). The net cash used in financing activities in the twelve months of 2000 of $118,287,000 is primarily due to the redemption of the Casino Magic Bossier City 13% Notes in August 2000 (see Note 14 to the Notes to Consolidated Financial Statements). 48 As discussed in Note 14 to the Notes to Consolidated Financial Statements, the Company has a bank credit facility with a syndicate of banks in the amount of $110,000,000, with scheduled commitment reductions of $6,667,000 on March 31, 2003 and $16,667,000 on each of June 30 and September 30, 2003 and which expires December 31, 2003 (the "Credit Facility"). As of December 31, 2001, the Company had no outstanding borrowings under the Credit Facility, and has not utilized the Credit Facility since February 1999. The Company does not anticipate making any borrowing under this facility in 2002 and maintains the facility to satisfy the requirements of the Louisiana Gaming Control Board that the Company has financing available to complete the Lake Charles project (see Note 8 to the Notes to Consolidated Financial Statements). Interest rates on borrowings under the Credit Facility are determined by adding a margin, which is based upon the Company's debt to cash flow ratio (as defined in the Credit Facility), to either the LIBOR rate or Prime Rate (at the Company's option). The Company also pays a quarterly commitment fee on the unused balance of the Credit Facility. The Credit Facility allows for interest rate swap agreements or other interest rate protection agreements. Presently, the Company does not use such financial instruments. In November 2001, the Company and the bank syndicate executed Amendment No. 6 to the Credit Facility, which, among other things, (i) amended various financial covenant ratios to be more consistent with current operations, (ii) allowed for certain capital expenditures, including $25,000,000 related to Casino Magic Bossier City, (iii) suspended any additional stock repurchase activity until April 1, 2002 and, (iv) required the Company to utilize its cash (other than working capital and casino cash) prior to drawing on the facility. In July 2001, the Company and the bank syndicate executed Amendment No. 5 to the Credit Facility, which, among other things, (i) amended various financial covenant ratios to be more consistent with operations (therefore reflective of the operations sold in 1999 and 2000, as well as the opening of the Belterra Casino Resort in October 2000), and (ii) allowed for the necessary capital spending for the Lake Charles opportunity. An additional amendment to the Credit Facility will be necessary to obtain approval from the bank syndicate for capital projects not specifically provided for in either Amendment No. 5 or Amendment No. 6 to the Credit Facility. As noted above, the Company was selected by the Gaming Control Board to receive a license for the construction and operation of a dockside riverboat casino in Lake Charles, Louisiana, and must stay in compliance with the Lake Charles Conditions, including satisfying certain financing requirements throughout the project. Currently, the Company anticipates it will not meet all of the financial covenant ratios specified in the Credit Facility in June 2002 and therefore will need to seek another amendment to the Credit Facility. In the event the Company is not successful in negotiating an amendment to the Credit Facility, the Company anticipates it will terminate the Credit Facility and secure a new bank credit agreement; however, there are no assurances the Company will be able to secure such new facility under terms and conditions favorable to the Company. In the event the Company is not successful in securing a new bank credit facility, the Company will need to secure an alternative source of financing for its Lake Charles project. There is no assurance the Louisiana Gaming Control Board will approve such alternative method of financing. The Company believes available cash, cash to be generated by potential asset sales, cash flow from operations and availability under the Credit Facility is sufficient to build the Lake Charles facility (subject to statements above regarding the need to amend the Credit Facility and, if the Company is unable to effect such amendment, then subject to the Company's ability to secure a new bank credit agreement), should the Company move forward with the project. As part of the Credit Facility, the Company is contractually obligated to utilize cash other than working capital and casino cash before drawing on the Credit Facility. In addition to the Credit Facility, the Company is considering various financing options for the development of the proposed Lake Charles project, including, but not limited to, a new credit facility or other senior debt, leasing arrangements and joint venture arrangements. Regardless of future changes to the Credit Facility, the Company currently believes that its available cash and cash equivalents at December 31, 2001 of over $153,000,000 and cash flow from operations in 2002 will be sufficient to finance working capital needs, make necessary debt service payments and finance the capital 49 spending requirements for at least the next twelve months and fund the $22,500,000 "escrow" requirement for the Lake Charles project (see Note 8 to the Notes to Consolidated Financial Statements). In addition, the Company also currently believes that cash requirements of its existing operations beyond the next twelve months will consist of debt service requirements and capital spending (including continued capital spending for the Lake Charles project, if commenced), which the Company expects to be met by then-existing cash, cash flows from operations and borrowing capacity under the existing Credit Facility (subject to statements above regarding the need to amend the Credit Facility and, if the Company is unable to effect such amendment, then subject to the Company's ability to secure a new bank credit agreement). In addition to the above anticipated uses of resources, the Company may use a portion of existing resources to (i) reduce its outstanding debt obligations prior to their scheduled maturities, (ii) make capital improvements at other existing properties, and/or (iii) develop or acquire other casino properties or companies. To the extent cash is used for these purposes, the Company's cash reserves will be diminished and the Company may require additional capital to finance any such activities, including the debt service and capital improvements. Additional capital may be generated through internally generated cash flow, future borrowings (including amounts available under the Credit Facility), asset sales and/or lease transactions. There can be no assurance, however, that such capital will be available on terms acceptable to the Company. Item 7A. Quantitative and Qualitative Disclosures About Market Risk - ------------------------------------------------------------------- The Company's primary exposures to market risk (or the risk of loss arising from adverse changes in market rates and prices, such as interest rates and foreign currency exchange rates) are with respect to the foreign currency exchange rate with Argentina due to the devaluation of the Argentine Peso in January 2002 (see Note 3 to the Notes to Consolidated Financial Statements), as well as potential interest rate risk associated with the long-term floating interest rate on borrowings under the Credit Facility (see Note 14 to the Notes to Consolidated Financial Statements). Total assets of Casino Magic Argentina at December 31, 2001 were $14,287,000 (including $3,452,000 of Argentine Peso cash translated to U.S. Dollars), or less than 2% of consolidated assets of the Company. The Company does not anticipate that these assets will significantly increase in the next twelve months. At December 31, 2001, the Company had no outstanding borrowings under the Credit Facility. As of December 31, 2001, the Company did not hold any investments in market risk sensitive instruments of the type described in Item 305 of Regulation S-K. Item 8. Financial Statements - ---------------------------- Financial statements and accompanying footnotes are attached hereto. Item 9. Changes in and Disagreements with Accountants on Accounting and - ----------------------------------------------------------------------- Financial Disclosure -------------------- None 50 PART III Item 10. Directors and Executive Officers of the Registrant - ----------------------------------------------------------- The information required under this Item is incorporated by reference herein from the Company's definitive 2002 proxy statement anticipated to be filed with the Securities and Exchange Commission within 120 days after December 31, 2001. Item 11. Executive Compensation - ------------------------------- The information required under this Item is incorporated by reference herein from the Company's definitive 2002 proxy statement anticipated to be filed with the Securities and Exchange Commission within 120 days after December 31, 2001. Item 12. Security Ownership of Certain Beneficial Owners and Management - ----------------------------------------------------------------------- The information required under this Item is incorporated by reference herein from the Company's definitive 2002 proxy statement anticipated to be filed with the Securities and Exchange Commission within 120 days after December 31, 2001. Item 13. Certain Relationships and Related Transactions - ------------------------------------------------------- The information required under this Item is incorporated by reference herein from the Company's definitive 2002 proxy statement anticipated to be filed with the Securities and Exchange Commission within 120 days after December 31, 2001. PART IV Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K - ------------------------------------------------------------------------- (a) Documents filed as a part of this report. 1. The consolidated financial statements are set forth in the index to Consolidated Financial Statements attached hereto. 2. Exhibits
Exhibit Number Description of Exhibit - ------ ---------------------- 2.1 Agreement and Plan of Merger, by and among Hollywood Park, Inc., HP Acquisition, Inc. and Boomtown, Inc., dated April 23, 1996, is hereby incorporated by reference to Exhibit 2.1 to the Company's Current Report on Form 8-K, filed May 3, 1996. 2.2 Agreement and Plan of Merger, dated as of February 19, 1998, among Casino Magic Corp., Hollywood Park, Inc. and HP Acquisition II, Inc., is hereby incorporated by reference to Exhibit 2.1 to the Company's Current Report on Form 8-K, filed February 26, 1998. 2.3 Agreement and Plan of Merger, dated as of April 17, 2000, among Pinnacle Entertainment, Inc., PH Casino Resorts, Inc., and Pinnacle Acquisition Corporation, is hereby incorporated by reference to Exhibit 2.1 to the Company's Current Report on Form 8-K filed May 1, 2000. 2.4 Letter Agreement dated August 22, 2000, among Pinnacle Entertainment, Inc., PH Casino Resorts, Inc., and Pinnacle Acquisition Corporation, is hereby incorporated by reference to Annex A1 to the Company's Definitive Proxy Statement filed August 23, 2000. 2.5 Second Amendment to Agreement and Plan of Merger, dated as of September 15, 2000, among Pinnacle Entertainment, Inc., PH Casino Resorts, Inc., and Pinnacle Acquisition Corporation, is hereby incorporated by reference to Annex A to the Company's Proxy Statement Supplement filed September 19, 2000.
51 2.6 Letter Agreement dated January 22, 2001, among Pinnacle Entertainment, Inc., PH Casino Resorts, Inc., and Pinnacle Acquisition Corporation, terminating the PHCR Merger Agreement, is hereby incorporated by reference from Exhibit (d)(8) to Amendment No. 7 to the Schedule 13E-3 filed January 25, 2001 by Pinnacle Entertainment, Inc., R.D. Hubbard, G. Michael Finnigan, Paul R. Alanis, J. Michael Allen, Loren S. Ostrow, Bruce C. Hinckley, PH Casino Resorts, Inc., Harveys Casino Resorts and Colony HCR Voteco, LLC. 3.1 Certificate of Incorporation of Hollywood Park, Inc., is hereby incorporated by reference to Exhibit 3.1 to the Company's Amendment No. 1 to Form S-4 Registration Statement dated March 26, 1999. 3.2 Restated By-laws of Hollywood Park, Inc. are hereby incorporated by reference to Exhibit 3.2 to the Company's Amendment No. 1 to Form S-4 Registration Statement dated March 26, 1999. 3.3 Certificate of Ownership and Merger, dated February 23, 2000, merging Pinnacle Entertainment, Inc. into Hollywood Park, Inc., is hereby incorporated by reference to Exhibit 3.3 to the Company's Annual Report on Form 10-K filed March 29, 2000. 3.4 Articles of Incorporation of HP/Compton, Inc., are hereby incorporated by reference to Exhibit 3.9 to the Company's Amendment No. 1 to Form S-4 Registration dated October 30, 1997. 3.5 By-laws of HP/Compton, Inc., are hereby incorporated by reference to Exhibit 3.10 to the Company's Amendment No. 1 to Form S-4 Registration Statement dated October 30, 1997. 3.6 Articles of Organization of Crystal Park Hotel and Casino Development Company, LLC, are hereby incorporated by reference to Exhibit 3.11 to the Company's Amendment No. 1 to Form S-4 Registration Statement dated October 30, 1997. 3.7 Operating Agreement of Crystal Park Hotel and Casino Development Company, LLC, are hereby incorporated by reference to Exhibit 3.12 to the Company's Amendment No. 1 to Form S-4 Registration Statement dated October 30, 1997. 3.8 Restated Articles of Incorporation of Turf Paradise, Inc., are hereby incorporated by reference to Exhibit 3.13 to the Company's Amendment No. 1 to Form S-4 Registration Statement dated October 30, 1997. 3.9 By-laws of Turf Paradise, are hereby incorporated by reference to Exhibit 3.14 to the Company's Amendment No. 1 to Form S-4 Registration Statement dated October 30, 1997. 3.10 Certificate of Incorporation of HP Yakama, Inc., is hereby incorporated by reference to Exhibit 3.15 to the Company's Amendment No. 1 to Form S-4 Registration Statement dated October 30, 1997. 3.11 By-laws of HP Yakama, Inc., are hereby incorporated by reference to Exhibit 3.16 to the Company's Amendment No. 1 to Form S-4 Registration Statement dated October 30, 1997. 3.12 Amended and Restated Certificate of Incorporation of Boomtown, Inc., is hereby incorporated by reference to Exhibit 3.17 to the Company's Amendment No. 1 to Form S-4 Registration Statement dated October 30, 1997. 3.13 By-laws of Boomtown, Inc., are hereby incorporated by reference to Exhibit 3.18 to the Company's Amendment No. 1 to Form S-4 Registration Statement dated October 30, 1997. 3.14 Certificate of Amended and Restated Articles of Incorporation of Boomtown Hotel & Casino, Inc., are hereby incorporated by reference to Exhibit 3.19 to the Company's Amendment No. 1 to Form S-4 Registration Statement dated October 30, 1997. 3.15 Revised and Restated By-laws of Boomtown Hotel & Casino, Inc., are hereby incorporated by reference to Exhibit 3.20 to the Company's Amendment No. 1 to Form S-4 Registration Statement dated October 30, 1997. 3.16 Articles of Incorporation of Bayview Yacht Club, Inc., are hereby incorporated by reference to Exhibit 3.21 to the Company's Amendment No. 1 to Form S-4 Registration Statement dated October 30, 1997. 3.17 By-laws of Bayview Yacht Club, Inc., are hereby incorporated by reference to Exhibit 3.22 to the Company's Amendment No. 1 to Form S-4 Registration Statement dated October 30, 1997. 3.18 Certificate of Mississippi Limited Partnership of Mississippi - I Gaming, L.P., are hereby incorporated by reference to Exhibit 3.23 to the Company's Amendment No. 1 to Form S-4 Registration Statement dated October 30, 1997. 3.19 Amended and Restated Agreement of Limited Partnership of Mississippi - I Gaming, L.P., is hereby incorporated by reference to Exhibit 10.31 to the Company's Quarterly Report on Form 10-Q for quarter ended June 30, 1997.
52 3.20 Articles of Incorporation of Louisiana Gaming Enterprises, Inc., are hereby incorporated by reference to Exhibit 3.25 to the Company's Amendment No. 1 to Form S-4 Registration Statement dated October 30, 1997. 3.21 Second Amended and Restated Partnership Agreement of Louisiana - I Gaming, a Louisiana Partnership in Commendam, is hereby incorporated by reference to Exhibit 3.26 to the Company's Amendment No. 1 to Form S-4 Registration Statement dated March 26, 1999. 3.22 Certificate of Incorporation of HP Yakama Consulting, Inc., is hereby incorporated by reference to Exhibit 3.27 to the Company's Amendment No. 1 to Form S-4 Registration Statement dated March 26, 1999. 3.23 By-laws of HP Yakama Consulting, Inc., are hereby incorporated by reference to Exhibit 3.28 to the Company's Amendment No. 1 to Form S-4 Registration Statement dated March 26, 1999. 3.24 Articles of Incorporation of Casino Magic Corp., are hereby incorporated by reference to Exhibit 3.29 to the Company's Amendment No. 1 to Form S-4 Registration Statement dated March 26, 1999. 3.25 Amended By-laws of Casino Magic Corp., are hereby incorporated by reference to Exhibit 3.30 to the Company's Amendment No. 1 to Form S-4 Registration Statement dated March 26, 1999. 3.26 Articles of Incorporation of Casino Magic American Corp., are hereby incorporated by reference to Exhibit 3.31 to the Company's Amendment No. 1 to Form S-4 Registration Statement dated March 26, 1999. 3.27 By-laws of Casino Magic American Corp., are hereby incorporated by reference to Exhibit 3.32 to the Company's Amendment No. 1 to Form S-4 Registration Statement dated March 26, 1999. 3.28 Articles of Incorporation of Biloxi Casino Corp., are hereby incorporated by reference to Exhibit 3.33 to the Company's Amendment No. 1 to Form S-4 Registration Statement dated March 26, 1999. 3.29 By-laws of Biloxi Casino Corp., are hereby incorporated by reference to Exhibit 3.34 to the Company's Amendment No. 1 to Form S-4 Registration Statement dated March 26, 1999. 3.30 Articles of Incorporation of Casino Magic Finance Corp., are hereby incorporated by reference to Exhibit 3.35 to the Company's Amendment No. 1 to Form S-4 Registration Statement dated March 26, 1999. 3.31 By-laws of Casino Magic Finance Corp., are hereby incorporated by reference to Exhibit 3.36 to the Company's Amendment No. 1 to Form S-4 Registration Statement dated March 26, 1999. 3.32 Articles of Incorporation of Casino One Corporation, are hereby incorporated by reference to Exhibit 3.37 to the Company's Amendment No. 1 to Form S-4 Registration Statement dated March 26, 1999. 3.33 By-laws of Casino One Corporation, are hereby incorporated by reference to Exhibit 3.38 to the Company's Amendment No. 1 to Form S-4 Registration Statement dated March 26, 1999. 3.34 Articles of Incorporation of Bay St. Louis Casino Corp., are hereby incorporated by reference to Exhibit 3.39 to the Company's Amendment No. 1 to Form S-4 Registration Statement dated March 26, 1999. 3.35 By-laws of Bay St. Louis Casino Corp., are hereby incorporated by reference to Exhibit 3.40 to the Company's Amendment No. 1 to Form S-4 Registration Statement dated March 26, 1999. 3.36 Articles of Incorporation of Mardi Gras Casino Corp., are hereby incorporated by reference to Exhibit 3.41 to the Company's Amendment No. 1 to Form S-4 Registration Statement dated March 26, 1999. 3.37 By-laws of Mardi Gras Casino Corp., are hereby incorporated by reference to Exhibit 3.42 to the Company's Amendment No. 1 to Form S-4 Registration Statement dated March 26, 1999. 3.38 Articles of Incorporation of Boomtown Hoosier, Inc., are hereby incorporated by reference to Exhibit 3.43 to the Company's Amendment No. 1 to Form S-4 Registration Statement dated March 26, 1999. 3.39 By-laws of Boomtown Hoosier, Inc., are hereby incorporate by reference to Exhibit 3.44 to the Company's Amendment No. 1 to Form S-4 Registration Statement dated March 26, 1999. 3.40 Articles of Organization of Indiana Ventures, LLC (subsequently renamed Belterra Resort Indiana, LLC), are hereby incorporated by reference to Exhibit 3.45 to the Company's Amendment No. 1 to Form S-4 Registration Statement dated March 26, 1999.
53 3.41 Operating Agreement of Indiana Ventures, LLC (subsequently renamed Belterra Resort Indiana, LLC), is hereby incorporated by reference to Exhibit 3.46 to the Company's Amendment No. 1 to Form S-4 Registration Statement dated March 26, 1999. 3.42 Articles of Incorporation of HP Casino, Inc., are hereby incorporated by reference to Exhibit 3.51 to the Company's Amendment No. 1 to Form S-4 Registration Statement dated March 26, 1999. 3.43 By-laws of HP Casino, Inc., are hereby incorporated by reference to Exhibit 3.52 to the Company's Amendment No. 1 to Form S-4 Registration Statement dated March 26, 1999. 3.44 Articles of Incorporation of Casino Magic of Louisiana, Corporation are hereby incorporated by reference to Exhibit 3.44 to the Company's Annual Report on Form 10-K for the year ended December 31, 2000. 3.45 By-laws of Casino Magic of Louisiana, Corporation are hereby incorporated by reference to Exhibit 3.45 to the Company's Annual Report on Form 10-K for the year ended December 31, 2000. 3.46 Articles of Incorporation of Jefferson Casino Corporation are hereby incorporated by reference to Exhibit 3.46 to the Company's Annual Report on Form 10-K for the year ended December 31, 2000. 3.47 By-laws of Jefferson Casino Corporation are hereby incorporated by reference to Exhibit 3.47 to the Company's Annual Report on Form 10-K for the year ended December 31, 2000. 4.1 Hollywood Park 1996 Stock Option Plan is hereby incorporated by reference to Exhibit 10.24 to the Company's Registration Statement on Form S-4 dated September 18, 1996. 4.2 Hollywood Park 1993 Stock Option Plan is hereby incorporated by reference to Exhibit 4.2 to the Company's Amendment No. 1 to Form S-4 Registration Statement dated March 26, 1999. 4.3 Pinnacle Entertainment, Inc. 2001 Stock Option Plan is hereby incorporated by reference to Appendix A to the Company's Definitive Proxy Statement filed April 11, 2001. 4.4 Indenture, dated August 1, 1997, governing the 9.5% Senior Subordinated Notes due 2007 by and among the Company, Hollywood Park Operating Company, Hollywood Park Food Services, Inc., Hollywood Park Fall Operating Company, HP/Compton, Inc., Crystal Park Hotel and Casino Development Company, LLC, HP Yakama, Inc., Turf Paradise, Inc., Boomtown, Inc., Boomtown Hotel & Casino, Inc., Louisiana - I Gaming, Louisiana Gaming Enterprises, Inc., Mississippi - I Gaming, L.P., Bayview Yacht Club, Inc. and The Bank of New York, as trustee, is hereby incorporated by reference to Exhibit 10.37 to the Company's Quarterly Report on Form 10-Q for the quarter ended June 30, 1997. 4.5 First Supplemental Indenture, dated as of February 5, 1999, to Indenture dated as of August 1, 1997 governing the 9.5% Senior Subordinated Notes due 2007, by and among the Company and Hollywood Park Operating Company, as co-issuers, and Bayview Yacht Club, Inc., Boomtown Hotel & Casino, Inc., Boomtown, Inc., Crystal Park Hotel and Casino Development Company, LLC, Hollywood Park Fall Operating Company, Hollywood Park Food Services, Inc., Hollywood Park Operating Company, HP/Compton, Inc., HP Yakama, Inc., Louisiana Gaming Enterprises, Inc., Louisiana - I Gaming, a Louisiana Partnership in Commendam, Mississippi - I Gaming, LP, and Turf Paradise, Inc. as guarantors, and The Bank of New York, as trustee, is hereby incorporated by reference to Exhibit 4.4 to the Company's S-4 Registration dated March 2, 1999. 4.6 Form of Series B 9.5% Senior Subordinated Notes due 2007 (included in Exhibit 4.4), is hereby incorporated by reference to the Company's Amendment No.1 to Registration Statement on Form S-4 dated October 30, 1997. 4.7 Indenture, dated as of February 18, 1999, governing the 9.25% Senior Subordinated Notes due 2007, by and among the Company as issuer, and Bay St. Louis Casino Corp., Bayview Yacht Club, Inc., Biloxi Casino Corp., Boomtown Hoosier, Inc., Boomtown Hotel & Casino, Inc., Boomtown, Inc., Casino Magic American Corp., Casino Magic Corp., Casino Magic Finance Corp., Casino One Corporation, Crystal Park Hotel and Casino Development Company, LLC, Hollywood Park Fall Operating Company, Hollywood Park Food Services, Inc., Hollywood Park Operating Company, HP Casino, Inc., HP/Compton, Inc., HP Yakama, Inc., HP Yakama Consulting, Inc., Indiana Ventures LLC, Louisiana Gaming Enterprises, Inc., Louisiana - I Gaming, a Louisiana Partnership in Commendam, Mardi Gras Casino Corp., Mississippi - I Gaming, L.P., Pinnacle Gaming Development Corp., Switzerland County Development Corp., and Turf Paradise, Inc. as initial guarantors, and The Bank of New York, as trustee, is hereby incorporated by reference to Exhibit 4.6 to the Company's S-4 Registration Statement dated March 2, 1999.
54 4.8 Form of Series B 9.25% Senior Subordinated Notes due 2007 (included in Exhibit 4.7), is hereby incorporated by reference to Exhibit 4.7 to the Company's S-4 Registration Statement dated March 2, 1999. 10.1 Directors Deferred Compensation Plan for Hollywood Park, Inc. is hereby incorporated by reference to Exhibit 10.1 to the Company's Amendment No. 1 to Form S-4 Registration Statement dated March 26, 1999. 10.2 Aircraft Time Sharing Agreement dated June 2, 1998, by and between Hollywood Park, Inc. and R.D. Hubbard Enterprises, Inc. is hereby incorporated by reference to Exhibit 10.2 to the Company's Amendment No.1 to Form S-4 Registration Statement dated March 26, 1999. 10.3* Amended and Restated Disposition and Development Agreement of Purchase and Sale, and Lease with Option to Purchase, dated August 2, 1995, by and between The Community Redevelopment Agency of the City of Compton and Compton Entertainment, Inc. 10.4* Guaranty, dated July 31, 1995, by Hollywood Park, Inc., in favor of the Community Redevelopment Agency of the City of Compton. 10.5* Assignment, Assumption and Consent Agreement, by and among HP/Compton, Inc., and Crystal Park Hotel and Casino Development Company LLC, Hollywood Park, Inc. and The Community Redevelopment Agency of the City of Compton, dated July 18, 1996. 10.6* Operating Agreement for Crystal Park Hotel and Casino Development Company, LLC, a California Limited Liability Company, dated July 18, 1996, effective August 28, 1996. 10.7 Lease, by and between Crystal Park Hotel and Casino Development Company, LLC and California Casino Management, Inc., dated December 19, 1997, is hereby incorporated by reference to Exhibit 10.41 to the Company's Annual Report on Form 10-K for the year ended December 31, 1997. 10.8 Addendum to the Lease Agreement dated December 19, 1997, by and between Crystal Park Hotel and Casino Development Company, LLC and California Casino Management, Inc., dated June 30, 1998, is hereby incorporated by reference to Exhibit 10.46 of the Company's Quarterly Report on Form 10-Q for the quarter ended June 30, 1998. 10.9 Blue Diamond Swap Agreement by and among Boomtown, Inc., Blue Diamond Hotel & Casino, Inc., Hollywood Park, Inc., Edward P. Roski, Jr., IVAC and Majestic Realty Co., dated August 12, 1996, is hereby incorporated by reference to Exhibit 10.22 to the Company's Registration Statement on Form S-4 filed September 18, 1996. 10.10 Stock Purchase Agreement, by and between Hollywood Park, Inc. and Edward P. Roski, Jr., dated August 12, 1996, is hereby incorporated by reference to Exhibit 10.23 to the Company's Registration Statement on Form S-4 filed September 18, 1996. 10.11 Second Addendum to the Lease Agreement dated December 19, 1997, by and between Crystal Park Hotel and Casino Development Company, LLC and California Casino Management, Inc. dated March 8, 1999, is hereby incorporated by reference to Exhibit 10.11 to the Company's Amendment No.1 to Form S-4 Registration Statement dated March 26, 1999. 10.12 Ground Lease, dated October 19, 1993, between Raphael Skrmetta as Landlord and Mississippi - I Gaming, L.P. as Tenant, is hereby incorporated by reference to Exhibit 10.33 to the Company's Quarterly Report on Form 10-Q for the quarter ended June 30, 1997. 10.13 First Amendment to Ground Lease dated October 19, 1993, between Raphael Skrmetta and Mississippi - I Gaming, L.P., is hereby incorporated by reference to Exhibit 10.34 to the Company's Quarterly Report on Form 10-Q for the quarter ended June 30, 1997. 10.14 Second Amendment to Ground Lease dated October 19, 1993, between Raphael Skrmetta and Mississippi - I Gaming, L.P., is hereby incorporated by reference to Exhibit 10.35 to the Company's Quarterly Report on Form 10-Q for the quarter ended June 30, 1997. 10.15 Profit Participation Agreement, by and between Hollywood Park, Inc., and North American Sports Management, Inc., dated July 14, 1997, is hereby incorporated by reference to Exhibit 10.40 to the Company's Quarterly Report on Form 10-Q for the quarter ended September 30, 1997. 10.16 Loan Agreement, by and between Yakama Tribal Gaming Corporation and HP Yakama, Inc., dated September 11, 1997, is hereby incorporated by reference Exhibit 10.41 to the Company's Quarterly Report on Form 10-Q for the quarter ended September 30, 1997.
55 10.17 Security Agreement, by and between Yakama Tribal Gaming Corporation and HP Yakama, Inc., dated September 11, 1997, is hereby incorporated by reference to Exhibit 10.42 to the Company's Quarterly Report on Form 10-Q for the quarter ended September 30, 1997. 10.18 Master Lease, by and between The Confederated Tribes and Bands of the Yakama Indian Nation and HP Yakama, Inc., dated September 11, 1997, is hereby incorporated by reference to Exhibit 10.43 to the Company's Quarterly Report on Form 10-Q for the quarter ended September 30, 1997. 10.19 Sublease, by and between HP Yakama, Inc. and Yakama Tribal Gaming Corporation, dated September 11, 1997, is hereby incorporated by reference to Exhibit 10.44 to the Company's Quarterly Report on Form 10-Q for the quarter ended September 30, 1997. 10.20 Construction and Development Agreement, by and between Yakama Tribal Gaming Corporation and HP Yakama Consulting, Inc., dated September 11, 1997, is hereby incorporated by reference to Exhibit 10.45 to the Company's Quarterly Report on Form 10-Q for the quarter ended September 30, 1997. 10.21 Voting Agreement, dated as of February 25, 1998, by and between Hollywood Park, Inc., and Marlin F. Torguson, is hereby incorporated by reference to Exhibit 10.1 to the Company's Current Report on Form 8-K, filed February 26, 1998. 10.22 Option agreement, by and among The Webster Family Limited Partnership and The Diuguid Family Limited Partnership, and Pinnacle Gaming Development Corp., dated June 2, 1998, is hereby incorporated by reference to Exhibit 10.47 of the Company's Quarterly Report on Form 10-Q for the quarter ended June 30, 1998. 10.23 Memorandum of Option Agreement, by and between the Webster Family Limited Partnership and The Duiguid Family Limited Partnership, and Pinnacle Gaming Development Corp., dated June 2, 1998, is hereby incorporated by reference to Exhibit 10.48 of the Company's Quarterly Report on Form 10-Q for the quarter ended June 30, 1998. 10.24 Amended and Restated Option Agreement, by and among Daniel Webster, Marsha S. Webster, William G. Duiguid, Sara T. Diuguid, J.R. Showers, III and Carol A. Showers, and Pinnacle Gaming Development Corp., dated June 2, 1998, is hereby incorporated by reference to Exhibit 10.49 of the Company's Quarterly Report on Form 10-Q for the quarter ended June 30, 1998. 10.25 Memorandum of Amended and Restated Option Agreement, by and between Daniel Webster, Marsha S. Webster, William Diuguid, Sara T. Diuguid, J.R. Showers, III and Carol A. Showers, and Pinnacle Gaming Development Corp., dated June 4, 1998, is hereby incorporated by reference to Exhibit 10.50 of the Company's Quarterly Report on Form 10-Q for the quarter ended June 30, 1998. 10.26 Assignment of Option Agreement, by Daniel Webster and Marsha S. Webster, and Pinnacle Gaming Development Corp., dated June 2, 1998, is hereby incorporated by reference to Exhibit 10.51 of the Company's Quarterly Report on Form 10-Q for the quarter ended June 30, 1998. 10.27 Employment Agreement, dated December 23, 1998, by and between Hollywood Park, Inc. and G. Michael Finnigan, is hereby incorporated by reference to Exhibit 10.36 to the Company's Amendment No. 1 to Form S-4 Registration Statement dated March 26, 1999. 10.28 Employment Agreement, dated September 10, 1998, by and between Hollywood Park, Inc. and Paul Alanis, is hereby incorporated by reference to Exhibit 10.37 to the Company's Amendment No. 1 to Form S-4 Registration Statement dated March 26, 1999. 10.29 Employment Agreement, dated September 10, 1998, by and between Hollywood Park, Inc. and Mike Allen, is hereby incorporated by reference to Exhibit 10.38 to the Company's Amendment No. 1 to Form S-4 Registration Statement dated March 26, 1999. 10.30 Employment Agreement, dated September 10, 1998, by and between Hollywood Park, Inc. and Loren Ostrow is hereby incorporated by reference to Exhibit 10.33 to the Company's Annual Report on Form 10-K for the year ended December 31, 2000. 10.31 Purchase Agreement, dated as of February 25, 1998, among Hilton Gaming (Switzerland County) Corporation and Boomtown Hoosier, Inc., is hereby incorporated by reference to Exhibit 10.40 to the Company's Amendment No. 1 to Form S-4 Registration Statement dated March 26, 1999. 10.32 Asset Purchase Agreement, dated May 5, 1999, among Hollywood Park, Inc. and Churchill Downs Incorporated, is hereby incorporated by reference to Exhibit 10.41 to the Company's Quarterly Report on Form 10-Q for the quarter ended June 30, 1999.
56 10.33 Amended and Restated Reducing Revolving Loan Agreement, dated October 14, 1998, among Hollywood Park, Inc., and the banks named therein, Societe Generale and Bank of Scotland (as Managing Agents), First National Bank of Commerce (as Co-Agent), and Bank of America National Trust and Savings Association (as Administrative Agent), is hereby incorporated by reference to Exhibit 2 of the Company's Current Report on Form 8-K, filed October 30, 1998. 10.34 Amendment No. 1 to Amended and Restated Reducing Revolving Loan Agreement, dated June 2, 1999, is hereby incorporated by reference to Exhibit 10.42 to the Company's Quarterly Report on Form 10-Q for the quarter ended June 30, 1999. 10.35 Amendment No. 2 to Amended and Restated Reducing Revolving Loan Agreement, dated September 24, 1999, is hereby incorporated by reference to Exhibit 10.43 to the Company's Quarterly Report on Form 10-Q for the quarter ended September 30, 1999. 10.36* Amendment No. 3 to Amended and Restated Reducing Revolving Loan Agreement, dated September 15, 2000. 10.37* Amendment No. 4 to Amended and Restated Reducing Revolving Loan Agreement, dated March 16, 2001. 10.38 Amendment No. 5 to Amended and Restated Reducing Revolving Credit Loan Agreement and Waiver, dated July 23, 2001 is hereby incorporated by reference to the Company's Quarterly Report on Form 10-Q for the Quarter ended June 30, 2001. 10.39 Amendment No. 6 to Amended and Restated Reducing Revolving Credit Loan Agreement and Waiver, dated November 7, 2001 is hereby incorporated by reference to the Company's Quarterly Report on From 10-Q for the Quarter ended September 30, 2001. 10.40 Asset Purchase Agreement, dated as of December 9, 1999, between BSL, Inc., and Casino Magic Corp. is hereby incorporated by reference to Exhibit 10.1 to the Company's Current Report on Form 8-K filed December 21, 1999. 10.41 Asset Purchase Agreement, dated as of December 9, 1999, between BTN, Inc. and Boomtown, Inc. is hereby incorporated by reference to Exhibit 10.2 to the Company's Current Report on Form 8-K filed December 21, 1999. 10.42 First Amendment to Asset Purchase Agreement, dated December 17, 1999, between BSL, Inc. and Casino Magic Corp. is hereby incorporated by reference to Exhibit 10.3 to the Company's Current Report on Form 8-K filed December 21, 1999. 10.43 First Amendment to Asset Purchase Agreement, dated December 17, 1999, between BTN, Inc. and Boomtown, Inc. is hereby incorporated by reference to Exhibit 10.4 to the Company's Current Report on Form 8-K filed December 21, 1999. 10.44 Guaranty issued by Penn National in favor of Casino Magic Corp. entered into as of December 9, 1999 is hereby incorporated by reference to Exhibit 10.5 to the Company's Current Report on Form 8-K filed December 21, 1999. 10.45 Guaranty issued by Penn National in favor of Boomtown, Inc. entered into as of December 9, 1999 is hereby incorporated by reference to Exhibit 10.6 to the Company's Current Report on Form 8-K filed December 21, 1999. 10.46 Guaranty issued by Hollywood Park in favor of BSL, Inc. entered into as of December 9, 1999 is hereby incorporated by reference to Exhibit 10.7 to the Company's Current Report on Form 8-K filed December 21, 1999. 10.47 Guaranty issued by Hollywood Park in favor of BTN, Inc. entered into as of December 9, 1999 is hereby incorporated by reference to Exhibit 10.8 to the Company's Current Report on Form 8-K filed December 21, 1999. 10.48 Executive Deferred Compensation Plan for Hollywood Park, Inc., is hereby incorporated by reference to Exhibit 10.48 to the Company's Annual Report on Form 10-K filed March 29, 2000. 10.49 Agreement for Purchase and Sale of Assets, dated as of February 24, 2000, between Pinnacle Entertainment, Inc. and Jerry Simms, is hereby incorporated by reference to Exhibit 10.49 to the Company's Annual Report on Form 10-K filed March 29, 2000. 10.50 First Amendment to Lease and Agreement by and between Pinnacle Entertainment, Inc. and Century Gaming Management, Inc. dated September 6, 2000, is hereby incorporated by reference to the Company's Quarterly Report on Form 10-Q filed November 14, 2000.
57 10.51 Option Agreement for the buyout of Full House, LLC's 3% non-voting interest in Belterra Resort Indiana, LLC, dated as of November 6, 2000, between Pinnacle Entertainment, Inc. and Full House, LLC is hereby incorporated by reference to Exhibit 10.50 to the Company's Annual Report on Form 10-K for the year ended December 31, 2000. 10.52 Agreement and Joint Escrow Instructions dated as of January 24, 2001 between Crystal Park Hotel and Casino Development Company, LLC, and The Community Redevelopment Agency of the City of Compton is hereby incorporated by reference to Exhibit 10.51 to the Company's Annual Report on Form 10-K for the year ended December 31, 2000. 10.53 Termination of Master Lease and Sublease Agreements dated as of June 28, 2001 by and between the Confederated Tribes and Bands of the Yakama Nation, the Yakama Tribal Gaming Corporation and HP Yakama, Inc. is hereby incorporated by reference to the Company's Quarterly Report on Form 10-Q for the Quarter ended June 30, 2001. 10.54 * Employment Agreement dated September 1, 2001, by and between Pinnacle Entertainment, Inc. and Wade Hundley. 10.55* First Amendment to the Pinnacle Entertainment, Inc. (formerly Hollywood Park, Inc.) Executive Deferred Compensation Plan dated March 15, 2000. 10.56* Second Amendment to the Pinnacle Entertainment, Inc. Executive Compensation Plan dated January 1, 2001. 10.57* Statement of Conditions to Riverboat Gaming License of PNK (Lake Charles), LLC dated November 20, 2001. 11.1 * Statement re: Computation of Per Share Earnings 21.1 * Subsidiaries of Pinnacle Entertainment, Inc. 23.1 * Consent of Arthur Andersen LLP 99.1 * Letter responsive to Temporary Note 3T to Article 3 of Regulation S-X
----- * Filed herewith (b) Reports on Form 8-K None 58 Signatures Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. PINNACLE ENTERTAINMENT, INC. (Registrant) By: /s/ Paul R. Alanis Dated: March 26, 2002 --------------------------------------- Paul R. Alanis Chief Executive Officer and President (Principal Executive Officer) By: /s/ Bruce C. Hinckley Dated: March 26, 2002 --------------------------------------- Bruce C. Hinckley Senior Vice President and Chief Financial Officer (Principal Financial and Accounting Officer) 59 Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and it the capacities and on the dates indicated: PINNACLE ENTERTAINMENT, INC. /s/ R.D. Hubbard Dated: March 26, 2002 - -------------------------------------------- R.D. Hubbard - Director /s/ Paul Alanis Dated: March 26, 2002 - -------------------------------------------- Paul Alanis - Director /s/ Robert T. Manfuso Dated: March 26, 2002 - -------------------------------------------- Robert T. Manfuso - Director /s/ James Martineau Dated: March 26, 2002 - -------------------------------------------- James Martineau - Director /s/ Gary Miller Dated: March 26, 2002 - -------------------------------------------- Gary Miller - Director /s/ Michael Ornest Dated: March 26, 2002 - -------------------------------------------- Michael Ornest - Director /s/ Timothy J. Parrott Dated: March 26, 2002 - -------------------------------------------- Timothy J. Parrott - Director /s/ Lynn P. Reitnouer Dated: March 26,2002 - -------------------------------------------- Lynn P. Reitnouer - Director /s/ Marlin Torguson Dated: March 26, 2002 - -------------------------------------------- Marlin Torguson - Director 60 Pinnacle Entertainment, Inc. Index to Consolidated Financial Statements Report of Independent Public Accountants Report of Arthur Andersen LLP...............................................62 Consolidated Statements of Operations for the years ended December 31, 2001, 2000 and 1999...................................63 Consolidated Balance Sheets as of December 31, 2001 and 2000..................64 Consolidated Statements of Changes in Stockholders' Equity for the years ended December 31, 2001, 2000 and 1999.....................65 Consolidated Statements of Cash Flows for the years ended December 31, 2001, 2000 and 1999...................................66 Notes to Consolidated Financial Statements....................................67 Other Financial Data..........................................................97 61 Report of Independent Public Accountants To the Board of Directors and Stockholders of Pinnacle Entertainment, Inc.: We have audited the accompanying consolidated balance sheets of Pinnacle Entertainment, Inc., (a Delaware corporation, formerly Hollywood Park, Inc.) and subsidiaries (the "Company") as of December 31, 2001 and 2000, and the related consolidated statements of operations, shareholders' equity and cash flows for each of the three years in the period ended December 31, 2001. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with auditing standards generally accepted in the United States. Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Pinnacle Entertainment, Inc. and subsidiaries as of December 31, 2001 and 2000, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 2001 in conformity with accounting principles generally accepted in the United States. ARTHUR ANDERSEN LLP Los Angeles, California February 4, 2002 62 Pinnacle Entertainment, Inc. Consolidated Statements of Operations
For the years ended December 31, ------------------------------------ 2001 2000 1999 --------- --------- -------- (in thousands, except per share data) Revenues: Gaming $ 442,089 $ 461,901 $536,661 Food and beverage 30,952 31,920 39,817 Truck stop and service station 20,190 21,782 17,644 Hotel and recreational vehicle park 14,977 12,730 11,737 Other income 20,433 25,340 24,924 Racing 0 9,452 55,209 --------- --------- -------- 528,641 563,125 685,992 --------- --------- -------- Expenses: Gaming 259,573 258,346 288,643 Food and beverage 38,799 35,180 46,558 Truck stop and service station 18,703 20,300 16,296 Hotel and recreational vehicle park 10,169 6,663 5,923 Racing 0 4,133 22,694 Selling, general and administrative 120,335 107,978 134,870 Depreciation and amortization 49,450 46,102 51,924 Other operating expenses 14,159 10,578 13,921 Pre-opening costs, Belterra Casino Resort 610 15,030 3,020 Gain on disposition of assets, net of losses (500) (118,816) (62,507) Asset impairment write-down 23,530 0 20,446 Terminated merger costs (464) 5,727 0 --------- --------- -------- 534,364 391,221 541,788 --------- --------- -------- Operating (loss) income (5,723) 171,904 144,204 Interest income (5,021) (12,604) (7,927) Interest expense, net 49,853 52,620 65,471 --------- --------- -------- (Loss) income before minority interest, income taxes and extraordinary item (50,555) 131,888 86,660 Minority interest 0 0 1,687 Income tax (benefit) expense (21,906) 52,396 40,926 --------- --------- -------- Net (loss) income before extraordinary item (28,649) 79,492 44,047 Extraordinary item, net of income tax benefit 0 2,653 0 --------- --------- -------- Net (loss) income ($28,649) $ 76,839 $ 44,047 ========= ========= ======== ============================================================================================== Net (loss) income per common share - basic Net (loss) income before extraordinary item ($1.11) $ 3.02 $ 1.70 Extraordinary item, net of income tax benefit 0.00 (0.10) 0.00 --------- --------- -------- Net (loss) income per common share - basic ($1.11) $ 2.92 $ 1.70 ========= ========= ======== Net (loss) income per common share - diluted Net (loss) income before extraordinary item ($1.11) $ 2.90 $ 1.67 Extraordinary item, net of income tax benefit 0.00 (0.10) 0.00 --------- --------- -------- Net (loss) income per common share - diluted ($1.11) $ 2.80 $ 1.67 ========= ========= ======== Number of shares - basic 25,814 26,335 25,966 Number of shares - diluted 25,814 27,456 26,329
- ---------- See accompanying notes to the consolidated financial statements. 63 Pinnacle Entertainment, Inc. Consolidated Balance Sheets
December 31, December 31, 2001 2000 ------------ ------------ Assets (in thousands, except share data) Current Assets: Cash and cash equivalents $153,187 $172,868 Restricted cash 3,452 0 Receivables, net of allowance for doubtful accounts of $2,365 and $2,737 as of December 31, 2001 and 2000, respectively 9,194 19,007 Income tax receivable 10,587 0 Prepaid expenses and other assets 18,407 18,425 Deferred income taxes 4,712 0 Assets held for sale 18,285 12,164 Current portion of notes receivable 1,000 2,393 -------- -------- Total current assets 218,824 224,857 Notes receivable 0 6,604 Property, plant and equipment, net 576,299 593,718 Goodwill, net of amortization 68,727 71,263 Gaming licenses, net of amortization 36,588 38,934 Debt issuance costs, net of amortization 12,334 15,847 Other assets 6,577 10,252 -------- -------- $919,349 $961,475 ======== ======== ===================================================================================================================== Liabilities and Stockholders' Equity Current Liabilities: Accounts payable $ 16,953 $ 19,349 Accrued interest 17,423 17,997 Accrued compensation 13,737 16,668 Other accrued liabilities 31,887 31,594 Deferred income taxes 0 4,335 Current portion of notes payable 3,654 3,432 -------- -------- Total current liabilities 83,654 93,375 Notes payable, less current maturities 493,493 497,162 Deferred income taxes 22,686 9,762 Stockholders' Equity: Capital stock -- Preferred - $1.00 par value, authorized 250,000 shares; none issued and outstanding in 2000 and 1999 0 0 Common - $0.10 par value, authorized 40,000,000 shares; 25,443,444 and 26,434,302 shares issued and outstanding in 2001 and 2000 2,545 2,644 Capital in excess of par value 219,613 228,095 Accumulated other comprehensive loss (4,430) 0 Retained earnings 101,788 130,437 -------- -------- Total stockholders' equity 319,516 361,176 -------- -------- $919,349 $961,475 ======== ========
- ---------- See accompanying notes to the consolidated financial statements. 64 Pinnacle Entertainment, Inc. Consolidated Statements of Changes in Stockholders' Equity For the years ended December 31, 2001, 2000 and 1999
Retained Capital in Earnings Total Common Excess of Comprehensive (Accumulated Stockholders' Stock Par Value (loss)/ income Deficit) Equity ------ ---------- -------------- ------------ ------------- (in thousands) Balance as of December 31, 1998 $2,580 $218,375 $ 470 $ 9,551 $230,976 Net income 0 0 0 44,047 44,047 Executive stock option compensation 0 828 0 0 828 Common stock options exercised 44 4,335 0 0 4,379 Tax benefit associated with exercised common stock options 0 1,116 0 0 1,116 Investment in stock - unrealized holding gain 0 0 (470) 0 (470) ------ -------- -------- -------- -------- Balance as of December 31, 1999 2,624 224,654 0 53,598 280,876 Net income 0 0 0 76,839 76,839 Executive stock option compensation 0 414 0 0 414 Common stock options exercised 20 2,302 0 0 2,322 Tax benefit associated with exercised common stock options 0 725 0 0 725 ------ -------- -------- -------- -------- Balance as of December 31, 2000 2,644 228,095 0 130,437 361,176 Net (loss) income 0 0 0 (28,649) (28,649) Repurchase and retirement of common stock (110) (9,710) 0 0 (9,820) Executive stock option compensation 0 414 0 0 414 Common stock options exercised 11 469 0 0 480 Foreign currency translation loss 0 0 (4,430) 0 (4,430) Tax benefit associated with exercised common stock options 0 345 0 0 345 ------ -------- -------- -------- -------- Balance as of December 31, 2001 $2,545 $219,613 ($4,430) $101,788 $319,516 ====== ======== ======== ======== ========
- ---------- See accompanying notes to the consolidated financial statements. 65 Pinnacle Entertainment, Inc. Consolidated Statements of Cash Flows
For the years ended December 31, ----------------------------------- 2001 2000 1999 --------- --------- --------- (in thousands) Cash flows from operating activities: Net (loss) income ($28,649) $ 76,839 $ 44,047 Adjustments to reconcile net (loss) income to net cash provided by (used in) operating activities: Depreciation and amortization 49,450 46,102 51,924 Net gain on disposition of assets (500) (118,816) (62,507) Asset impairment writedown 23,530 0 20,446 Other changes that (used) provided cash, net of the effects of the purchase and disposition of businesses: Restricted cash (3,452) 0 0 Receivables, net 6,991 (2,017) (2,242) Income tax receivable (10,587) 0 0 Prepaid expenses and other assets (2,495) (7,168) (4,780) Accounts payable (2,396) (1,747) (10,948) Accrued liabilities (10,339) (8,351) (16,254) Accrued interest (574) (8,083) 9,344 Income taxes 14,556 (6,271) 38,393 All other, net 530 4,028 6,784 --------- --------- --------- Net cash provided by (used in) operating activities 36,065 (25,484) 74,207 --------- --------- --------- Cash flows from investing activities: Additions to property, plant and equipment (51,783) (194,627) (58,321) Capitalized interest (481) (8,148) (1,359) Receipts from disposition of property, plant and equipment, net 324 266,925 140,083 Principal collected on notes receivable 8,636 5,699 5,283 Proceeds from (purchase of) short term investments 0 123,428 (120,249) Payment to buy-out minority interest in subsidiaries 0 0 (16,500) --------- --------- --------- Net cash (used in) provided by investing activities (43,304) 193,277 (51,063) --------- --------- --------- Cash flows from financing activities: Redemption of Casino Magtic 13% Notes 0 (112,875) 0 Write-off of unamortized premium and debt costs associated with the Casino Magic 13% Notes, net 0 (3,340) 0 Payment of notes payable (3,447) (5,119) (15,566) Proceeds from secured Bank Credit Facility 0 0 17,000 Payment of secured Bank Credit Facility 0 0 (287,000) Proceeds from issuance of 9.25% Notes 0 0 350,000 Increase in debt issuance costs 0 0 (15,309) Common stock repurchase and retirement (9,820) 0 0 Other financing activities, net 825 3,047 6,859 --------- --------- --------- Net cash (used in) provided by financing activities (12,442) (118,287) 55,984 --------- --------- --------- (Decrease) increase in cash and cash equivalents (19,681) 49,506 79,128 Cash and cash equivalents at the beginning of the period 172,868 123,362 44,234 --------- --------- --------- Cash and cash equivalents at the end of the period $ 153,187 $ 172,868 $ 123,362 ========= ========= =========
- ---------- See accompanying notes to the consolidated financial statements. 66 Pinnacle Entertainment, Inc. Notes to Consolidated Financial Statements Note 1 - Summary of Significant Accounting Policies General Pinnacle Entertainment, Inc. (the "Company" or "Pinnacle Entertainment") is a diversified gaming company that owns and operates seven casinos (four with hotels) in Indiana, Louisiana, Mississippi, Nevada and Argentina and is pursing the development of a hotel and casino resort in Lake Charles, Louisiana. Pinnacle Entertainment owns and operates through a subsidiary, the Belterra Casino Resort, a hotel and cruising riverboat casino resort in Switzerland County, Indiana, in which the Company owned a 97% interest, until August 2001, at which time the remaining 3% held by a non-voting local partner was purchased by the Company (see Note 9). The Company also owns and operates, through its Boomtown, Inc. ("Boomtown") subsidiary, land-based gaming operations in Verdi, Nevada ("Boomtown Reno") and dockside riverboat gaming operations in Harvey, Louisiana ("Boomtown New Orleans"). On April 1, 2001, legislation became effective in Louisiana that requires cruising riverboat casinos in southern Louisiana, including the Company's Boomtown New Orleans operations, to remain dockside at all times (see Note 7). The Company also owns and operates, through its Casino Magic Corp. ("Casino Magic") subsidiary, dockside gaming operations in Biloxi, Mississippi ("Casino Magic Biloxi"); dockside riverboat gaming operations in Bossier City, Louisiana ("Casino Magic Bossier City"); and two land-based casinos in Argentina ("Casino Magic Argentina"). The Company is also pursing the development of a luxury hotel and dockside riverboat casino resort in connection with the 15th and final gaming license to be issued in Louisiana at a site in Lake Charles (see Note 8). Pinnacle Entertainment receives lease income from two card clubs - the Hollywood Park-Casino and Crystal Park Hotel and Casino. The Hollywood Park-Casino is leased from Churchill Downs California Company ("Churchill Downs"), a wholly owned subsidiary of Churchill Downs Incorporated, and subleased to an unaffiliated third party operator. The Crystal Park Hotel and Casino ("Crystal Park Casino") is owned by the Company and is leased to the same card club operator that 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 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). Prior to August 2000, the Company owned and operated dockside gaming facilities in Biloxi, Mississippi ("Boomtown Biloxi") and in Bay St. Louis, Mississippi ("Casino Magic Bay St. Louis"). In August 2000, the Company completed the sale of these facilities (see Note 11). Prior to June 2000, the Company owned and operated Turf Paradise, Inc. ("Turf Paradise"), a horse racing facility in Phoenix, Arizona. In June 2000, the Company completed the sale of Turf Paradise (see Note 11). Prior to September 1999, the Hollywood Park-Casino was owned and operated by the Company. In September 1999, the Company completed the sale of the Hollywood Park Race Track in Inglewood, California to Churchill Downs (see Note 11). Principles of Consolidation The consolidated financial statements include the accounts of Pinnacle Entertainment and its subsidiaries. All significant inter-company accounts and transactions have been eliminated. Goodwill Goodwill consists of the excess of the acquisition cost over the fair value of the net assets acquired in business combinations and is being amortized on a straight-line basis over 40 years, except for the goodwill related to the acquisition of the 49% minority partner in Casino Magic Argentina, which is being amortized over the extended life of the concession agreement (see "-Gaming Licenses" below). Unamortized goodwill as of December 31, 2001 was $68,727,000, including $10,709,000 attributed to the Casino Magic Argentina minority partner purchase in October 1999, $38,460,000 attributed to the Casino Magic Corp purchase in October 1998 and $19,558,000 attributed to the Boomtown, Inc. purchase in June 1997 (see Note 9). Accumulated amortization as of December 31, 2001 and 2000 was $13,863,000 and $11,017,000, respectively. In August 2000, in connection with the sale of the two casinos in Mississippi (see Note 11), the Company wrote off approximately $13,128,000 of unamortized goodwill associated with these properties. 67 In June 2001, the Financial Accounting Standards Board issued Statements of Financial Accounting Standards No. 141 "Business Combinations" ("SFAS No. 141") and No. 142 "Goodwill and Other Intangible Assets" ("SFAS No. 142") which are effective July 1, 2001 and January 1, 2002, respectively, for the Company. SFAS 141 requires that the purchase method of accounting be used for all business combinations initiated after June 30, 2001. With the adoption of SFAS No. 142 on January 1, 2002 (earlier adoption is not permitted), goodwill is no longer amortized over its estimated useful life, which, for the years ended December 31, 2001, 2000 and 1999, was $2,846,000, $3,030,000 and $2,859,000, respectively. Rather, goodwill will be subject to at least an annual assessment for impairment by applying a fair-value-based test. The Company is in the process of completing its evaluation of the financial statement impact of adoption of SFAS No. 142 and anticipates there will be an impairment charge recorded in the first quarter of 2002 related to its Casino Magic locations. In accordance with SFAS No. 142, any such transition related impairment charge would be classified as a cumulative effect of a change in accounting principle. In addition, under the new rules, any future acquired intangible asset will be separately recognized if the benefit of the intangible is obtained through contractual or other legal rights, or if the intangible asset can be sold, transferred, licensed, rented, or exchanged, regardless of the acquirer's intent to do so. Intangible assets with definitive lives will be amortized over their useful lives. Gaming Licenses In 1994, Casino Magic acquired a twelve-year concession agreement to operate two casinos in Argentina, and capitalized the costs related to obtaining the concession agreement. Such costs are being amortized, based on the straight-line method, over the extended life of the concession agreement. The exclusive concession contract with the Province of Neuquen, Argentina was originally scheduled to expire in December 2006; however in August 2001, the Company and the Province entered into an agreement whereby the concession contract will be extended for an additional fifteen years if Casino Magic Argentina invests in the development of a new casino facility and related amenities in accordance with the terms of the agreement. In connection with such extension, in August 2001, the Company reclassified a $2,276,000 receivable from the Province of Neuquen to Gaming Licenses on the Consolidated Balance Sheet, as the Company agreed to not pursue the collection of such receivable as additional consideration for the fifteen-year extension. Such additional concession agreement cost will be amortized over the extended life of the concession agreement. In the event the Company determines not to proceed with the capital improvements, the amortization period for the concession agreement will be reduced to be consistent with a December 2006 expiration date. The Company has not made any change to the planned capital improvements at this time. The unamortized gaming license costs related to Casino Magic Argentina as of December 31, 2001 and 2000 were $4,949,000 (which amount reflects the translation adjustment for Casino Magic Argentina assets and liabilities pursuant to SFAS No. 52 as of December 31, 2001 - see Note 3) and $5,693,000, respectively, and amortization expense was $1,006,000, $952,000 and $949,000 for the years ended December 31, 2001, 2000 and 1999, respectively. In 1996, Casino Magic acquired a Louisiana gaming license to conduct the gaming operations of Casino Magic Bossier City. Casino Magic allocated a portion of the purchase price to the gaming license and, through December 31, 2001, was amortizing the cost, based on the straight-line method, over twenty-five years. Accumulated amortization as of December 31, 2001 and 2000 was $8,423,000 and $6,821,000, respectively. In connection with the implementation of SFAS 142, effective January 1, 2002, the Company no longer amortizes the gaming license as the Company has classified such asset as a non-amortizing intangible asset. As such, pursuant to FAS 142, the gaming license asset maintained by Casino Magic Bossier City will be subject to at least an annual assessment for impairment by applying a fair-value-based test. The unamortized gaming license costs related to Casino Magic Bossier City as of December 31, 2001 and 2000 were $31,639,000 and $33,241,000, respectively, and amortization expense was $1,602,000 for each of the years ended December 31, 2001, 2000 and 1999. Amortization of Debt Issuance Costs Debt issuance costs incurred in connection with long-term debt and bank financing are capitalized and amortized, based on the straight-line method which approximates the effective interest method, to interest expense during the period the debt or loan commitments are outstanding. Accumulated amortization as of December 31, 2001 and 2000 was $11,472,000 and $8,967,000, respectively. During the twelve months ended December 31, 2000, the Company wrote off $2,429,000 of unamortized debt 68 issuance costs associated with the Casino Magic 13% Notes in connection with the redemption of such notes (see Note 14). Amortization of debt issuance costs included in interest expense was $3,742,000, $3,062,000 and $2,449,000 for the years ended December 31, 2001, 2000 and 1999, respectively. Gaming Revenues and Promotional Allowances Gaming revenues at the Belterra, Boomtown and Casino Magic properties consist of the difference between gaming wins and losses, and in 1999 while the Company operated the Hollywood Park-Casino, consisted of fees collected from patrons on a per seat or per hand basis. Revenues in the accompanying statements of operations exclude the retail value of food and beverage, hotel rooms and other items provided to patrons on a complimentary basis. The estimated cost of providing these promotional allowances (which is included in gaming expenses) was $50,216,000, $45,713,000 and $41,341,000 for the years ended December 31, 2001, 2000 and 1999, respectively. Racing Revenues and Expenses During the period in which the Company operated horse race tracks, the Company recorded pari-mutuel revenues, admissions, food and beverage and other racing income associated with racing on a daily basis, except for prepaid admissions, which were recorded ratably over the racing season. Expenses associated with racing revenues were charged against income in those periods in which racing revenues were recognized. Other racing expenses were recognized as they occurred throughout the year. Use of Estimates The preparation of consolidated financial statements in conformity with accounting principles generally accepted in the United States requires management to make estimates and assumptions that affect (i) the reported amounts of assets and liabilities, (ii) the disclosure of contingent assets and liabilities at the date of the consolidated financial statements, and (iii) the reported amounts of revenues and expenses during the reporting period. The Company uses estimates in evaluating the recoverability of property, plant and equipment, other long-term assets, deferred tax assets, reserves associated with asset sales, and in determining litigation and other obligations. Actual results could differ from those estimates. Property, Plant and Equipment Additions to property, plant and equipment are recorded at cost. Projects in excess of $10,000,000 include capitalized interest. Capitalized interest is based on project costs at an imputed rate and was $481,000, $8,148,000 and $1,359,000 in fiscal 2001, 2000 and 1999, respectively. Depreciation and amortization are provided based on the straight-line method over the assets' estimated useful lives as follows: Years ----- Land improvements 3 to 25 Buildings 5 to 40 Vessels and Barges 25 to 31 Equipment 3 to 10 Maintenance, repairs and assets purchased below $2,500 (or a group of like-type assets purchased below $5,000) are charged to expense, and betterments are capitalized. The costs of property sold or otherwise disposed of and their associated accumulated depreciation are eliminated from both the property and accumulated depreciation accounts. Cash and Cash Equivalents Cash and cash equivalents consist of cash, certificates of deposit and short-term investments with original maturities of 90 days or less. Restricted Cash Restricted cash at December 31, 2001 consists of the cash of Casino Magic Argentina maintained in Argentina, translated from the Argentine peso to the U.S. dollar. As discussed below in Note 3, Argentina experienced political and economic disruption in the latter part of 2001, including the devaluation of its currency and the governmental restriction of transferring any cash out of the country. As such, all assets, including cash, have been translated to U.S. dollars from the Argentine peso, and, until such time as the restriction of transferring funds out of the country has been lifted, cash of Casino Magic Argentina maintained 69 in Argentina will be classified as Restricted Cash on the Consolidated Balance Sheet as it can only be utilized by Casino Magic Argentina and not by Pinnacle Entertainment or any of its other subsidiaries. Income Taxes The Company accounts for income taxes under Statement of Financial Accounting Standards 109, Accounting for Income Taxes ("SFAS No. 109"), whereby deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. Under SFAS No. 109, the effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that included the enactment date. Stock-Based Compensation The Company accounts for its stock-based compensation under Accounting Principles Board Opinion No. 25, Accounting for Stock Issued to Employees, and follows the disclosure provisions of Financial Accounting Standards Board's Statement of Financial Accounting Standards No. 123 Accounting for Stock-Based Compensation. Segment Information Statement of Financial Accounting Standards No. 131 Disclosures about Segments of an Enterprise and Related Information ("SFAS No. 131") was effective for years beginning after December 15, 1997, and has been adopted by the Company for all periods presented in these consolidated financial statements. SFAS No. 131 establishes guidelines for public companies in determining operating segments based on those used for internal reporting to management. Based on these guidelines, the Company reports information under a single gaming segment. Pre-opening Costs The Company's policy has been to expense pre-opening costs as incurred, in accordance with Statement of Position 98-5 Reporting on the Costs of Start-Up Activities. Foreign Currency Translation Statement of Financial Accounting Standards No. 52 Foreign Currency Translation ("SFAS No. 52") requires all assets and liabilities of a company's foreign subsidiaries be translated into U.S. dollars at the exchange rate in effect at the end of the period, and revenues and expenses are translated at average exchange rates prevailing during the period. The resulting translation adjustments are reflected in a separate component of stockholders' equity. Prior to December 31, 2001, the Company had no such translation adjustments, as the Argentine peso, the local currency for the Company's Casino Magic Argentina subsidiary, was pegged to the U.S. dollar. Effective with the devaluation of the Argentine peso in early January 2002, the Company recorded a translation loss at December 31, 2001 as a separate component of stockholders' equity - see Note 3. Revenue Recognition In December 1999, Staff Accounting Bulletin 101 Revenue Recognition in Financial Statements ("SAB 101"), issued by the Securities and Exchange Commission ("SEC"), was issued and became effective beginning the fourth quarter of fiscal years beginning after December 15, 1999. SAB 101 summarizes certain of the SEC staff's views in applying accounting principles generally accepted in the United States to revenue recognition in financial statements. Implementation of SAB 101 did not have a material impact on the Company's financial position and results of operations. Derivative Instruments and Hedging Activities In June 1998, Statement of Financial Accounting Standards No. 133 Accounting for Derivative Instruments and Hedging Activities ("SFAS No. 133") was issued. SFAS No. 133 establishes accounting and reporting standards for derivative instruments, including certain derivative instruments embedded in other contracts, and for hedging activities. In June 1999, Statement of Financial Accounting Standards No. 137 Accounting for Derivative Instruments and Hedging Activities - Deferral of the Effective Date of FASB Statement No. 133 ("SFAS No. 137") was issued. SFAS No. 133, as amended by SFAS No. 137, is effective for all fiscal quarters of fiscal years beginning after June 15, 2000. The Company did not have any derivative or hedging instruments during the years ended December 31, 2001, 2000 and 1999. Accounting for Customer "Cash-back" Loyalty Programs In January 2001, the Emerging Issues Task Force ("EITF") reached consensus on Issue 3 addressed in Issue No. 00-22 Accounting for "Points" and Certain Other 70 Time-Based Sales Incentive Offers, and Offers for Free Products or Services to Be Delivered in the Future. This EITF pronouncement requires that the cost of the cash back component of the Company's customer loyalty programs be treated as a reduction in revenues. The Company rewards customers with cash, based upon their level of play on certain casino games (primarily slot machines). These costs were previously recorded as a casino expense. The consensus reached on Issue 3 was effective beginning in fiscal quarters ending after February 15, 2001 and was adopted by the Company in the quarter ended March 31, 2001. In connection with the adoption of Issue 3, the Company reclassified (i.e., reduced gaming revenue and gaming expense) the cash back component of its customer loyalty programs in the amount of $21,497,000 and $20,865,000 related to the years ended December 31, 2000 and 1999 to be consistent with the year ended December 31, 2001. Accounting for Asset Retirement Obligations In June 2001, Statement of Financial Accounting Standards No. 143 Accounting for Asset Retirement Obligations ("SFAS No. 143) was issued. SFAS No. 143 addresses the diversity in practice for the recognizing asset retirement obligations ("ARO"). SFAS No. 143 requires that obligations associated with the retirement of a tangible long-lived asset be recorded as a liability when those obligations are incurred, with the amount of the liability initially measured at fair value. Upon initially recognizing a liability for ARO's, an entity must capitalize the cost by recognizing an increase in the carrying amount of the related long-lived asset. Over time, the liability is accreted to its present value each period, and the capitalized cost is depreciated over the useful life of the related asset. Upon settlement of the liability, an entity either settles the obligation for its recorded amount or incurs a gain or loss upon settlement. SFAS No. 143 will be effective for financial statements for fiscal years beginning after June 15, 2002, although early adoption is encouraged. The Company believes the adoption of SFAS No. 143 will not have a material impact on its financial position or results of operations. Long-lived Assets The Company periodically reviews the propriety of the carrying amount of long-lived assets and the related intangible assets as well as the related amortization period to determine whether current events or circumstances warrant adjustments to the carrying value and/or to the estimates of useful lives. This evaluation consists of comparing asset carrying values to the Company's projection of the undiscounted cash flows over the remaining lives of the assets, in accordance with Statement of Financial Accounting Standards No. 121 Accounting for the Impairment of Long-lived Assets and for Long-lived Assets to Be Disposed Of ("SFAS No. 121"). Based on its review, other than the asset impairment write-downs noted in Note 4, the Company believes that, as of December 31, 2001 and 2000, there were no significant impairments of its long-lived assets or related intangible assets. In September 1999, an impairment write-down of the Hollywood Park-Casino was recorded (see Note 11). Accounting for the Impairment or Disposal of Long-lived Assets In August 2001, Statement of Financial Accounting Standards No. 144 Accounting for the Impairment or Disposal of Long-lived Assets ("SFAS No. 144") was issued. SFAS No. 144 addresses financial accounting and reporting for the impairment or disposal of long-lived assets. This statement supercedes SFAS No. 121 and the accounting and reporting provisions of APB Opinion No. 30 Reporting the Results of Operations - Reporting the Effects of Disposal of a Segment of a Business, and Extraordinary, Unusual and Infrequently Occurring Events and Transactions for the disposal of a segment of a business. Because SFAS No. 121 did not address the accounting for a segment of a business accounted for as a discontinued operation under APB Opinion No. 30, two accounting models existed for long-lived assets to be disposed. The FASB decided to establish a single accounting model, based on the framework established in SFAS No. 121, for long-lived assets to be disposed of by sale. The FASB also decided to resolve significant implementation issues related to SFAS No. 121. The provisions of the statement are effective for financial statements issued for fiscal years beginning after December 31, 2001, and interim periods within those fiscal years, with early application encouraged. The provisions of SFAS No. 144 generally are to be applied prospectively. The Company believes that the adoption of SFAS No. 144 will not have a material impact on its financial position or results of operations. Earnings per Share Basic earnings per share are based on net income less preferred stock dividend requirements divided by the weighted average common shares outstanding during the period. Diluted earnings per share assume exercise of in-the-money stock options (those options with exercise prices at or 71 below weighted average market price for the periods presented) outstanding at the beginning of the year or at the date of the issuance, unless the assumed exercises are antidilutive. Reclassifications Certain reclassifications have been made to the 2000 and 1999 amounts to be consistent with the 2001 financial statement presentation. Note 2 - Supplemental Disclosure of Cash Flow Information For the years ended December 31, -------------------------------- 2001 2000 1999 ------- ------- ------- (in thousands) Cash paid during the year for: Interest $45,720 $56,248 $58,943 Income taxes 1,996 64,600 (a) 6,223 (a) The increase in taxes paid in 2000 is due primarily to the gain on asset dispositions in 2000 and 1999 (see Note 11). Note 3 - Stockholders' Equity and Casino Magic Argentina Currency Devaluation During the second half of 2001, the political and economic condition of Argentina deteriorated, including an increase in the risk of being unable to repatriate funds out of the country, the fall of international reserves, the continuous fiscal imbalance, and the decrease in the financial system deposits. In December 2001, these events culminated in the resignation of the then President of the country, the imposition of restrictions on cash withdrawals, the delaying of payment of wages to government employees and the closing of the banking system from late December 2001 to January 11, 2002. In an effort to stabilize the country, the new government of Argentina elected to devalue the Argentine Peso in early January 2002 (which had been pegged to the U.S. dollar for over ten years), as well as stop all transfers of U.S. dollars out of the country. As a result of the actions taken, the Company recorded a translation loss in the amount of $4,430,000 and reflected such loss as Accumulated Other Comprehensive Loss, a separate component of stockholders' equity, as of December 31, 2001. In accordance with EITF Topic 0-12, Foreign Currency Translation - Selection of an Exchange Rate When Trading is Temporarily Suspended, the Company recorded a translation loss based upon applying the open market exchange rate of 1.65 pesos to the U.S. Dollar, the approximate rate when the foreign exchange markets opened on January 11, 2002, to the assets and liabilities as of December 31, 2001. (Total assets of Casino Magic Argentina at December 31, 2001 were $14,287,000, including the $3,452,000 of restricted cash maintained in Argentina and $2,911,000 of cash maintained outside the country). The Company anticipates such translation loss will fluctuate in the future based on changes in the currency exchange rate between the Argentine Peso and the U.S. Dollar. In September 1998, the Company granted 817,500 stock options (625,000 at an exercise price of $10.1875 and 192,500 at an exercise price of $18.00) outside of the Company's 1993 and 1996 Stock Option Plans (see Note 17) to four executives hired on January 1, 1999. Of these grants, 613,125 (420,625 at an exercise price of $10.1875 and 192,500 at an exercise price of $18.00) were made subject to shareholder approval, which approval was granted at the shareholder meeting held May 25, 1999 (the "Measurement Date") at which time the stock price was $14.13. Accounting Principles Board Opinion No. 25 requires that compensation be determined as of the Measurement Date based on the excess of the quoted market price over the exercise price of the stock and charged over the service period of the executives in their employment agreements or option vesting period, whichever is shorter. As the employment service period for the executives expired in 2001, there will be no future charges. Compensation related to these options for the years ended December 31, 2001, 2000 and 1999, was $414,000, $414,000 and $828,000, respectively. In August 1998, the Company announced its intention to repurchase and retire up to 20%, or approximately 5,256,000 shares, of its then issued and outstanding common stock on the open market or in negotiated transactions. In February 2001, the Company announced its intention to continue to make purchases under this program. During the year ended December 31, 2001, the Company repurchased 1,103,000 shares at a 72 cost of approximately $9,820,000. Over the life of the program, the Company has repurchased 1,603,000 shares at a total cost of approximately $15,360,000. Effective with Amendment No. 6 to the Credit Facility (see Note 14), the Company agreed to suspend additional stock repurchase activity until April 1, 2002. Under the Company's most restrictive debt covenants, approximately $3,000,000 is otherwise available to continue the stock buyback program at December 31, 2001. Note 4 - Asset Impairment Write-downs During the fourth quarter of 2001, under provisions of SFAS No. 121, the Company determined that it would not be able to recover the net book value of the Crystal Park Casino card club on an undiscounted cash flow basis, as it agreed to reduce the rent payable to the Company to $20,000 per month from $100,000 a month, effective October 1, 2001. As such, the Company recorded an impairment write-down of the long-lived assets comprising the Crystal Park Casino card club of $20,358,000 representing the difference between its net book value of $26,358,000 and its estimated fair value less estimated costs to sell. Fair value was determined by management based on current real estate and market conditions in Compton, California. In addition, as the Company has begun aggressively seeking a buyer of Crystal Park Casino, the Company reclassified the net book value to "Assets held for sale" as of December 31, 2001, as the Company committed to a disposal plan in the fourth quarter of 2001 (see Note 5). In addition, during the fourth quarter of 2001, under provisions of SFAS No. 121, the Company determined it would not be able to recover the net book value of the Boomtown Belle I (the original cruising riverboat casino operated at Boomtown New Orleans) based on recent offers to purchase the cruising riverboat casino. As such, the Company recorded an impairment write-down of approximately $1,808,000, representing the difference between its net book value of $1,932,000 and its estimated fair value less estimated selling costs. Fair value was based on the most recent offer to purchase the asset for salvage value. In addition, the Company reclassified the net book value to "Assets held for sale" as of December 31, 2001, as the Company committed to a disposal plan in the fourth quarter of 2001 (see Note 5). Also, during the fourth quarter of 2001, the Company committed to a sale of a breakwater asset at Casino Magic Biloxi to a local fishery entity for a nominal amount, as well as wrote-down certain other assets at Casino Magic Biloxi, and as such recorded asset impairment charges of approximately $1,364,000. Note 5 - Assets Held For Sale Assets held for sale at December 31, 2001 consists primarily of 97 acres of surplus land in Inglewood, California and the Crystal Park Casino in Compton, California (see Note 4), and at December 31, 2000 consists of the 97 acres of surplus land in Inglewood, California. As noted below (see Note 11), in September 1999, the Company sold 240 acres of land in conjunction with the sale of the Hollywood Park Race Track and Casino in Inglewood, California and in March 2001, sold another 42 acres of surplus land. As of December 31, 2001, the Company continues to seek a buyer of the remaining 97 acres of land owned in Inglewood, California, and as such, has classified the land as held for sale on the Consolidated Balance Sheets since December 2000. In April 2000, the Company announced it had entered into an agreement for the sale of the 97 acres for $63,050,000 in cash. In April 2001, the Company announced the prospective buyer had elected to terminate the agreement. The Company continues to market the property to prospective buyers. Note 6 - HP Yakama In 1998, the Company, through its wholly owned subsidiary HP Yakama, Inc. ("HP Yakama"), loaned approximately $9,618,000 to the Tribal Gaming Corporation (the "Tribal Corporation") to construct the Legends Casino in Yakima, Washington. The Tribal Corporation gave HP Yakama a promissory note for the $9,618,000, payable in 84 equal monthly installments at a 10% rate of interest. 73 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 agreement, the Company no longer receives interest income nor cash flow participation income for the sublease agreements. Note 7 - Louisiana Dockside Gaming Legislation In March 2001, the Louisiana state legislature passed a law enabling riverboat casinos to remain dockside at all times and increased the gaming taxes paid to the state of Louisiana from 18.5% to 21.5% of net gaming proceeds effective April 1, 2001 for the nine riverboats in the southern region of the state, including the Company's Boomtown New Orleans property. The gaming tax increase to 21.5% of net gaming proceeds will be phased in over an approximately two-year period for the riverboats operating in parishes bordering the Red River, including the Company's Casino Magic Bossier City property. The phase-in included a 1% increase on April 1, 2001, with another 1% on each of April 1, 2002 and 2003. Note 8 - Expansion and Development Casino Magic Bossier City 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 amend its prior 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. In addition, the Company's Credit Facility was amended in November 2001 (see Note 14) to allow for such $25,000,000 improvement. 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". Lake Charles In November 1999, the Company filed an application for the fifteenth and final gaming license to be issued by the Louisiana Gaming Control Board (the "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 such referendum will not be delayed beyond April 2002, and if held, that it will pass. 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 $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 74 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, leasing arrangements and joint venture arrangements. In February 2002, 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. 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 connection with the 1999 application noted above, Pinnacle Entertainment entered into an option agreement with the Lake Charles Harbor and Terminal District (the "District") to lease 225 acres of unimproved land from the District upon which such resort complex would be constructed. The initial lease option was for a six-month period ending January 2000, with three six-month renewal options (all of which have been exercised), at a cost of $62,500 per six-month renewal option. In June 2001 and again in January 2002, the District agreed to extend the option period for additional six-month terms at a cost of $62,500 per six-month term. In the event the local referendum noted above is not held prior to the expiration of the current option extension, the Company anticipates requesting an additional lease option extension from the District. These lease option payments are expensed over the option periods. If the lease option were exercised, the annual rental payment would be $815,000, with a maximum annual increase of 5%, commencing upon opening of the facility. The term of the lease would be for a total of up to 70 years, with an initial term of 10 years and six consecutive renewal options of 10 years each. The lease would require the Company to develop certain on- and off-site improvements at the location. All costs incurred by the Company related to obtaining this license have been expensed as incurred. Note 9 - Acquisitions Purchase of Belterra Casino Resort Minority Interest Prior to August 2001, the Company owned a 97% interest in the Belterra Casino Resort which opened in October 2000, with the remaining 3% held by a non-voting local partner. In November 2000, the Company entered into an agreement with the local partner whereby the local partner had the right to require the Company to purchase, for a purchase price determined in accordance with the agreement, its entire ownership interest in the Belterra Casino Resort at any time on or after January 1, 2001. A $100,000 deposit toward such ultimate purchase price was made by the Company to the partner at that time. In July 2001, the local partner exercised the right to require the Company to purchase the remaining 3% ownership 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. Purchase of Casino Magic Argentina Minority Interest On October 8, 1999, the Company purchased the 49% minority interest not owned by the Company in Casino Magic Argentina for $16,500,000 in cash. The $12,300,000 purchase price paid in October 1999 in excess of the then minority interest was allocated to goodwill and, through December 31, 2001, was being amortized over the extended life of the concession agreement, as described in Note 1 "-Goodwill". Consistent with the implementation of SFAS No. 142 (see Note 1 "-Goodwill"), goodwill will no longer be amortized, but instead will be subject to at least an annual assessment for impairment by applying a fair-value-based test. In the case of the goodwill recorded for the 75 Casino Magic Argentina minority interest purchase, and to the extent there remains any goodwill after implementation of SFAS No. 142, such fair-value-based test will be impacted in the event the Company elects to not invest capital in Casino Magic Argentina and, as such, the concession contract is not extended beyond December 2006 (see Note 1 "-Gaming Licenses"). Casino Magic Acquisition On October 15, 1998, the Company acquired Casino Magic, Corp. (the "Casino Magic Merger"). As a result of the Casino Magic Merger, Casino Magic became a wholly owned subsidiary of the Company. The Casino Magic Merger was accounted for under the purchase method of accounting for a business combination. The purchase price of the Casino Magic Merger was allocated to identifiable assets acquired and liabilities assumed based on their estimated fair values at the date of acquisition. Assets acquired and liabilities assumed were, when necessary, written up or down to their fair market values based on financial analyses, which considered the impact of general economic, financial and market conditions. The Casino Magic Merger generated certain excess acquisition costs over the fair value of the net assets acquired, which was recorded as goodwill and was being amortized over 40 years. Pursuant to the implementation of SFAS No. 142 (see Note 1 "-Goodwill"), the remaining unamortized goodwill of $38,460,000 will no longer be amortized. As noted above, the Company is in the process of completing its evaluation of the financial statement impact of adoption of SFAS No. 142 and anticipates there will be an impairment charge recorded in the first quarter of 2002 related to its Casino Magic locations. Boomtown Acquisition On June 30, 1997, the Company acquired Boomtown, Inc. (the "Boomtown Merger"). As a result of the Boomtown Merger, Boomtown became a wholly owned subsidiary of the Company. The Boomtown Merger was accounted for under the purchase method of accounting for a business combination. The purchase price of the Boomtown Merger was allocated to identifiable assets acquired and liabilities assumed based on their estimated fair values at the date of acquisition. Assets acquired and liabilities assumed were, when necessary, written up or down to their fair market values based on financial analyses, which considered the impact of general economic, financial and market conditions. The Boomtown Merger generated certain excess acquisition cost over the fair value of the net assets acquired, which was recorded as goodwill and was being amortized over 40 years. Pursuant to the implementation of FAS 142 (see Note 1 "-Goodwill"), the remaining unamortized goodwill of $19,558,000 will no longer be amortized. As noted above, the Company is in the process of completing its evaluation of the financial statement impact of adoption of SFAS No. 142 and does not anticipate there will be an impairment charge recorded related to its Boomtown locations. As such, the remaining unamortized goodwill will be subject to at least an annual assessment for impairment by applying a fair-value-based test. Note 10 - Terminated Merger Agreement 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 (previously extended to January 31, 2001) of the Merger. Since all of the conditions to consummation of the Merger would not be met by such date, the Company, PHCR and Pinnacle Acq Corp mutually agreed that the Merger Agreement would be terminated. 76 Note 11 - Assets Sold Casino Sales In August 2000, the Company completed the sale of two of its casinos in Mississippi, Casino Magic Bay St. Louis and Boomtown Biloxi, to subsidiaries of Penn National Gaming, Inc. ("Penn National") for $195,000,000 in cash. The after-tax gain from these sales was approximately $35,538,000. Condensed results of operations before income taxes for the Casino Magic Bay St. Louis and Boomtown Biloxi casinos from January 1, 2000 to August 8, 2000 (the date of sale) and for the year ended December 31, 1999 were: For the 221 For the year days ended ended August 8, December 31, 2000 1999 ----------- ------------ (in thousands) Revenues (a) $93,668 $150,897 Expenses 76,417 125,408 ------- -------- Operating income 17,251 25,489 Interest expense, net 90 86 ------- -------- Income before income taxes $17,161 $ 25,403 ======= ======== (a) Revenues for the 221 days ended August 8, 2000 include proceeds from the settlement of a business interruption claim of approximately $1,204,000 related to hurricane damage and casino closure in September 1998. Turf Paradise Sale In June 2000, the Company completed the sale of Turf Paradise to a company owned by a private investor for $53,000,000 in cash. The after-tax gain from this sale was approximately $21,262,000. The condensed results of operations before income taxes for Turf Paradise from January 1, 2000 to June 13, 2000 (the date of sale) and for the year ended December 31, 1999 were: For the 165 For the year days ended ended June 13, December 31, 2000 1999 ----------- ------------ (in thousands) Revenues $10,665 $17,644 Expenses 7,628 13,819 ------- ------- Operating income 3,037 3,825 Interest expense, net 49 -- ------- ------- Income before income taxes $ 3,086 $ 3,825 ======= ======= Land Sale In March 2000, the Company announced it had completed the sale of approximately 42 acres of surplus land in Inglewood, California to Home Depot, Inc. for $24,200,000 in cash. The after tax gain from this sale was approximately $15,322,000. 77 Dispositions of Hollywood Park Race Track and Hollywood Park-Casino In September 1999, the Company completed the dispositions of the Hollywood Park Race Track and Hollywood Park-Casino to Churchill Downs for $117,000,000 in cash and $23,000,000 in cash, respectively. Churchill Downs acquired the race track, 240 acres of related real estate and the Hollywood Park-Casino. The Company then entered into a 10-year leaseback of the Hollywood Park-Casino at an annual lease rate of $3,000,000 per annum, with a 10-year renewal option. The Company then subleased the facility to a third party operator for a lease payment of $6,000,000 per year. The initial term of the sublease was for a one-year period. In September 2000, the Company renewed the sublease until the earlier of December 31, 2001 or the expiration or early termination of the Company's lease with Churchill Downs. In December 2001, the Company further renewed the sublease until December 31, 2002. The disposition of the Hollywood Park Race Track and related real estate was accounted for as a sale and resulted in a pre-tax gain of $61,522,000. The disposition of the Hollywood Park-Casino was accounted for as a financing transaction and therefore not recognized as a sale for accounting purposes as the Company subleased the Hollywood Park-Casino to a third-party operator. During the third quarter of 1999, under the provisions of SFAS No. 121, the Company determined that it would not be able to recover the net book value of the Hollywood Park-Casino on an undiscounted cash flow basis. The Company recorded an impairment write-down of the long-lived assets comprising the Hollywood Park-Casino of $20,446,000 representing the difference between its net book value of $43,400,000 and its estimated fair value. Fair value was determined based on an independent appraisal. Due to competitive conditions in the California casino market, sublease rentals were projected to decline over the ten-year lease term. Pursuant to accounting guidelines, the Company recorded a long-term debt obligation of $23,000,000 for the Hollywood Park-Casino (see Note 14). The Hollywood Park-Casino building will continue to be depreciated over its estimated useful life. Due to the disposition of the Hollywood Park Race Track and Hollywood Park-Casino in September 1999, there are no results of operations for the years ended December 31, 2001 and 2000 for these facilities. As discussed above, effective with the disposition of the Hollywood Park-Casino, the Company receives lease income from the operator of the facility, which was $6,000,000 in 2001 and 2000 and is included in other revenue. The condensed results of operations before income taxes for the Hollywood Park Race Track and Hollywood Park-Casino from January 1, 1999 to September 10, 1999 (the date of sale) was: For the 253 days ended September 10, 1999 ------------ (in thousands) Revenues $86,235 Expenses 73,019 ------- Operating income 13,216 Interest expense (a) 0 ------- Income before income taxes $13,216 ======= (a) No interest expense was specifically identified for these operations. 78 Note 12 - Income Taxes The composition of the Company's income tax expense (benefit) for the years ended December 31, 2001, 2000 and 1999 was as follows: Current Deferred Total -------- --------- --------- (in thousands) Year ended December 31, 2001: U.S. Federal ($3,866) ($16,200) ($20,066) State (607) (2,546) (3,153) Foreign 1,313 0 1,313 -------- --------- --------- ($3,160) ($18,746) ($21,906) -------- --------- --------- Year ended December 31, 2000: U.S. Federal $ 52,545 ($10,119) $ 42,426 State 8,249 (2,125) 6,124 Foreign 2,353 0 2,353 -------- --------- --------- $ 63,147 ($12,244) $ 50,903 (a) ======== ========= ========= Year ended December 31, 1999: U.S. Federal $ 10,986 $ 21,963 $ 32,949 State 2,392 3,137 5,529 Foreign 2,448 0 2,448 -------- --------- --------- $ 15,826 $ 25,100 $ 40,926 ======== ========= ========= (a) Includes $1,493,000 of tax benefit of extraordinary item. The following table reconciles the Company's income tax expense to the federal statutory tax rate of 35%:
For the years ended December 31, -------------------------------- 2001 2000 1999 -------- ------- ------- (in thousands) Federal income tax expense (benefit) at the statutory rate ($17,694) $46,161 $29,741 State income taxes, net of federal tax benefits (2,781) 6,124 5,529 Non-deductible impairment write-down on Hollywood Park-Casino (see Note 11) 0 0 7,157 Other expenses (income) 3,173 111 (1,501) Reduction in valuation allowance (4,604) 0 0 -------- ------- ------- Income tax expense (benefit) before extraordinary item (21,906) 52,396 40,926 Tax benefit of extraordinary item 0 (1,493) 0 -------- ------- ------- Income tax (benefit) expense ($21,906) $50,903 $40,926 ======== ======= =======
79 At December 31, 2001 and 2000, the tax effects of temporary differences that gave rise to significant portions of the deferred tax assets and deferred tax liabilities were:
2001 2000 ---------- --------- Current deferred tax assets (liabilities): (in thousands) Workers' compensation insurance reserve $ 487 $ 819 General liability insurance reserve 75 436 Vacation and sick pay accrual 1,390 2,230 Sale of Hollywood Park Race Track & Casino 0 1,739 Sale of Mississippi Casinos and Turf Paradise 0 (12,555) Legal and merger reserves 1,840 2,146 Other 920 850 ---------- --------- Net current deferred tax assets/ (liabilities) $ 4,712 ($4,335) ========== ========= Non-current deferred tax assets (liabilities): Net operating loss carry-forwards $ 9,042 $ 19,969 Excess tax basis over book value of acquired assets 11,736 11,736 Asset impairment writedowns 9,454 0 Los Angeles revitalization zone tax credits 9,967 11,717 Less valuation allowance (27,396) (32,000) Depreciation, amortization and pre-opening expenses (38,223) (30,042) Other 2,734 8,858 ---------- --------- Net non-current deferred tax liabilities ($22,686) ($9,762) ========== =========
Prior to 2000, the Company earned a substantial amount of California tax credits related to the ownership and operation of the Hollywood Park Race Track and Hollywood Park-Casino as well as the ownership of the Crystal Park Card Club Casino, which were located in the Los Angeles Revitalization Tax Zone (LARZ). As of December 31, 2001, the Company had approximately $9,967,000 of Los Angeles Revitalization Zone ("LARZ") tax credits. The LARZ tax credits can only be used to reduce certain California tax liabilities and cannot be used to reduce federal tax liabilities. A valuation allowance has been recorded with respect to the LARZ tax credits because the Company may not generate enough income subject to California tax to utilize the LARZ tax credits before they expire. The amount subject to carry-forward of these unused California tax credits (net of valuation allowance) was approximately $967,000. The LARZ credits will expire between 2007 to 2012. As of December 31, 2001, the Company had federal net operating loss ("NOL") of approximately $22,326,000 comprised principally of NOL carry-forwards acquired in the Casino Magic Merger. The NOL carry-forwards expire on various dates through 2018. Under the provision of Internal Revenue Code (Section 382) and the regulations promulgated thereunder, the utilization of NOL carry-forwards to reduce tax liability is restricted under certain circumstances. Events which cause such a limitation, include, but are not limited to, certain changes in the ownership of a corporation. The 1998 acquisition of Casino Magic resulted in such limitation and, accordingly, the Company's use of Casino Magic's NOL carry-forwards is subject to restrictions imposed by Section 382 of the Internal Revenue Code. 80 Note 13 - Property, Plant and Equipment Property, plant and equipment held at December 31, 2001 and 2000 consisted of the following: December 31, ------------------- 2001 (a) 2000 (a) -------- -------- (in thousands) Land and land improvements $106,643 $ 96,249 Buildings 327,864 353,902 Equipment 196,708 183,523 Vessel and barges 112,029 105,829 Construction in progress 12,129 2,404 -------- -------- 755,373 741,907 Less accumulated depreciation 179,074 148,189 -------- -------- $576,299 $593,718 ======== ======== (a) Excludes $18,285,000 and $12,164,000 of assets held for sale as of December 31, 2001 and 2000, respectively (see Note 5). Note 14 - Secured and Unsecured Notes Payable Notes payable at December 31, 2001 and 2000 consisted of the following: December 31, -------------------- 2001 2000 -------- -------- (in thousands) Secured notes payable, Credit Facility $ 0 $ 0 Unsecured 9.25% Notes 350,000 350,000 Unsecured 9.5% Notes 125,000 125,000 Hollywood Park-Casino debt obligation 18,847 20,745 Other secured notes payable 2,407 3,259 Other unsecured notes payable 893 1,590 -------- -------- 497,147 500,594 Less current maturities 3,654 3,432 -------- -------- $493,493 $497,162 ======== ======== Secured Notes Payable, Bank Credit Facility Under the terms of the 1998 bank credit facility with a syndicate of banks, expiring in 2003 (the "Credit Facility"), the Company chose in May of 1999 to reduce the amount available under the facility from $300,000,000 to $200,000,000. Effective April 2, 2001, July 2, 2001 and October 1, 2001, the commitment amount of the Credit Facility was automatically reduced by $10,000,000 on each such date, such that, in connection with the scheduled commitment reductions, the commitment balance at October 1, 2001 was $170,000,000. In November 2001, the Company chose to further reduce the amount available under the facility to $110,000,000. Remaining scheduled commitment reductions are $6,667,000 on March 31, 2003 and $16,667,000 on each June 30 and September 30, 2003. The Credit Facility also provides for letters of credit up to $30,000,000 and swing line loans of up to $10,000,000. As of December 31, 2001 and 2000, the Company had no outstanding borrowings under the Credit Facility. The Credit Facility has remained unused since February 1999. Interest rates on borrowings under the Credit Facility are determined by adding a margin, which is based upon the Company's debt to cash flow ratio (as defined in the Credit Facility), to either the LIBOR rate or Prime Rate (at the Company's option). The Company also pays a quarterly commitment fee on the unused balance of the Credit Facility. The Credit Facility allows for interest rate swap agreements or other interest rate protection agreements. Presently, the Company does not use such financial instruments. 81 In November 2001, the Company and the bank syndicate executed Amendment No. 6, which, among other things: (i) amended various financial covenant ratios to be more consistent with current operations (therefore, reflective of the economic uncertainty enhanced by the tragedies of September 11, 2001), (ii) allowed for certain capital expenditures, including $25,000,000 related to Casino Magic Bossier City (see Note 8), (iii) suspended any additional stock repurchase activity until April 1, 2002 and, (iv) required the Company to utilize its cash (other than working capital and casino cash) prior to drawing on the facility. In July 2001, the Company and the bank syndicate executed Amendment No. 5, which, among other things: (i) amended various financial covenant ratios to be more consistent with operations (therefore reflective of the operations sold in 1999 and 2000, as well as the opening of the Belterra Casino Resort in October 2000), and (ii) allowed for the necessary capital spending for the Lake Charles project (see Note 8). An additional amendment to the Credit Facility will be necessary to obtain approval from the bank syndicate for capital projects not specifically provided for in either Amendment No. 5 or No. 6. Costs associated with Amendment No. 5 and 6 have been deferred and amortized over the remaining life of the bank credit facility. Unsecured 9.25% and 9.5% Notes In February of 1999, the Company issued $350,000,000 of 9.25% Senior Subordinated Notes due 2007 (the "9.25% Notes"), the proceeds from which were used to pay the outstanding borrowings on the Credit Facility, to fund current capital expenditures, and for other general corporate purposes. In August of 1997, the Company issued $125,000,000 of 9.5% Senior Subordinated Notes due 2007 (the "9.5% Notes"). On January 29, 1999, the Company received the required number of consents to modify selected covenants associated with the 9.5% Notes. Among other things, the modifications lowered the required minimum consolidated coverage ratio for debt assumption and increased the size of allowed borrowings under the Credit Facility. The Company paid a consent fee of $50 per $1,000 principal amount of the 9.5% Notes which, combined with other transactional expenses, is being amortized over the remaining term of the 9.5% Notes. The 9.25% and 9.5% Notes are redeemable, at the option of the Company, in whole or in part, on the following dates, at the following premium-to-face values: 9.25% Notes redeemable: 9.5% Notes redeemable: - ------------------------------------ ------------------------------------- after February 14, at a premium of After July 31, at a premium of - ------------------------------------ ------------------------------------- 2003 104.625% 2002 104.750% 2004 103.083% 2003 102.375% 2005 101.542% 2004 101.188% 2006 100.000% 2005 100.000% 2007 maturity 2006 100.000% 2007 maturity Both the 9.25% and the 9.5% Notes are unsecured obligations of the Company, guaranteed by all material restricted subsidiaries of the Company, as defined in the indentures. The Casino Magic Argentina subsidiaries do not guaranty the debt. The indentures governing the 9.25% and 9.5% Notes, as well as the Credit Facility, contain certain covenants limiting the ability of the Company and its restricted subsidiaries to incur additional indebtedness, issue preferred stock, pay dividends or make certain distributions, repurchase equity interests or subordinated indebtedness (including the Company's common stock - see Note 3), create certain liens, enter into certain transactions with affiliates, sell assets, issue or sell equity interests in its subsidiaries, or enter into certain mergers and consolidations. Redemption of Casino Magic 13% Notes and Extraordinary Item In August of 1996, Casino Magic of Louisiana, Corp. ("Casino Magic of Louisiana") issued $115,000,000 of 13% First Mortgage Notes due 2003 (the "Casino Magic 13% Notes"), with contingent interest equal to 5% of Casino Magic Bossier City's adjusted consolidated cash flows (as defined by the indenture). 82 On August 15, 2000, the Company redeemed all $112,875,000 in aggregate principal amount of its then outstanding Casino Magic 13% Notes at the redemption price of 106.5%. Upon deposit of principal, premium and accrued interest for such redemption, Casino Magic of Louisiana satisfied all conditions required to discharge its obligations under the indenture. In connection with the redemption, in August 2000, the Company recorded an extraordinary loss of $2,653,000, net of federal and state income taxes, or $0.10 per basic and diluted share. The extraordinary loss represents the payment of the redemption premium and the write-off of deferred finance and premium costs, net of the related federal and state income tax benefit of $1,493,000. Following the redemption, Casino Magic of Louisiana became a guarantor of the Credit Facility, the 9.25% Notes and the 9.5% Notes. Hollywood Park-Casino Debt Obligation In connection with the disposition of the Hollywood Park-Casino to Churchill Downs in September 1999, the Company recorded a long-term lease obligation of $23,000,000. Annual lease payments to Churchill Downs of $3,000,000 are applied as a reduction of principal and interest expense. The debt obligation is being amortized, based on a mortgage interest method, over 10 years (the initial lease term with Churchill Downs). Annual Maturities As of December 31, 2001, annual maturities of secured and unsecured notes payable (including the long-term lease obligation related to the Hollywood Park-Casino) are as follows: Year ending December 31: (in thousands) - ------------ -------------- 2002 $ 3,654 2003 2,416 2004 2,343 2005 2,474 2006 2,564 Thereafter 483,696 -------- $497,147 ======== Note 15 - Long Term Lease Obligations The Company has certain long term lease obligations, including corporate office space (approximately 10,000 square feet), land at Belterra Casino Resort, office equipment and gaming equipment. Minimum lease payments required under operating leases that have initial terms in excess of one year as of December 31, 2001 are as follows: Period (in thousands) - ------ -------------- 2002 $ 7,384 2003 5,697 2004 4,784 2005 4,413 2006 4,177 Thereafter 48,663 ------- $75,118 ======= Total rent expense for these long-term lease obligations for the years ended December 31, 2001, 2000 and 1999 was $9,488,000, $7,281,000 and $6,481,000, respectively. Note 16 - Slot Participation Expense The Company is also a party to a number of slot participation arrangements at its various casinos (which arrangements are customary for casino operations). The arrangements consist of either a fix rent agreement on a per day basis, or a percentage of slot machine gaming revenue, generally payable at month-end. Slot participation expense was $9,539,000, $7,048,000 and $6,746,000 for the years ended December 31, 2001, 2000 and 1999, respectively. 83 Note 17 - Stock Option Plans The Company has three stock option plans (the "Stock Option Plans") that provide for the granting of stock options to officers and key employees. The objectives of these plans include attracting and retaining the best personnel, providing for additional performance incentives, and promoting the success of the Company. In 2001, the shareholders of the Company adopted the 2001 Stock Option Plan (the "2001 Plan"), which provides for the issuance of up to 900,000 shares. Except for the provisions governing the number of shares issuable under the 2001 Plan and except for the provisions which reflect changes in tax and securities laws, the provisions of the 2001 Plan are substantially similar to the provisions of the prior plan adopted in 1993. In 1996, the shareholders of the Company adopted the 1996 Stock Option Plan (the "1996 Plan"), which provides for the issuance of up to 900,000 shares. Except for the provisions governing the number of shares issuable under the 1996 Plan and except for the provisions which reflect changes in tax and securities laws, the provisions of the 1996 Plan are substantially similar to the provisions of the prior plan adopted in 1993. The Stock Options Plans are administered and terms of option grants are established by the Board of Directors' Compensation Committee. Under the terms of the Stock Option Plans, options alone, or coupled with stock appreciation rights, may be granted to select key employees, directors, consultants and advisors of the Company. Options become exercisable ratably over a vesting period as determined by the Compensation Committee and expire over terms not exceeding ten years from the date of grant, one month after termination of employment, or six months after the death or permanent disability of the optionee. The purchase price for all shares granted under the Stock Option Plans shall be determined by the Compensation Committee, but in the case of incentive stock options, the price will not be less than the fair market value of the common stock at the date of grant. As of December 31, 2001, the 2001 Plan is the only plan with stock option awards available for grant; all of the 900,000 shares eligible for issuance under the 1996 Plan and all of the 625,000 shares eligible for issuance under the 1993 stock option plan have been granted. Of the 900,000 shares eligible for issuance under the 2001 Plan, approximately 165,000 have been granted. In addition, 585,000 shares (all of which are vested and have a weighted average exercise price of $8.56 per share) of Pinnacle Entertainment common stock are issuable upon exercise of options granted under pre-merger stock option plans of Boomtown. In addition, 174,000 shares (all of which are vested and have a weighted average exercise price of $23.03 per share) of Pinnacle Entertainment common stock are issuable upon exercise of options granted under pre-merger stock options plans of Casino Magic. On September 10, 1998, the Company granted 817,500 options (625,000 at an exercise price of $10.1875, and 192,500 at an exercise price of $18.00) outside of the 1993 and 1996 Plans to the executive management team hired as of January 1, 1999 (see Note 3). As of December 31, 2001, none of these options were exercised. 84 The following table summarizes information related to shares under option and shares available for grant under the Company's 2001, 1996 and 1993 plans: Weighted Average Number Exercise of Shares Price --------- -------- Options outstanding at December 31, 1998 1,644,321(a) $12.02 Granted 298,500 $12.30 Exercised, expired or forfeited (253,478) $11.72 - ------------------------------------------------------------------ Options outstanding at December 31, 1999 1,689,343 $12.08 Granted 0 $ 0.00 Exercised, expired or forfeited (116,259) $13.53 - ------------------------------------------------------------------ Options outstanding at December 31, 2000 1,573,084 $12.13 Granted 595,000 $ 9.85 Exercised, expired or forfeited (127,583) $ 8.62 - ------------------------------------------------------------------ Options outstanding at December 31, 2001 2,040,501 $11.52 ================================================================== Options exercisable at: December 31, 2001 1,326,257 $12.20 December 31, 2000 995,912 $12.23 December 31, 1999 701,926 $11.90 ================================================================== (a) Includes 817,500 options issued outside of the 1993 and 1996 Plans. The following table summarizes information about stock options under the 2001, 1996 and 1993 plans outstanding as of December 31, 2001: Outstanding Exercisable -------------------- --------------------- Weighted Weighted Number of Average Number of Average Range of Shares at Exercise Shares at Exercise Exercise Price 12/31/01 Price 12/31/01 Price - --------------------------------------------------------------- $6.70 - $10.19 1,190,633 $ 9.71 824,638 $10.03 $10.65 - $14.75 614,501 $12.54 297,502 $14.20 $14.81 - $20.25 235,367 $18.03 204,117 $18.03 - --------------------------------------------------------------- 2,040,501 $11.52 1,326,257 $12.20 =============================================================== The weighted average remaining contractual life of the outstanding options under the Company's 2001, 1996 and 1993 plans as of December 31, 2001 is approximately 7.18 years. Accounting for Stock-Based Compensation The Company estimated the fair market value of stock options using an option-pricing model taking into account, as of the date of grant, the exercise price and expected life of the option, the then current price of the underlying stock and its expected volatility, expected dividend on the stock, and the risk-free interest rate for the expected term of the options. 85 In computing the stock-based compensation, the following assumptions were made:
Risk-Free Interest Original Expected Expected Rate Expected Life Volatility Dividends --------- ------------- ---------- --------- Options granted in the following periods: 1997 5.0% 3 years 47.8% None 1998 4.5% 3 to 10 years 40.1% None 1999 4.6% 10 years 47.3% None 2001 4.7% 7 years 50.4% None
The following sets forth the unaudited pro forma financial results related to the Company's employee stock-based compensation plans, with respect to the options estimated fair value, based on the Company's stock price at the grant date:
For the years ended December 31, ------------------------------------- 2001 2000 1999 -------- -------- ------- (in thousands, except per share data) Net (loss) income before extraordinary item and stock-based compensation expense ($28,649) $ 79,492 $44,047 Stock-based compensation expense 2,748 1,187 1,510 -------- -------- ------- Pro forma net (loss) income, before extraordinary item (31,397) 78,305 42,537 Extraordinary item, net of taxes 0 2,653 0 -------- -------- ------- Pro forma net (loss) income ($31,397) $ 75,652 $42,537 ======== ======== ======= Pro forma net (loss) income per common share - basic Pro forma net (loss) income before extraordinary income ($ 1.22) $ 2.97 $ 1.64 Extraordinary item, net of tax benefit 0.00 (0.10) 0.00 -------- -------- ------- Pro forma net (loss) income per share - basic ($ 1.22) $ 2.87 $ 1.64 ======== ======== ======= Pro forma net (loss) income per common share - diluted Pro forma net (loss) income before extraordinary income ($ 1.22) $ 2.85 $ 1.62 Extraordinary item, net of tax benefit 0.00 (0.10) 0.00 -------- -------- ------- Pro forma net (loss) income per share - diluted ($ 1.22) $ 2.75 $ 1.62 ======== ======== ======= Number of shares - basic 25,814 26,335 25,966 Number of shares - diluted 25,814 27,456 26,329
Note 18 - Employee Benefit Plans The Company offers a 401(k) Investment Plan (the "401(k) Plan") which is subject to the provisions of the Employee Retirement Income Security Act of 1994. The 401(k) Plan is available to all employees of the Company (except those covered by collective bargaining agreements) who have completed a minimum of 500 hours of service. Employees may contribute up to 18% of pretax income (subject to the legal limitation of $10,500 for 2001). The Company offers discretionary matching, and for the years ended December 31, 2001, 2000 and 1999 matching contributions to the 401(k) Plan totaled $567,000, $1,027,000 and $1,437,000, respectively. Prior to the sale of the Hollywood Park Race Track in September of 1999, the Company contributed to several collectively-bargained multi-employer pension and retirement plans, which were administered by unions, and to a pension plan covering non-union employees, administered by an association of race track owners. Amounts charged to pension cost and contributed to these plans for the year ended December 31, 1999 totaled $948,000. Contributions to the collectively-bargained plans were determined in accordance with the provisions of negotiated labor contracts and generally based upon the number of employee hours or days worked. Contributions to the non-union plans were based on the covered employees' compensation. It is 86 management's belief that no withdrawal liability existed for these plans at the time of the sale of the race track. On January 1, 2000, the Company instituted a nonqualified Executive Deferred Compensation Plan (the "Deferred Plan") to permit certain key employees to defer receipt of current compensation in order to provide retirement benefits on behalf of such employees. The Company does not make matching contributions to the Deferred Plan. As a nonqualified plan (as defined by the Internal Revenue Code), all deferred compensation remains within the general assets of the Company and would be subject to claims of general creditors in the unlikely case of insolvency. The Company has the right to amend, modify or terminate the Deferred Plan. Note 19 - Related Party Transactions In June 1998, the Company and R.D. Hubbard Enterprises, Inc. ("Hubbard Enterprises"), which is wholly owned by Mr. Hubbard, (the Company's Chairman) entered into a new Aircraft Time Sharing Agreement. A prior agreement was entered into in November 1993. The June 1998 Aircraft Time Sharing Agreement is identical to the prior agreement in all respects, except for the type of aircraft covered by the agreement. The June 1998 Aircraft Time Sharing Agreement expired on December 31, 1999, and now automatically renews each month unless written notice of termination is given by either party at least two weeks before a renewal date. The Company reimburses Hubbard Enterprises for expenses incurred as a result of the Company's use of the aircraft, which totaled approximately $55,000 in 2001, $97,000 in 2000 and $176,000 in 1999. Timothy J. Parrott (a director and member of the Executive Committee, and, as of October 2000, a member of the Audit Committee of the Company's Board of Directors) purchased 270,738 shares of Boomtown common stock in connection with Boomtown's 1988 acquisition of Boomtown Hotel & Casino, Inc. (which operates Boomtown Reno). Mr. Parrott paid an aggregate purchase price for the common stock of $222,000, of which $1,000 was paid in cash and $221,000 was paid by a promissory note secured by a pledge to Boomtown of all of the shares owned by Mr. Parrott. As of October 31, 1998, Mr. Parrott resigned his position as Chairman of Boomtown, and the Company retained him as a consultant to provide services relating to gaming and other business issues. For such services, Mr. Parrott was retained for a three-year period, which period expired in October 2001, with an annual retainer of $350,000 with health and disability benefits equivalent to those he received as Chairman of Boomtown. Mr. Parrott's $221,000 note was forgiven in three equal parts on each anniversary of the consulting agreement. Marlin Torguson, who beneficially owned approximately 21.5% of the then outstanding common shares of Casino Magic, agreed, in connection with the Casino Magic acquisition, to vote his Casino Magic shares in favor of the acquisition by the Company. In addition, Mr. Torguson agreed to continue to serve as an employee of Casino Magic for three years following the acquisition, and during such three year period, not to compete with the Company or Casino Magic in any jurisdiction in which either the Company or Casino Magic operates. The Company appointed Mr. Torguson to its Board of Directors. The Company issued to Mr. Torguson 60,000 shares of the Company's common stock as compensation for his three-year service as an employee, and paid him $300,000 for each year, during the three-year period, which period expired in October 2001, for his non-compete agreement. In addition, the Company issued Mr. Torguson 30,000 options to acquire the Company's common stock as of the October 15, 1998, acquisition of Casino Magic, priced at the closing price of the Company's common stock on that date. All of the foregoing payments have been made to Mr. Torguson as of December 31, 2001. Note 20 - Commitments and Contingencies Employment and Severance Agreement The Company has an employment agreement with one officer, which grants the employee the right to receive his annual salary for up to the balance of the contract period, plus extension of certain benefits and the immediate vesting of certain stock options, if the employee terminates the contract for good reason (as defined in the employment agreement) or if the Company terminates the employee without cause (as defined in the employment agreement). In the event of a change in control (as defined in the employment agreement), the employee is entitled to receive one full year's salary 87 plus the maximum bonus payable, plus extension of certain benefits and the immediate vesting of all stock options. At December 31, 2001, the maximum contingent liability for salary and incentive compensation under this agreement was approximately $600,000. Legal Astoria Entertainment Litigation In November 1998, Astoria Entertainment, -------------------------------- Inc. filed a complaint in the United States District Court for the Eastern District of Louisiana. Astoria, an unsuccessful applicant for a license to operate a riverboat casino in Louisiana, attempted to assert a claim under the Racketeer Influenced and Corrupt Organizations ("RICO") statutes, seeking damages allegedly resulting from its failure to obtain a license. Astoria named several companies and individuals as defendants, including Hollywood Park, Inc. (the predecessor to Pinnacle Entertainment), Louisiana Gaming Enterprises, Inc. ("LGE"), a wholly owned subsidiary of the Company, and an employee of Boomtown, Inc. The Company believed the RICO claim against it had no merit and, indeed, Astoria voluntarily dismissed its RICO claim against Hollywood Park, LGE, and the Boomtown employee. On March 1, 2001, Astoria amended its complaint. Astoria's amended complaint added new legal claims, and named Boomtown, Inc. and LGE as defendants. Astoria claims that the defendants (i) conspired to corrupt the process for awarding licenses to operate riverboat casinos in Louisiana, (ii) succeeded in corrupting the process, (iii) violated federal and Louisiana antitrust laws, and (iv) violated the Louisiana Unfair Trade Practices Act. The amended complaint asserts that Astoria would have obtained a license to operate a riverboat casino in Louisiana, but for these alleged improper acts. On August 21, 2001, the court dismissed Astoria's federal claims with prejudice and its state claims without prejudice. On September 21, 2001, Astoria appealed those dismissals to the U.S. Court of Appeals for the Fifth Circuit. On October 3, 2001, Boomtown, Inc. and LGE filed a cross-appeal on the grounds that the state claims should have been dismissed with prejudice. Astoria subsequently voluntarily dismissed its appeal. Boomtown Inc.'s and LGE's appeal is currently pending before the court. Poulos Lawsuit A class action lawsuit was filed on April 26, 1994, in the United - -------------- States District Court, Middle District of Florida (the "Poulos Lawsuit"), naming as defendants 41 manufacturers, distributors and casino operators of video poker and electronic slot machines, including Casino Magic. The lawsuit alleges that the defendants have engaged in a course of fraudulent and misleading conduct intended to induce people to play such games based on false beliefs concerning the operation of the gaming machines and the extent to which there is an opportunity to win. The suit alleges violations of the Racketeer Influenced and Corrupt Organization Act ("RICO"), as well as claims of common law fraud, unjust enrichment and negligent misrepresentation, and seeks damages in excess of $6 billion. On May 10, 1994, a second class action lawsuit was filed in the United States District Court, Middle District of Florida (the "Ahern Lawsuit"), naming as defendants the same defendants who were named in the Poulos Lawsuit and adding as defendants the owners of certain casino operations in Puerto Rico and the Bahamas, who were not named as defendants in the Poulos Lawsuit. The claims in the Ahern Lawsuit are identical to the claims in the Poulos Lawsuit. Because of the similarity of parties and claims, the Poulos Lawsuit and Ahern Lawsuit were consolidated into one case file (the "Poulos/Ahern Lawsuit") in the United States District Court, Middle District of Florida. On December 9, 1994 a motion by the defendants for change of venue was granted, transferring the case to the United States District Court for the District of Nevada, in Las Vegas. In an order dated April 17, 1996, the court granted motions to dismiss filed by Casino Magic and other defendants and dismissed the Complaint without prejudice. The plaintiffs then filed an amended Complaint on May 31, 1996 seeking damages against Casino Magic and other defendants in excess of $1 billion and punitive damages for violations of RICO and for state common law claims for fraud, unjust enrichment and negligent misrepresentation. At a December 13, 1996 status conference, the Poulos/Ahern Lawsuit was consolidated with two other class action lawsuits (one on behalf of a smaller, more defined class of plaintiffs and one against additional defendants) involving allegations substantially identical to those in the Poulos/Ahern Lawsuit (collectively, the "Consolidated Lawsuits") and all pending motions in the Consolidated Lawsuits were deemed withdrawn without prejudice. The plaintiffs in the Consolidated Lawsuits filed a consolidated amended complaint on February 14, 1997, which the defendants moved to dismiss. On December 19, 1997, the court granted the defendants' motion to dismiss certain allegations in the RICO claim, but denied the motion as to the remainder 88 of such claim; granted the defendants' motion to strike certain parts of the consolidated amended complaint; denied the defendants' remaining motions to dismiss and to stay or abstain; and permitted the plaintiffs to substitute one of the class representatives. On January 9, 1998, the plaintiffs filed a second consolidated amended complaint containing claims nearly identical to those in the previously dismissed complaints. The defendants answered, denying the substantive allegations of the second consolidated amended complaint. On March 19, 1998, the magistrate judge granted the defendants' motion to bifurcate discovery into "class" and "merits" phases. "Class" discovery was completed on July 17, 1998. The magistrate judge recommended denial of the plaintiffs' motion to compel further discovery from the defendants, and the court affirmed in part. "Merits" discovery is stayed until the court decides the motion for class certification filed by the plaintiffs on March 18, 1998, which motion the defendants opposed. In January 2001, the plaintiffs filed a supplement to their motion for class certification. On March 29, 2001, defendants filed their response to plaintiffs' supplement to motion for class certification. The hearing on plaintiffs' Motion for Class Certification was held November 15, 2001. The Court has not issued a ruling on this motion. The claims are not covered under the Company's insurance policies. While the Company cannot predict the outcome of this litigation, management believes that the claims are without merit and does not expect that the lawsuit will have a materially adverse effect on the financial condition or results of operations of the Company. Casino America Litigation On or about September 6, 1996, Casino America, Inc. - ------------------------- commenced litigation in the Chancery Court of Harrison County, Mississippi, Second Judicial District, against Casino Magic Corp., and James Edward Ernst, its then Chief Executive Officer. In the complaint, as amended, the plaintiff claims, among other things, that the defendants (i) breached the terms of an agreement they had with the plaintiff; (ii) tortiously interfered with certain of the plaintiff's contracts and business relations; and (iii) breached covenants of good faith and fair dealing they allegedly owed to the plaintiff, and seeks compensatory damages in an amount to be proven at trial as well as punitive damages. On or about October 8, 1996, the defendants interposed an answer, denying the allegations contained in the Complaint. On June 26, 1998, defendants filed a motion for summary judgment, as well as a motion for partial summary judgment on damages issues. Thereafter, the plaintiff, in July of 1998, filed a motion to reopen discovery. The court granted the plaintiff's motion, in part, allowing the parties to conduct additional limited discovery. On November 30, 1999, the matter was transferred to the Circuit Court for the Second Judicial District for Harrison County, Mississippi. On October 19, 2001, the Court denied defendant's motion for summary judgment. On October 22, 2001, the Court granted defendant's motion for partial summary judgment, in part, requiring plaintiff to modify its method of calculating damages. On October 24, 2001, the defendants were granted a continuance in order to allow additional discovery to be conducted on plaintiff's revised damage claims. Trial has been set for November 12, 2002. The Company's insurer has essentially denied coverage of the claim against Mr. Ernst under the Company's directors and officers insurance policy, but has reserved its right to review the matter as to tortious interference at or following trial. The Company believes that the insurer should not be permitted to deny coverage, although no assurances can be given that the insurer will change its position. While the Company cannot predict the outcome of this action, management believes the lawsuit will not have a material adverse effect and intends to vigorously defend this action. Skrmetta Lawsuit A suit was filed on August 14, 1998 in the Circuit Court of - ---------------- Harrison County, Mississippi by the ground lessor of property underlying the Boomtown Biloxi land based improvements in Biloxi, Mississippi (the "Project"). The lawsuit alleged that the plaintiff agreed to exchange the first two years' ground rentals for an equity position in the Project based upon defendants' purported assurances that a hotel would be constructed as a component of the Project. Plaintiff sought recovery in excess of $4,000,000 plus punitive damages. At trial of the matter in March 2000, the judge granted the Company's motion to dismiss the case. On April 26, 2000, plaintiff appealed the court's dismissal to the Mississippi Supreme Court. On February 7, 2002, the Mississippi Supreme Court affirmed the judgment of the lower court. Casino Magic Biloxi Patron Shooting Incident On January 13, 2001, three Casino - -------------------------------------------- Magic Biloxi patrons were shot, sustaining serious injuries as a result of a shooting incident involving another Casino Magic Biloxi patron, who then killed himself. Several other patrons sustained minor injuries while attempting to exit the casino. On August 1, 2001, two of the casino patrons shot during the January 13, 2001 incident filed a complaint in the 89 Circuit Court of Harrison County, Mississippi, Second Judicial District. The complaint alleges that Biloxi Casino Corp. failed to exercise reasonable care to keep its patrons safe from foreseeable criminal acts of third persons and seeks unspecified compensatory and punitive damages. The Plaintiffs filed an amended complaint on August 17, 2001. The amended complaint added an allegation that Biloxi Casino Corp. violated a Mississippi statute by serving alcoholic beverages to the perpetrator who was allegedly visibly intoxicated and that Biloxi Casino Corp.'s violation of the statute was the proximate cause of or contributing cause to Plaintiffs' injuries. While the Company cannot predict the outcome of the litigation, the Company believes that Biloxi Casino Corp. is not liable for any damages arising from the incident and the Company, together with its applicable insurers, intends to vigorously defend this lawsuit. Actions by Greek Authorities In 1995, a Dutch subsidiary of Casino Magic Corp., - ---------------------------- Casino Magic Europe B.V. ("CME"), performed management services for Porto Carras Casino, S.A. ("PCC"), a joint venture in which CME had a minority interest. Effective December 31, 1995, CME with the approval of PCC, assigned its interests and obligations under the PCC management agreement to a Greek subsidiary, Casino Magic Hellas S.A. "(Hellas"). Hellas issued invoices to PCC for management fees which accrued during 1995, but had not been billed by CME. In September 1996, local Greek tax authorities in Thessaloniki assessed a penalty of approximately $3,500,000 against Hellas, and an equal amount against PCC, arising out of the presentation and payment of the invoices. The Thessaloniki tax authorities asserted that the Hellas invoices were fictitious, representing an effort to reduce the taxable income of PCC. PCC and Hellas each appealed their respective assessments. The assessment of the fine against PCC was overturned by the Administrative court of Thessaloniki on December 11, 2000. The court determined that the actions taken by Hellas and PCC were not fictitious but constituted a legitimate business transaction and accordingly overturned the assessment of the fine. The taxing authorities may appeal the court's decision. Hellas's appeal was dismissed for technical procedural failures and has not been reinstated; presumably, however, the rationale of the court in the PCC fine matter would apply equally to the Hellas fine matter. Under Greek law, shareholders are not liable for the liabilities of a Greek company in which they hold shares, even if the entity is later liquidated or dissolved, and assessments such as these generally are treated as liabilities of the company. Additionally, all of PCC's stock was sold to an unrelated company in December of 1996, and the buyer assumed all of PCC's liabilities. Therefore, management does not expect that this matter will have a materially adverse effect on the financial condition or results of operations of the Company. In June 2000, Greek authorities issued a warrant to appear at a September 29, 2000 criminal proceeding to Marlin Torguson (a member of the Company's board of directors and Chairman of the Board of Casino Magic since its inception) and Robert Callaway (former Associate General Counsel for the Company and, prior to its acquisition by the Company, Casino Magic's General Counsel). They were charged under Greek law, and convicted in absentia, as being culpable criminally for corporate misconduct based solely on their status as alleged executive board members of PCC. The Company is advised that they are not, and have never been, managing (active) executive directors of PCC. Accordingly, the Company believes that they were improperly named in the proceedings. The defendants have a right of appeal for a de novo trial under Greek law. Upon being notified of the convictions, the Company's compliance committee suspended Mr. Callaway and Mr. Torguson from their respective duties, other than to assist in the investigation of actions described above, and sought the resignation of Mr. Torguson from the Company board of directors. At the time that the Greek court overturned the PCC fine, and based upon (1) the determination of the court that the Hellas/PCC transaction was a legitimate transaction and (2) the fact that neither Mr. Torguson nor Mr. Callaway were properly named, the compliance committee reinstated Messsrs. Torguson and Callaway. In February 2001, Mr. Callaway left the employ of the Company. 90 During the first quarter of 2001, the Greek taxing authorities appealed the December 11, 2000 decision by the Administrative Court of Thessaloniki overturning the assessment of the fine against PCC. No hearing date on such appeal has been set. On March 30, 2001, appeals on behalf of Marlin Torguson and Robert Callaway were filed. The hearing before the three-member Court of Misdemeanors of Thessaloniki has been set for October 24, 2002. The Company has been advised that the resolution of the related civil penalties may sometimes resolve criminal issues in Greece. The Company is actively working to resolve the civil and criminal actions related to this matter. Other The Company is party to a number of other pending legal proceedings, - ----- though management does not expect that the outcome of such proceedings, either individually or in the aggregate, will have a material effect on the Company's financial results. Note 21 - Unaudited Quarterly Information; Supplementary Financial Information The following is a summary of unaudited quarterly financial data for the years ended December 31, 2001 and 2000:
2001 -------------------------------------------- Dec.31, Sept.30, June.30, Mar.31, --------- -------- -------- -------- (in thousands, except per share data) Revenues $ 123,767 $139,264 $131,603 $134,007 Loss (gain) on asset impairment/disposition, net $ 23,530 $ 81 ($581) $ 0 Pre-opening costs, Belterra Casino Resort $ 0 $ 0 $ 412 $ 198 Terminated merger $ 0 $ 0 ($464) $ 0 Operating (loss) income ($22,879) $ 7,390 $ 2,621 $ 7,145 Net (loss) income ($22,244) $ 1,003 ($5,287) ($2,121) ========= ======== ======== ======== Per Share Data Net (loss) income per share - basic & diluted (a) ($0.87) $ 0.04 ($0.20) ($0.08) ========= ======== ======== ========
2000 ----------------------------------------------- Dec.31, Sept.30, June.30, Mar.31, -------- --------- --------- --------- (in thousands, except per share data) Revenues $123,144 $ 141,029 $ 158,906 $ 161,543 Loss (gain) on asset impairment/disposition, net $ 566 ($59,941) ($35,587) ($23,854) Pre-opening costs, Belterra Casino Resort $ 1,721 $ 7,853 $ 3,713 $ 1,743 Terminated merger $ 724 $ 2,878 $ 1,500 $ 625 Operating (loss) income ($1,214) $ 71,319 $ 54,768 $ 47,031 Net (loss) income before extraordinary item ($6,141) $ 37,489 $ 26,232 $ 21,912 Extraordinary item, net of taxes 0 2,653 0 0 -------- -------- --------- --------- Net (loss) income ($6,141) $ 34,836 $ 26,232 $ 21,912 ======== ======== ========= ========= Net (loss) income per common share - basic (a) Net (loss) income before extraordinary item ($0.23) $ 1.42 $ 1.00 $ 0.83 Extraordinary item, net of tax benefit 0.00 (0.10) 0.00 0.00 -------- -------- --------- --------- Net (loss) income per share - basic ($0.23) $ 1.32 $ 1.00 $ 0.83 ======== ======== ========= ========= Net income per common share - diluted (a) Net (loss) income before extraordinary item ($0.23) $ 1.37 $ 0.96 $ 0.80 Extraordinary item, net of tax benefit 0.00 (0.10) 0.00 0.00 -------- --------- --------- --------- Net (loss) income per share - diluted ($0.23) $ 1.27 $ 0.96 $ 0.80 ======== ========= ========= =========
(a) Net (loss) income per share calculations for each quarter are based on the weighted average number of shares outstanding during the respective periods; accordingly, the sum of the quarters may not equal the full year (loss) income per share. 91 Below are the material unusual and infrequent occurring items that impacted the 2001 and 2000 quarterly financial results: . In December 2001, the Company wrote down certain assets, including a card club in Compton, California, a riverboat casino in Harvey, Louisiana and a breakwater reef in Biloxi, Mississippi, and accordingly recorded asset impairment charges of $23,530,000 (see Note 4). . In June 2001, the Company received an early pay-off of the promissory note related to the HP Yakama operations and payment for the early termination of the Master Lease and Sublease, and after deducting for cash participation receivables through June 30, 2001, and certain closing costs, the Company's pre-tax gain from the transaction was approximately $639,000 (see Note 6). . In June 2001, the Company opened the Tom Fazio-designed championship golf course at Belterra Casino Resort, and in October 2000, the Company opened the Belterra Casino Resort. Pre-opening costs associated with the completion of the golf course in 2001 and the development and construction of the resort in 2000 were $610,000 and $15,030,000 for the years ended December 31, 2001 and 2000, respectively. . In August 2000, the Company completed the sale of two of its casinos in Mississippi for $195,000,000 in cash and an after-tax gain of $35,538,000, in June 2000, the Company completed the sale of Turf Paradise for $53,000,000 in cash and an after-tax gain of $21,262,000, and in March 2000, the Company completed the sale of 42 acres of surplus land for $24,200,000 in cash and an after-tax gain of $15,322,000 (see Note 11). . In August 2000, the Company redeemed all of the outstanding Casino Magic 13% Notes at a redemption price of 106.5%. In connection with the redemption, the Company recorded an extraordinary loss of $2,653,000, which amount represents the payment of the redemption premium and the write-off of deferred finance and premium costs, net of the related income tax benefit (see Note 14). . In April 2000, the Company entered into the Merger Agreement, which agreement was subsequently terminated in January 2001. In 2001, the Company recovered $464,000 of costs due to the settlement of the Purported Class Action Lawsuits (see Note 20) and, in 2000, the Company incurred costs of $5,727,000 in connection with the terminated merger (see Note 10). The Company does not expect to incur additional costs relating to the terminated merger. Note 22 - Fair Value of Financial Instruments Due to the short-term maturity of financial instruments classified as current assets and liabilities, the fair value approximates the carrying value. It is not practical to estimate the fair value of long term receivables and long-term debt instruments, other than the 9.25% Notes and 9.5% Notes, because there are no quoted market prices for transactions of a similar nature. Based on quoted market values at December 31, 2001, the fair values of the 9.5% and 9.25% Notes are approximately $107,500,000 and 297,500,000, respectively, compared to book values as of December 31, 2001 of $125,000,000 and $350,000,000, respectively. 92 Note 23 - Consolidating Condensed Financial Information The Company's subsidiaries (excluding Casino Magic Argentina and certain non-material subsidiaries) have fully and unconditionally guaranteed the payment of all obligations under the 9.25% Notes and the 9.5% Notes. Separate financial statements and other disclosures regarding the subsidiary guarantors are not included herein because management has determined that such information is not material to investors. In lieu thereof, the Company includes the following: Pinnacle Entertainment, Inc. Consolidating Condensed Financial Information As of and for the year ended December 31, 2001
(b) (a) Wholly Wholly Owned Consolidating Pinnacle Pinnacle Owned Non- and Entertainment, Entertainment, Guarantor Guarantor Eliminating Inc. Inc. Subsidiaries Subsidiaries Entries Consolidated -------------- ------------ ------------ ------------- -------------- (in thousands) As of and for the year ended December 31, 2001 Balance Sheet - ------------- Current assets $ 140,407 $ 70,992 $ 7,425 $ 0 $ 218,824 Property, plant and equipment, net 21,753 552,633 1,913 0 576,299 Other non-current assets 20,796 57,631 4,949 40,850 124,226 Investment in subsidiaries 542,202 5,280 0 (547,482) 0 Inter-company 156,082 20,360 0 (176,442) 0 --------- --------- -------- --------- --------- $ 881,240 $ 706,896 $ 14,287 ($683,074) $ 919,349 ========= ========= ======== ========= ========= Current liabilities $ 34,816 $ 46,223 $ 2,615 $ 0 $ 83,654 Notes payable, long term 492,016 1,477 0 0 493,493 Other non-current liabilities 34,892 0 0 (12,206) 22,686 Inter-company 0 170,050 6,392 (176,442) 0 Equity 319,516 489,146 5,280 (494,426) 319,516 --------- --------- -------- --------- --------- $ 881,240 $ 706,896 $ 14,287 ($683,074) $ 919,349 ========= ========= ======== ========= ========= Statement of Operations - ----------------------- Revenues: Gaming $ 0 $ 423,487 $ 18,602 $ 0 $ 442,089 Food and beverage 0 29,524 1,428 0 30,952 Equity in subsidiaries (16,308) 4,622 0 11,686 0 Other 6,000 49,471 129 0 55,600 --------- --------- -------- --------- --------- (10,308) 507,104 20,159 11,686 528,641 --------- --------- -------- --------- --------- Expenses: Gaming 0 254,589 4,984 0 259,573 Food and beverage 0 37,665 1,134 0 38,799 Administrative and other 15,119 164,451 6,972 0 186,542 Depreciation and amortization 2,684 44,203 1,447 1,116 49,450 --------- --------- -------- --------- --------- 17,803 500,908 14,537 1,116 534,364 --------- --------- -------- --------- --------- Operating income (loss) (28,111) 6,196 5,622 10,570 (5,723) Interest expense (income), net 46,129 (984) (313) 0 44,832 --------- --------- -------- --------- --------- Income (loss) before management fee, intercompany interest expense (income) and taxes (74,240) 7,180 5,935 10,570 (50,555) Management fee & intercompany interest expense (income) (23,488) 23,488 0 0 0 Income tax expense (23,219) 0 1,313 0 (21,906) --------- --------- -------- --------- --------- Net income (loss) ($27,533) ($16,308) $ 4,622 $ 10,570 ($28,649) ========= ========= ======== ========= ========= Statement of Cash Flows - ----------------------- Net cash provided by (used in) operating activities ($11,862) $ 48,297 ($1,486) $ 1,116 $ 36,065 Net cash provided by (used in) investing activities (264) (41,461) (1,579) 0 (43,304) Net cash provided by (used in) financing activities (11,591) (851) 0 0 (12,442)
93 Pinnacle Entertainment, Inc. Consolidating Condensed Financial Information As of and for the year ended December 31, 2000
(b) (a) Wholly Wholly Owned Consolidating Pinnacle Pinnacle Owned Non- and Entertainment, Entertainment, Guarantor Guarantor Eliminating Inc. Inc. Subsidiaries Subsidiaries Entries Consolidated -------------- ------------ -------------- ------------- -------------- (in thousands) As of and for the year ended December 31, 2000 Balance Sheet - ------------- Current assets $ 146,941 $ 67,931 $ 9,985 $ 0 $ 224,857 Property, plant and equipment, net 23,969 567,714 2,035 0 593,718 Other non-current assets 24,309 70,927 5,693 41,971 142,900 Investment in subsidiaries 560,204 6,539 0 (566,743) 0 Inter-company 162,213 100,074 0 (262,287) 0 --------- --------- ------- --------- --------- $ 917,636 $ 813,185 $17,713 ($787,059) $ 961,475 ========= ========= ======= ========= ========= Current liabilities $ 43,115 $ 50,683 ($423) $ 0 $ 93,375 Notes payable, long term 494,729 2,433 0 0 497,162 Other non-current liabilities 18,615 (2,447) 5,800 (12,206) 9,762 Inter-company 0 256,490 5,797 (262,287) 0 Equity 361,177 506,026 6,539 (512,566) 361,176 --------- --------- ------- --------- --------- $ 917,636 $ 813,185 $17,713 ($787,059) $ 961,475 ========= ========= ======= ========= ========= Statement of Operations - ----------------------- Revenues: Gaming $ 0 $ 441,503 $20,398 $ 0 $ 461,901 Food and beverage 1,056 29,300 1,564 0 31,920 Racing 9,452 0 0 0 9,452 Equity in subsidiaries 63,703 5,150 0 (68,853) 0 Other 6,157 53,565 130 0 59,852 --------- --------- ------- --------- --------- 80,368 529,518 22,092 (68,853) 563,125 --------- --------- ------- --------- --------- Expenses: Gaming 0 252,565 5,781 0 258,346 Food and beverage 892 32,952 1,336 0 35,180 Racing 4,133 0 0 0 4,133 Administrative and other 24,351 135,928 5,997 0 166,276 (Gain) loss on disposition of assets (119,718) 902 0 0 (118,816) Depreciation and amortization 3,336 39,798 1,573 1,395 46,102 --------- --------- ------- --------- --------- (87,006) 462,145 14,687 1,395 391,221 --------- --------- ------- --------- --------- Operating income (loss) 167,374 67,373 7,405 (70,248) 171,904 Interest expense (income), net 39,279 1,017 (280) 0 40,016 --------- --------- ------- --------- --------- Income (loss) before taxes and extraordinary item 128,095 66,356 7,685 (70,248) 131,888 Income tax expense 49,861 0 2,535 0 52,396 --------- --------- ------- --------- --------- Net income (loss) before extraordinary item 78,234 66,356 5,150 (70,248) 79,492 ------- --------- --------- Extraordinary item, net of income taxes 0 2,653 0 0 2,653 --------- --------- ------- --------- --------- Net income (loss) $ 78,234 $ 63,703 $ 5,150 ($ 70,248) $ 76,839 ========= ========= ======= ========= ========= Statement of Cash Flows - ----------------------- Net cash provided by (used in) operating activities ($333,857) $ 303,312 $ 3,757 $ 1,304 ($ 25,484) Net cash provided by (used in) investing activities 388,466 (194,008) (1,181) 0 193,277 Net cash provided by (used in) financing activities (5,119) (113,168) 0 0 (118,287)
94 Pinnacle Entertainment, Inc. Consolidating Condensed Financial Information As of and for the year ended December 31, 1999
(b) (a) Wholly Wholly Owned Consolidating Pinnacle Pinnacle Owned Non- and Entertainment, Entertainment, Guarantor Guarantor Eliminating Inc. Inc. Subsidiaries Subsidiaries Entries Consolidated -------------- ------------ -------------- ------------- -------------- (in thousands) As of and for the year ended December 31, 1999 Balance Sheet - ------------- Current assets $220,216 $188,330 $ 28,928 $ 0 $ 437,474 Property, plant and equipment, net 36,671 311,165 89,879 0 437,715 Other non-current assets 28,369 40,788 44,599 56,463 170,219 Investment in subsidiaries 340,840 86,215 0 (427,055) 0 Inter-company 239,469 173,002 31,493 (443,964) 0 -------- -------- -------- ---------- ---------- $865,565 $799,500 $194,899 ($814,556) $1,045,408 ======== ======== ======== ========== ========== Current liabilities $ 75,933 $ 52,159 $ 16,916 $ 0 $ 145,008 Notes payable, long term 502,421 3,393 112,884 0 618,698 Other non-current liabilities (7,165) 83 20,114 (12,206) 826 Inter-company 13,500 406,437 24,031 (443,968) 0 Equity 280,876 337,428 20,954 (358,382) 280,876 -------- -------- -------- ---------- ---------- $865,565 $799,500 $194,899 ($814,556) $1,045,408 ======== ======== ======== ========== ========== Statement of Operations - ----------------------- Revenues: Gaming $ 33,638 $356,833 $146,190 $ 0 $ 536,661 Racing 39,714 15,495 0 0 55,209 Food and beverage 8,073 27,823 3,921 0 39,817 Equity in subsidiaries 78,679 42,974 0 (121,653) 0 Other 6,661 44,324 3,320 0 54,305 -------- -------- -------- ---------- ---------- 166,765 487,449 153,431 (121,653) 685,992 -------- -------- -------- ---------- ---------- Expenses: Gaming 18,241 188,434 81,968 0 288,643 Racing 15,843 6,851 0 0 22,694 Food and beverage 11,060 31,237 4,261 0 46,558 Administrative and other 34,124 114,633 25,273 0 174,030 (Gain) loss on disposition of assets (42,828) 767 0 0 (42,061) Depreciation and amortization 5,295 35,480 9,664 1,485 51,924 -------- -------- -------- ---------- ---------- 41,735 377,402 121,166 1,485 541,788 -------- -------- -------- ---------- ---------- Operating income (loss) 125,030 110,047 32,265 (123,138) 144,204 Interest expense, net 41,030 (1,460) 17,974 0 57,544 -------- -------- -------- ---------- ---------- Income (loss) before minority interests and taxes 84,000 111,507 14,291 (123,138) 86,660 Minority interests 0 1,687 0 0 1,687 Income tax expense 38,469 10 2,447 0 40,926 -------- -------- -------- ---------- ---------- Net income (loss) $ 45,531 $109,810 $ 11,844 ($123,138) $ 44,047 ======== ======== ======== ========== ========== Statement of Cash Flows - ----------------------- Net cash provided by (used in) operating activities $ 592 $ 56,861 $ 19,632 ($ 1,762) $ 75,323 Net cash provided by (used in) investing activities 897 (49,100) (2,860) 0 (51,063) Net cash provided by (used in) financing activities 66,941 (3,149) (8,924) 0 54,868
(a) The following subsidiaries are treated as guarantors of both the 9.5% Notes and 9.25% Notes for all periods presented: Turf Paradise, Inc. (through June 13, 2000), Hollywood Park Food Services, Inc. (through September 10, 1999), Hollywood Park Fall Operating Company (through September 10, 1999) and, with respect to the 9.25% Notes, Hollywood Park Operating Company (through September 10, 1999) (it was a co-obligor on the 9.5% Notes through September 10, 1999), Belterra Resorts LLC, Boomtown, Inc., Boomtown Hotel & Casino, Inc., Bay View Yacht Club, Inc. (through August 8, 2000), Louisiana - I Gaming, Louisiana Gaming Enterprises, Inc., Boomtown Hoosier, Inc., HP Casino, Inc., HP Yakama, Inc., HP Consulting, Inc. and HP/Compton, Inc. The following subsidiaries were treated as guarantors for periods beginning on October 15, 1998, when the Casino Magic Merger was consummated: Casino Magic Corp., Mardi Gras Casino Corp. (through August 8, 2000), Biloxi Casino Corp., Bay St. Louis Casino Corp., Casino Magic Finance Corp., Casino Magic American Corp., and Casino One Corporation. Crystal Park Hotel and Casino Development Company, LLC and Mississippi - I Gaming L.P. (through August 8, 2000) were treated as wholly owned guarantors for periods beginning in January 1998 and October 1998, respectively, when the Company acquired the outstanding minority interests therein and they became wholly owned subsidiaries. Jefferson Casino Corporation and Casino Magic of Louisiana, Corp. were treated as wholly owned guarantors upon the redemption of the Casino Magic 13% Notes in August 2000 (see Note 14). 95 (b) Prior to the redemption of the Casino Magic 13% Notes on August 15, 2000, (see Note 14), Jefferson Casino Corporation and Casino Magic of Louisiana, Corp. were wholly owned non-guarantors of the 9.5% and 9.25% Notes. Upon redemption of the Casino Magic 13% Notes, Jefferson Casino Corporation and Casino Magic of Louisiana, Corporation became guarantors of the 9.5% and 9.25% Notes (see note (a) above). Prior to October 1999, Casino Magic Neuquen S.A. and its subsidiary Casino Magic Support Services were non-wholly owned non-guarantors to the 9.5% and 9.25% Notes. In October 1999, Casino Magic Neuquen S.A. and its subsidiary Casino Magic Support Services became wholly owned subsidiaries of the Company, but remain non-guarantors of the 9.5% and 9.25% Notes. 96 Pinnacle Entertainment, Inc. Selected Financial Data by Property
For the year For the three months ended, ended ---------------------------------------------------- ------------ December 31, September 30, June 30, March 31, December 31, 2001 2001 2001 2001 2001 ------------ ------------- --------- --------- ------------ (unaudited) (audited) ---------------------------------------------------- ------------ (in thousands, except per share data) Revenues: Belterra Casino Resort $ 26,479 $ 28,903 $ 25,994 $ 26,195 $ 107,571 Boomtown Reno 19,483 26,868 24,833 19,112 90,296 Boomtown New Orleans 26,116 27,005 24,839 25,742 103,702 Casino Magic Biloxi 20,497 21,735 21,548 22,715 86,495 Casino Magic Bossier City 25,649 27,354 25,431 32,528 110,962 Casino Magic Argentina 3,983 5,599 5,384 5,193 20,159 Card Clubs and Other 1,560 1,800 3,574 2,522 9,456 Pinnacle Entertainment, Inc. - Corporate 0 0 0 0 0 --------- -------- --------- --------- --------- 123,767 139,264 131,603 134,007 528,641 --------- -------- --------- --------- --------- Expenses: Belterra Casino Resort 28,922 29,806 28,196 25,812 112,736 Boomtown Reno 15,689 19,933 18,745 16,745 71,112 Boomtown New Orleans 19,309 19,974 18,518 18,336 76,137 Casino Magic Biloxi 17,153 17,721 17,369 18,284 70,527 Casino Magic Bossier City 23,312 23,616 27,180 27,457 101,565 Casino Magic Argentina 3,310 3,427 3,169 3,184 13,090 Card Clubs and Other 78 66 45 158 347 Pinnacle Entertainment, Inc. - Corporate 3,209 4,157 4,258 4,600 16,224 --------- -------- --------- --------- --------- 110,982 118,700 117,480 114,576 461,738 --------- -------- --------- --------- --------- Non-recurring income (expenses): Gain (loss) on disposition of assets, net 0 (81) 581 0 500 Impairment write-down of assests (23,530) 0 0 0 (23,530) Pre-opening costs, Belterra Casino Resort 0 0 (412) (198) (610) Terminated merger costs 0 0 464 0 464 --------- -------- --------- --------- --------- (23,530) (81) 633 (198) (23,176) --------- -------- --------- --------- --------- Depreciation and amortization: Belterra Casino Resort 2,993 3,840 3,075 2,990 12,898 Boomtown Reno 1,956 1,941 1,940 1,997 7,834 Boomtown New Orleans 1,572 1,580 1,447 1,413 6,012 Casino Magic Biloxi 1,824 1,640 1,670 1,665 6,799 Casino Magic Bossier City 1,944 2,210 2,134 2,122 8,410 Casino Magic Argentina 400 344 344 359 1,447 Card Clubs and Other 878 968 953 968 3,767 Pinnacle Entertainment, Inc. - Corporate 567 570 572 574 2,283 --------- -------- --------- --------- --------- 12,134 13,093 12,135 12,088 49,450 --------- -------- --------- --------- --------- Operating (loss) income (22,879) 7,390 2,621 7,145 (5,723) Interest income (761) (984) (1,428) (1,848) (5,021) Interest expense, net of interest income 12,639 12,596 12,311 12,307 49,853 --------- -------- --------- --------- --------- Income (loss) before income taxes (34,757) (4,222) (8,262) (3,314) (50,555) Income tax (benefit) expense (12,513) (5,225) (2,975) (1,193) (21,906) --------- -------- --------- --------- --------- Net (loss) income ($22,244) $ 1,003 ($ 5,287) ($2,121) ($28,649) ========= ======== ========= ========= ========= Net (loss) income per common share : Net (loss) income - basic ($0.87) $ 0.04 ($0.20) ($0.08) ($1.11) Net (loss) income - diluted ($0.87) $ 0.04 ($0.20) ($0.08) ($1.11) Number of shares - basic Number of shares - diluted 25,444 25,542 25,996 26,288 25,814 25,444 25,623 25,996 26,288 25,814
97 Pinnacle Entertainment, Inc. Exhibit Index Exhibit Description - ------- ----------- 10.3 Amended and Restated Disposition and Development Agreement of Purchase and Sale, and Lease with Option to Purchase, dated August 2, 1995, by and between The Community Redevelopment Agency of the City of Compton and Compton Entertainment, Inc. 10.4 Guaranty, dated July 31, 1995, by Hollywood Park, Inc., in favor of the Community Redevelopment Agency of the City of Compton. 10.5 Assignment, Assumption and Consent Agreement, by and among HP/Compton, Inc., and Crystal Park Hotel and Casino Development Company LLC, Hollywood Park, Inc. and The Community Redevelopment Agency of the City of Compton, dated July 18, 1996. 10.6 Operating Agreement for Crystal Park Hotel and Casino Development Company, LLC, a California Limited Liability Company, dated July 18, 1996, effective August 28, 1996. 10.36 Amendment No. 3 to Amended and Restated Reducing Revolving Loan Agreement, dated September 15, 2000. 10.37 Amendment No. 4 to Amended and Restated Reducing Revolving Loan Agreement, dated March 16, 2001. 10.54 Employment Agreement dated September 1, 2001, by and between Pinnacle Entertainment, Inc. and Wade Hundley. 10.55 First Amendment to the Pinnacle Entertainment, Inc. (formerly Hollywood Park, Inc.) Executive Deferred Compensation Plan dated March 15, 2000. 10.56 Second Amendment to the Pinnacle Entertainment, Inc. Executive Compensation Plan dated January 1, 2001. 10.57 Statement of Conditions to Riverboat Gaming License of PNK (Lake Charles), LLC dated November 20, 2001. 11.1 Statement re: Computation of Per Share Earnings 21.1 Subsidiaries of Pinnacle Entertainment, Inc. 23.1 Consent of Arthur Andersen LLP 99.1 Letter responsive to Temporary Note 3T to Article 3 of Regulation S-X 98 EX-10.3 3 dex103.txt DISPOSITION & DEVELOPMENT AGREEMENT (8/2/95) EXHIBIT 10.3 AMENDED AND RESTATED --------------------- DISPOSITION AND DEVELOPMENT AGREEMENT, AGREEMENT OF --------------------------------------------------- PURCHASE AND SALE, AND LEASE WITH OPTION TO PURCHASE ---------------------------------------------------- between THE COMMUNITY REDEVELOPMENT AGENCY OF THE CITY OF COMPTON, a public body, corporate and politic, and COMPTON ENTERTAINMENT, INC., a California corporation WALNUT INDUSTRIAL PARK REDEVELOPMENT PROJECT AMENDED AND RESTATED -------------------- DISPOSITION AND DEVELOPMENT AGREEMENT, AGREEMENT OF --------------------------------------------------- PURCHASE AND SALE, AND LEASE WITH OPTION TO PURCHASE ---------------------------------------------------- THIS AMENDED AND RESTATED DISPOSITION AND DEVELOPMENT AGREEMENT (this "DDA" or "Lease") is made as of this 4th day of April, 1995, by and between the COMMUNITY REDEVELOPMENT AGENCY OF THE CITY OF COMPTON, a public body corporate and politic ("Agency") and COMPTON ENTERTAINMENT, INC., a California corporation ("Redeveloper"). TABLE OF CONTENTS Page ---- RECITALS 1. Purchase and Sale of the Convention Center Parcel 2 2. Lease of the Hotel and Other Parcels 4 3. Title and Survey 5 4. Term 7 5. Rent 9 6. Rent Reduction/Credit 9 7. Additional Consideration 11 8. Taxes 11 9. Use and Compliance with Laws 12 10. Physical Condition of the Property 14 11. Construction by Redeveloper 17 12. Certificate of Completion 21 13. Utilities and Services 23 14. Maintenance 23 15. Alterations 24 16. Destruction 24 17. Insurance and Indemnity 27 18. Condemnation 33 19. Assignment, Subletting and Encumbering 36 20. Default 39 21. Agency's Entry on Property 47 22. Notices 48 23. Interest on Past-due Obligations 48 24. Attorneys' Fees 48 Page ---- 25. Estoppel Certificates 50 26. Surrender of Property 50 27. Form of Nondiscrimination and Nonsegregation Clauses; Local Hiring and Affirmative Action 50 28. Local Contractors 52 29. Expansion parcels 52 30. Option to Purchase 54 31. Holding Over 57 32. Force Majeure; Extension of Times of Performance 57 33. Sale or Transfer by Agency 58 34. Limitation on Recourse Against Agency 58 35. Redeveloper's Representations and Warranties 58 36. Agency's Representations and Warranties 60 37. Miscellaneous 61 (a) Governing Law 61 (b) Time of Essence 61 (c) Additional Rent 61 (d) Quiet Enjoyment 61 (e) Transfer of Agency's Interest 61 (f) Waiver 61 (g) Brokers 61 (h) Headings 62 (i) Inspection Of Books and Records 62 (j) Merger 62 (k) Gender; Number 62 (l) No Joint Venture 62 (m) Exhibits 62 (n) Entire Agreement; Modification 62 (o) Joint and Several Obligations 63 (p) Severability 63 (q) Consents of Agency 63 (r) Records 63 (s) Recordation of Memorandum of Lease With Option to Purchase 63 (t) Execution in Counterparts 63 EXHIBIT 1 LEGAL DESCRIPTIONS 1 EXHIBIT 2 SITE PLAN 1 EXHIBIT 3 SCHEDULE OF PERFORMANCE 1 EXHIBIT 4 CONDITIONS OF CONSTRUCTION 1 EXHIBIT 5 SCOPE OF DEVELOPMENT 1 RECITALS -1- A. The purpose of this DDA is to effectuate the Agency's Redevelopment Plan, as amended (the "Redevelopment Plan") for the Walnut Industrial Park Project Area (the "Project Area") in the City of Compton (the "City") by facilitating the development, rehabilitation and operation of all or some portion of an existing hotel structure (the "Hotel") and entertainment center (the "Entertainment Center") containing one or more restaurants and a card club (the "Card Club"), and parking (and which may contain a nightclub/sports lounge, gift shop, meeting facilities/theater, corporate business lounge, and assorted concession venues), on a parcel of real property of approximately 24.45 acres (the "Property") located within the Project Area. The Property is legally described in Exhibit 1 attached hereto, and is depicted on the Site Plan attached hereto as Exhibit 2. B. Agency is the owner of the Property. C. Redeveloper desires to purchase a portion of the Property and to lease the remainder of the Property for the purpose of developing and operating the Hotel and Entertainment Center thereon. D. Agency desires to lease the Property to Redeveloper in accordance with the terms and conditions set forth hereinbelow. E. The Property contains four elements: 1. A portion of the Property (the "Convention Center Parcel") currently improved with a convention center and parking structure, including the underlying land, all of which is subject to easements for access to, support of and parking for the Hotel Parcel. 2. A portion of the Property (the "Hotel Parcel") consisting of a parcel of air space which includes a nine (9) story hotel containing 290 guest rooms and ancillary areas such as lobbies, restaurant, kitchen, bars, commercial areas and the like. 3. A portion of the Property (the "Parking Parcels") will be improved with parking to support the Hotel and the Entertainment Center. 4. A portion of the Property consists of additional land (the "Expansion Parcels") upon which Redeveloper shall have the right to expand by construction of an additional casino or card club. The Hotel Parcel, the Parking Parcels and the Expansion Parcels are referred to herein collectively as the "Leasehold Parcels" or the "balance of the Property." F. This DDA consists of an agreement of purchase and sale of a portion of the Property, a lease of the balance of the Property to Redeveloper and, if Redeveloper complies with the terms thereof, an option to purchase the balance of the Property. -2- G. The parties hereto are parties to that certain Disposition and Development Agreement dated as of December 10, 1992, concerning real property adjacent to the Property (the "Prior DDA"). By this DDA, the parties shall amend and restate such Disposition and Development Agreement on the terms provided herein. H. Redeveloper has obtained a license (the "License") from the City of Compton ("City") to operate within the City of Compton a Card Club pursuant to Section 9-10 of the Compton Municipal Code, on the terms and conditions set forth in the City's Resolution No. 17,087. Such license has been extended and amended by City Resolution Nos. 17,617 and 17,831. More or less concurrently herewith, Redeveloper is applying for an amendment to the license to cover the entire Property so as to permit expansion of the Card Club. I. Redeveloper proposes to: (i) construct improvements to complete and rehabilitate the Hotel so that it can be operated, in whole or in part, as a full service hotel lodging facility, (ii) construct improvements to the Property so that the Entertainment Center, including the Card Club, can be operated therefrom, (iii) construct additional parking needed to support the Hotel and Entertainment Center, and (iv) subject to Section 29 hereof, within fifteen (15) years after the date hereof, construct, open and operate an expansion of the Card Club facility on the Expansion Parcels and/or other portions of the Property. Construction of such improvements and operation of the Hotel and Entertainment Center from the Property, and construction of the expansion facility on the Expansion Parcels are referred to herein as the "Project." J. The Project will assist in the elimination of blight in the Project Area, will provide additional jobs, and will substantially improve the economic and physical conditions in the Project Area in accordance with the purposes and goals of the Redevelopment Plan. NOW THEREFORE, the parties agree as follows: 1. Purchase and Sale of the Convention Center Parcel. (a) Redeveloper hereby agrees to purchase from Agency, and Agency agrees to sell to Redeveloper, the Convention Center Parcel, including the underlying land and parking structure, subject to easements of support and for parking for the benefit of the Hotel Parcel, on the terms and conditions set forth hereinbelow. (b) The purchase price shall be $2,000,000 cash, payable in full at closing. (c) Closing shall occur at such time as the contingencies set forth in Section 2(b) hereof have been satisfied, but in no case later than July 31, 1995; provided, however, if the closing has not occurred by July 31, 1995 due to the fact that the bonds described in Section 5 have not theretofore been defeased, then -3- the closing date may be extended for up to 90 additional days, and if the closing has not occurred by October 31, 1995, then either party hereto may terminate this DDA if the terminating party has not defaulted hereunder. Notwithstanding the foregoing, if the sole reason that the closing has not occurred is due to the fact that the lis pendens recorded on April 10, 1995, as Instrument No. 95-496676, Official Records, Los Angeles County (the "Lis Pendens") has not been expunged, then the closing date may be extended until such time as the Lis Pendens has been expunged as an exception to title; provided, however, if the Lis Pendens is not expunged as a title exception by April 30, 1996, then either party may thereafter terminate this Agreement. (d) In addition to other matters of title, as provided in Section 3 hereof, title shall be subject to the following matters: (i) Existing easements of access, support and for parking referred to hereinabove. (ii) The Grant Deed pursuant to which Redeveloper or its successor in interest takes title shall contain a deed covenant in favor of Agency and City obligating the grantee, its successors and assigns to continuously and uninterruptedly operate the Hotel, Card Club and Entertainment Center (except for necessary interruptions which shall not exceed six consecutive months). If any such use becomes unfeasible or is rendered illegal (other than as the result of voluntary action on the part of Redeveloper or a successor in interest), the parties shall negotiate in good faith to substitute appropriate uses for the Property. Said covenant shall become ineffective from and after the date that is fifty years after the Rent Commencement Date (as defined below). (iii) A deed of trust (the "deed of trust"), in favor of Agency securing Redeveloper's performance under the Lease hereinafter provided for, shall be recorded at closing; provided, however, that the foreclosure of such deed of trust shall not extinguish the Agency's obligation to deliver the sum set forth in Section 1(e) hereof upon the conditions set forth in Section 1(e). (e) Anything in Section 1(d)(iii) hereinabove or in the Lease to the contrary notwithstanding, if, for any reason other than the exercise by Redeveloper of the option to purchase the Leasehold Parcels, as provided herein, the Lease is terminated, including a voluntary termination under Section 4(c) hereof or a termination for breach on the part of Redeveloper or any successor to Redeveloper, Agency shall be obligated to pay to Redeveloper or to its successor in interest, the original $2,000,000.00 purchase price of the Convention Center Parcel, and Redeveloper shall be obligated to reconvey the Convention Center Parcel to Agency. The failure of Redeveloper to reconvey the Convention Center Parcel to Agency shall be deemed an event of default under the deed of trust referred to in Section 1(d)(iii) hereof. Such repurchase price shall be paid over such -4- period of time as shall be determined by binding negotiations of the parties during the 90 day period following the termination of the Lease. Upon the exercise of by Redeveloper of the option to purchase the Property which is subject to the Lease and the payment of the purchase price thereof, the provisions of this Section 1(e) shall be ineffective, and the deed of trust referred to in Section 1(d)(iii) shall be reconveyed. The effect of the covenants referred to in Section 1(d)(ii) and this Section 1(e) shall survive the transfer of title to the optioned property to Redeveloper or its permitted successor in interest. (f) The purchase price shall be paid in all cash through the close of escrow. Agency will pay the cost of a CLTA policy of title insurance, any documentary transfer tax, and one half of the escrow fees. Redeveloper will pay the cost of recording, the additional premium and any expenses (including survey costs) in the event Redeveloper desires to obtain an extended coverage policy of title insurance, and the other half of the escrow fees. In connection therewith, the parties shall execute normal and necessary escrow instructions and all documents reasonably called for thereunder, so long as such instructions and documents are not inconsistent herewith. 2. Lease of the Hotel and Other Parcels. (a) Agency hereby leases the Leasehold Parcels to Redeveloper, and Redeveloper leases the Leasehold Parcels from Agency (the "Lease"), for the term set forth in Section 8 hereof, subject to and on the terms and conditions set forth in this Lease. (b) Notwithstanding the foregoing, this Lease, including the parties' obligations hereunder, is subject to the satisfaction or waiver of each of the following conditions on or before the Effective Date (as hereinafter defined): (i) Agency's receipt of an opinion from bond counsel to be selected and approved by Agency that this transaction will not adversely affect the tax exempt status of any bonds or other obligations issued to finance the acquisition and/or construction of the Property or any part thereof (including any improvements thereon) to be leased or conveyed to Redeveloper. This condition is inserted for the sole benefit of Agency and may be waived or deferred by an instrument in writing signed by Agency. The parties shall use their best efforts to resolve any bond issues raised by such opinion letter; (ii) Redeveloper's execution and delivery of the deed of trust and other security instruments and a recordable Memorandum of Lease, in substantially the form approved by Agency and Redeveloper's title insurance company; (iii) The City of Compton's adoption of an amendment to the License providing that Hollywood Park, Inc., may be a licensee upon a change in state law allowing Hollywood Park, Inc., (or a joint -5- venture of Hollywood Park, Inc., and the Redeveloper) to hold such license, and subject to Hollywood Park, Inc. (or such joint venture) qualifying as a licensee pursuant to Subsections 9-10.1 through 9-10.10, and 9-10.13, of the Compton Municipal Code, and any other applicable provisions of the Compton Municipal Code; (iv) Agency's delivery to Redeveloper of Redeveloper's Policies of Title Insurance described in Section 6 hereof. This condition is inserted for the sole benefit of Redeveloper and may be waived, in whole or in part, or deferred by Redeveloper by an instrument in writing signed by Redeveloper. If the foregoing conditions are not satisfied or waived by the time permitted for closing under Section 1(c) hereof, then this Lease may be terminated by either party on ten (10) days prior written notice to the other party, and this Lease shall thereafter be of no further force or effect. 3. Title and Survey. (a) Within ten (10) business days following execution hereof, Agency shall deliver to Redeveloper a Preliminary Title Report issued by Old Republic Title Company. Redeveloper's fee interest in the Convention Center Parcel shall be insured by a standard form, CLTA Owners Policy of title insurance, and Redeveloper's leasehold interest in the balance of the Property shall be insured as of the Effective Date by a CLTA Policy of Leasehold Title Insurance (the "Leasehold Policy") to be purchased and paid for by Agency. The Policy shall insure Redeveloper's leasehold interest in the Leasehold Parcels free and clear of all liens, encumbrances, restrictions, and rights-of-way of record, subject only to the following permitted conditions of title ("Permitted Title Exceptions"): (i) Agency's fee interest in the Leasehold Parcels; -6- (ii) The applicable zoning, building and development regulations of any city, county, state or federal jurisdiction affecting the Property; and (iii) Those exceptions approved by Redeveloper by May 31, 1995. If Redeveloper unconditionally disapproves any exceptions, this DDA shall thereupon terminate and shall be of no further force or effect, unless the sole disapproved exception is the Lis Pendens, in which case this DDA shall terminate if the Lis Pendens is not expunged by April 30, 1996. If Redeveloper conditionally disapproves any exceptions, then Agency shall have ten (10) business days after receipt from Redeveloper of a written specification of the title exceptions to which Redeveloper is taking objection within which to either agree to remove the exceptions to which objection was taken or to notify Redeveloper that it is unwilling or unable to do so. In the event that Agency gives notice that it is unwilling or unable to remove any exception to which objection was taken, then Redeveloper shall have ten (10) business days within which to give notice that either (A) it will accept title subject to the exceptions as to which the Agency is unwilling or unable to remove, or (B) to terminate this DDA forthwith, in which instance each of the parties shall be relieved of all further liability hereunder, provided that no such termination shall affect the License for the Card Club or any liability of Redeveloper to City in connection therewith. The failure of Agency to give notice as provided hereinabove within the ten (10) day period shall be deemed to be a notice that it is unwilling or unable to cure the title exceptions to which Redeveloper took exception, and the failure of Redeveloper to give notice within the subsequent ten (10) day period that it will either accept title subject to such matters or to terminate this DDA shall be deemed an election on the part of Redeveloper to terminate this DDA. If Agency gives notice that it intends to remove a title defect, it shall use its best efforts to complete such action within thirty (30) days thereafter, but, in any case, Agency shall proceed diligently to cause such title exceptions to be removed. (iv) With respect to the Convention Center Parcel, those matters set forth in Section 1(d) hereof. (v) Should a title exception which Agency is unwilling or unable to cure and which Redeveloper is unwilling to accept apply only to one or more the Expansion Parcels, then Redeveloper may elect to defer or sever the affected parcel by giving written notice thereof to Agency. In the event that the affected parcel is severed therefrom, there shall be an equitable reduction in the rental and the option price pursuant to Section 30 hereof. In the event that the parcel is merely deferred, no such adjustments shall be made until such time as Redeveloper elects to sever the particular parcel or parcels and gives notice thereof as provided herein. -7- (b) Redeveloper has elected to obtain an ALTA Extended Coverage Title Insurance Policy for the Convention Center Parcel and the Leasehold Parcels. Redeveloper shall cause a licensed surveyor or civil engineer to conduct a survey of the Property, to prepare from the survey a legal description satisfactory to the title company insuring Redeveloper's title, and to prepare a plot plan showing the location of any streets, easements, and rights of way over or in favor of the Property, by June 7, 1995. Redeveloper shall approve or disapprove any survey by June 15, 1995. Any survey and any premiums for endorsements or extended coverage shall be paid by Redeveloper. 4. Term. (a) Effective Date of Agreement. This Lease shall become effective (the "Effective Date") on the close of escrow on the purchase and sale of the Convention Center Parcel. If escrow has not closed by July 31, 1995, then (subject to the extensions of time for the reasons set forth in Subsection) either party may terminate this Agreement. Redeveloper shall have the right, on five (5) days prior notice in writing, to enter into the entire Property (including both the Convention Center Parcel and the Leasehold Parcels) at any time prior to the Effective Date for the purposes of undertaking preconstruction inspection, testing and planning studies, and Redeveloper's obligation to indemnify Agency, pursuant to Section 17 hereof, shall commence on the date which is five (5) days after such notice is given (but the insurance obligations set forth in Section 17 shall not commence until the Effective Date). Redeveloper shall not commence any work of improvement or other construction prior to the Effective Date. -8- (b) Term of Lease. The term of this Lease (the "Term") shall commence on the Effective Date, and shall end on the date that is fifty (50) years after the Rent Commencement Date; unless sooner terminated as provided for herein. The Rent Commencement Date shall be the earlier of (i) the date that the Card Club or Hotel open for business or (ii) the date that is two (2) years after the Effective Date. Notwithstanding the foregoing, if the rehabilitation of the Hotel and Entertainment Center has not been completed by the date set forth in the Schedule of Performance, then the Agency shall have the right to terminate this Lease upon giving Redeveloper thirty (30) days written notice, and all rights of Redeveloper hereunder or in the Property (including the Initial Improvements (as defined below)) shall thereupon cease and shall be of no further force or effect,provided however, that within such thirty (30) day notice period, Redeveloper shall have the right to exercise its option to purchase the Property, as provided in Section 30 hereof. If the Card Club has not opened for business within 5 years after the Effective Date, or if the Redeveloper has not purchased the Property by the date that is 5 years after the Effective Date, then the Agency shall have the right to bring forth a substitute developer or operator for the Card Club, and in such event the Redeveloper shall negotiate in good faith with such party for either an operating agreement or a buy-out, on reasonable and fair terms, of the Redeveloper's interest in this DDA. For the purposes hereof, a "Lease Year" shall be the period commencing on the Rent Commencement Date or any anniversary thereof and ending on the day prior to the next anniversary of the Rent Commencement Date. (c) Redeveloper's Right to Terminate the Lease. Redeveloper shall have the right, at any time either (i) prior to issuance of any building permits for the Property, or (ii) after issuance of the Certificate of Completion as described in Section 22 hereof, to terminate this DDA; provided, however, in the event of such termination, Redeveloper shall remain liable for any accrued obligations hereunder arising prior to the date of termination, and any rights of Agency which are intended to survive the termination of this Lease shall continue in full force and effect. Redeveloper shall provide 90 days prior written notice to Agency of any election to terminate this DDA. Redeveloper shall not have the right to terminate this DDA during the period (i) from and after issuance of any building permit for the Property and (ii) prior to the issuance of the Certificate of Completion. In the event of such termination, Redeveloper shall be released of any further obligation to pay rent (other than rent accrued prior to the date of termination). -9- (d) Personalty. Upon termination of the Lease for any reason other than the exercise by Redeveloper or its permitted successor in interest of the option to purchase the Property as provided herein, Redeveloper shall deliver possession of the Property (including both the Convention Center Parcel (subject to Section 1(e)) and the Leasehold Parcels) to Agency in a good and workable state of repair (ordinary wear and tear excepted), together with full inventories of furniture, fixtures and equipment of the type for which Redeveloper was entitled to Rent Reduction/Credit under Section 6 hereof, including all additions to or replacements of such items installed after the initial rehabilitation of the Property. 5. Rent. Redeveloper shall pay to Agency, without demand, prior notice, deduction, or set-off (except as provided in Section 10 hereof) base rent ("Base Rent"), in the following sums: Lease Years 1 through 5 - $ 600,000 per year Lease Years 6 through 10 - $ 850,000 per year Lease Years 11 through 15 - $1,100,000 per year Lease Years 16 through 20 - $1,350,000 per year Lease Years 21 through 25 - $1,600,000 per year Lease Years 26 through 30 - $1,850,000 per year Lease Years 31 through 35 - $2,100,000 per year Lease Years 36 through 40 - $2,350,000 per year Lease Years 41 through 45 - $2,600,000 per year Lease Years 46 through the end of the Lease - $2,850,000 per year Base Rent shall be payable in advance on the first day of each Lease Year, in legal currency of the United States, commencing on the Rent Commencement Date. 6. Rent Reduction/Credit. Redeveloper shall receive a credit against any Base Rent obligation of Redeveloper set forth in Section 10 in an amount equal to the actual verified costs of the Initial Improvements constructed or installed by Redeveloper for the Hotel and the Convention Center, including the actual verified costs of furnishing and equipping the Hotel and Entertainment Center pursuant to Section 18 hereof and Exhibit 4 hereto, such costs of construction, furnishings and equipage including but not limited to inventories of china, glassware and linens, ("Initial Improvement Costs") to be consistent with budgets prepared by Redeveloper and submitted to and approved by Agency, provided however that the cost of remedying defects, certified as latent defects by the City Engineer, which existed at the Effective Date and which Redeveloper would have included in the budgets had their existence been known at the Effective Date, shall be eligible for reimbursement even if not included in the approved budgets. For purposes hereof, the "Initial Improvements" are the improvements to the Hotel and Convention Center approved by Agency and provided pursuant to the Scope of Development, and the furniture, fixtures and equipment having a useful life of one year or more reasonably required to open the Hotel and Card Club for -10- business, where first approved by Agency and described in the Scope of Development, constructed or acquired prior to the earlier of (i) the issuance of the Certificate of Occupancy, or (ii) issuance of the Certificate of Completion, or (iii) the opening of the Hotel or Card Club for business. Except as specifically provided herein, no capital investment after the Initial Improvement Costs shall be eligible for such credit. Expendables, and other personalty having a useful life of one year or less, shall not be deemed to be part of the furniture, fixtures and equipment the cost of which is eligible for such credit, unless otherwise approved by Agency's Board of Directors. Redeveloper's allowable credit shall be on a dollar for dollar basis and shall be applied to the first Base Rent due hereunder. Any unused credit in any Lease Year shall be carried forward to the next ensuing Lease Year. Redeveloper shall not receive the credit against Base Rent unless and until (i) Redeveloper is entitled to receive a Certificate of Completion, and (ii) the Hotel and Entertainment Center (including the Card Club) are complete and free of mechanics' and materialmen's liens which concern an amount, in the aggregate, of $100,000.00 (or any such liens are released through counterbonding pursuant to California Civil Code Section 3143). No credit shall be available for costs incurred after the Hotel or Card Club receives a Certificate of Occupancy or opens for business unless the Agency's Board of Directors agrees to provide such additional credit. -11- 7. Additional Consideration. Compton Entertainment, Inc. ("CEI"), shall, as additional consideration, deliver to with Agency the sum of $1,000,000. Such additional consideration shall be delivered by CEI to Agency in ten installments as follows: The sum of $100,000 shall be paid on the first day of the third Lease Year, and the sum of $100,000 shall be paid by CEI to Agency on the first day of each subsequent Lease Year through the 12th Lease Year, for an aggregate maximum of $1,000,000.00. The payments of additional consideration provided for herein shall not be subject to the Rent Reduction/Credit provided for in Section 6 hereof, and shall remain the obligation of CEI and shall not become the obligation of any assignee of this DDA. 8. Taxes. (a) Covenant to Pay Taxes. As additional rent, Redeveloper shall pay directly to the appropriate taxing authorities all Taxes (as defined in Section 8(b)). All Taxes shall be paid at least 10 days before delinquency and before any fine, interest or penalty shall become due or be imposed by operation of law for their non-payment. Redeveloper shall furnish to Agency at least 10 days prior to the date when any Taxes would become delinquent receipts or other appropriate evidence establishing such payment. Notwithstanding the foregoing, so long as Redeveloper is fully operating the Card Club and the Hotel, Redeveloper shall not be obligated to pay or shall be entitled to receive a refund or rebate of that portion of any possessory interest taxes, or real property taxes relating to the Property, to the extent payable or allocable to Agency or City during the first ten (10) Lease Years of the Term. Provided, however, that if Redeveloper or Redeveloper's successor in interest has not obtained a State of California Gaming License for the Card Club within one year after the Effective Date, Redeveloper shall be obligated to pay the full possessory interest tax or real property tax (or any prorated portion thereof), and shall not be entitled to any rebate or refund thereof, until the date upon which the California Gaming License is obtained. -12- (b) Definition of Taxes. The term "Taxes" shall include all real property taxes (including increases in real property taxes caused by reappraisals that are the result of changes in the ownership of Agency's interest), possessory interest taxes, personal property taxes, charges and assessments, (including but not limited to street improvement liens) which are levied, assessed upon or imposed by any governmental authority or political subdivision thereof during or with respect to any portion of the Term hereof with respect to the Property or any improvements, fixtures, equipment or other property of Redeveloper or Agency, real or personal, located on the Property or used in connection with the operation of the Project, and any tax which shall be levied or assessed in addition to or in lieu of such real or personal property taxes, and any license fees, taxes measured by or imposed upon rents, or other taxes or charges upon Agency's leasing of the Property or the receipt of rent hereunder. All assessments, taxes, fees, levies and charges imposed by governmental agencies for services such as fire protection, street, sidewalk and road maintenance, refuse removal and other public services generally provided without charge to owners or occupants prior to the adoption of Proposition 13 by the voters of the State of California in the June 1978 election, also shall be deemed included within the definition of "Taxes" for the purposes of this Lease. Provided, however, that the definition of "Taxes" shall not include (i) any taxes imposed by City (other than gaming tax) unless such taxes are of general application over the City as a whole, or (ii) any special assessments or special taxes hereafter adopted by City against the Property unless Redeveloper shall have been granted the right of a property owner to protest the inclusion of the Property in the Special District in question. (c) Proration of Redeveloper's Tax Liability. Redeveloper's liability to pay Taxes shall be prorated on the basis of a 365-day year to account for any fractional portion of a fiscal tax year included in the Term at its commencement or expiration. 9. Use and Compliance with Laws. (a) Redeveloper or an operator under contract to Redeveloper shall use and operate the Property solely for the following purposes: (i) the construction and operation of the Hotel in whole or in part. (ii) the construction and operation of the Card Club containing the maximum number of gaming tables permitted, subject to health and safety codes and marketing consideration, in order to maximize revenues. (iii) operation of one or more restaurants (the "Restaurants"). -13- (b) Redeveloper shall have the obligation to provide ancillary facilities which may include but need not be limited to a night club, a sports bar and other entertainment facilities. The parties recognize that public demand for such matters may vary from time to time as public tastes and technology change, and Redeveloper agrees to consult with Agency with respect to the installation, commencement and termination of operation, substitution and other modification or replacement of such ancillary facilities. Redeveloper covenants to and for the benefit of Agency that, subject to Section 32 hereof, Redeveloper shall continuously and uninterruptedly, throughout the Term of this Lease, operate the Hotel, in whole or in part, the Card Club and one or more Restaurants on the Property, following completion of the Initial Improvements constituting the Project, subject to temporary closures for repairs or remodeling which are reasonable in frequency and duration. Redeveloper shall diligently pursue obtaining the requisite permission from the State of California for operation of the Card Club. (c) At all times from and after opening for business, Redeveloper shall at all times during the Term hereof obtain, keep and maintain all licenses and permits required by state and local governmental authorities necessary to operate the Hotel and the Entertainment Center from the Property. Redeveloper hereby agrees to comply with all obligations under the Card Club License issued by the City of Compton, and Redeveloper's breach thereof or the termination thereof shall be a breach of this Lease. (d) Redeveloper shall at all times provide such security for operation of the Hotel and Entertainment Center as shall reasonably be required to provide all necessary protection for the customers, employees, guests, contractors and other invitees of the Entertainment Center. Redeveloper shall fully comply with the security requirements of the City of Compton Card Club Ordinance and with the Security Plan submitted to and approved by the City in connection with the issuance of the Card Club License. Neither Agency nor Agency's Executive Director shall have any duty or obligation to review, evaluate, or direct the security of the Hotel and Entertainment Center operation, it being the intent hereof that Redeveloper shall be solely responsible for providing all necessary security. Redeveloper shall indemnify, hold harmless and defend Agency and City against any and all loss, cost or obligation with respect to any claim that any injury to person or property arising out of or in connection with the operation of the Property was the result of or was aggravated by any lack of security or defect in the security plan or the implementation thereof,except for matters caused by the sole active negligence or to the extent of the wilful misconduct of Agency or City. -14- (e) Redeveloper shall, at Redeveloper's expense, comply promptly with all applicable statutes, ordinances, rules, regulations, orders, covenants, conditions, and restrictions of record, and requirements of any governmental authority or the local Insurance Services Office in effect during the Term hereof, regulating the Property, the improvements thereon, or Redeveloper's use of the Property. Redeveloper shall keep and maintain in full force and effect, and in good standing, all permits and licenses required from state and local governmental authorities for operation of the Hotel and Entertainment Center (including the Card Club), and termination of any permit or license shall be a material breach hereof. If the Insurance Services Office or any other similar body or any bureau, department or official of the state, county or city government or any other governmental authority having jurisdiction requires that any changes, modifications, replacements, alterations, or additional equipment necessary to life safety be made or supplied in or to any portion of the Property by reason of Redeveloper's use thereof, Redeveloper shall, at Redeveloper's cost and expense, make and supply such changes, modifications, replacements, alterations or additional equipment. Redeveloper shall not use nor permit the use of the Property in any manner that will tend to create waste or a nuisance. (f) At present, the Property conforms to the Redevelopment Plan. This Lease is conditioned upon, and Redeveloper shall at all times operate the Property, in conformity with the Redevelopment Plan. (g) Notwithstanding anything provided herein to the contrary, the parcels identified as Parcels 2, 3 and 4 of Parcel Map 10784, recorded in Book 112, Pages 96 and 97, of Parcel Maps, Official Records, Los Angeles County, California, Parcels 1 and 2 of Parcel Map 8669, recorded in Book 87, Page 9, of Parcel Maps, Official Records, Los Angeles County, California, and Parcels 2, 7, and 11 of Parcel Map 7899, recorded in Book 79, Page 47-49, of Parcel Maps, Official Records, shall be used by Redeveloper only for surface parking (unless redesignated at the request of Redeveloper and approved by the Agency), and Parcels 8 and 9 of Parcel Map No. 7899 shall be used by Redeveloper only for purposes of expansion of the Card Club and/or for a Casino pursuant to an approved plan of expansion, provided that such plan makes provision for, and Redeveloper in fact provides, not less than 14 gross acres of surface parking on the Property for the benefit of the Hotel and Entertainment Center and for no other purpose whatsoever. The Agency shall not unreasonably withhold consent to redesignation of the parcels for development of the expansion of the Card Club, and no fee shall be charged for such redesignation except as may be necessary to cover any of the Agency's reasonable expenses (including attorneys fees) in effectuating such redesignation. 10. Physical Condition of the Property. -15- (a) "As-Is" Condition. Except as provided herein below to its contrary, Agency disclaims any and all covenants or warranties respecting the condition of the soil or subsoil or any other physical or environmental condition of the Property. Redeveloper is purchasing and leasing the entire Property in their "as-is" condition. Prior to the date set forth in the Schedule of Performance attached hereto as Exhibit 3 (the "Schedule of Performance"), Redeveloper may, at Redeveloper's expense, conduct examinations, soils tests or an environmental site assessment on the Property (in connection with which Redeveloper shall indemnify and hold Agency and the Property free and harmless from any and all costs, expenses, liabilities and charges resulting from Redeveloper's entry onto the Property). If the examination or soils tests reveal that the Property is not suitable (or cannot be made suitable at reasonable cost) for construction of the Initial Improvements thereon, Redeveloper may elect to cancel this DDA upon written notice to Agency given within ten (10) days after Redeveloper's receipt of the completed soils reports or environmental site assessments, but in any event such notice shall be delivered to Agency no later than June 15, 1995. Agency hereby assigns to Redeveloper any and all causes of action which it may have against prior developers, builders, contractors, subcontractors or suppliers of labor and/or materials to the Hotel Parcel and the Convention Center Parcel for design and construction defects, negligent construction or other causes of action of a similar nature resulting in damage to the Hotel Parcel and/or the Convention Center Parcel, it being understood that (i) all costs of any litigation (including attorneys' fees) shall be borne solely by Redeveloper and (ii) the proceeds from any recovery with respect to such litigation, after payment of the costs thereof (including attorneys' fees), shall be credited against the cost of the Initial Improvement Costs, thus reducing the Rent Reduction/Credit referred to in Section 6 hereof. (b) Environmental Conditions of Property Prior to Commencement of - ------------------------------------------------------------------ Lease. Agency shall be solely responsible for the costs of clean up or remediation of any deposit or discharge of Hazardous Materials on or from the Property which occurred prior to the Effective Date, and Agency shall indemnify, hold harmless and defend Redeveloper against any and all loss, cost or obligation with respect thereto (including attorneys fees and costs), provided, however, that Agency shall not be liable to Redeveloper for any consequential damages suffered by Redeveloper by reason of the existence of any Hazardous Waste on the Property which existed prior to the Effective Date and which could have reasonably been discovered by a competent environmental assessment of the Property. -16- (c) Environmental Condition of the Property During Lease Term. - --------------------------------------------------------------- Redeveloper shall indemnify, protect, defend and hold harmless Agency from and against any and all claims, liabilities, suits, losses, costs, expenses and damages, including but not limited to attorneys' fees and costs, arising out of any claim for loss or damage to any property, including the Property (including both the Convention Center Parcel and the Leasehold Parcels), injuries to or death of persons, or for the cost of cleaning up the Property, and removing hazardous or toxic substances, materials and waste therefrom, by reason of contamination or adverse effects on the environment, or by reason of any statutes, ordinances, orders, rules or regulations of any governmental entity or agency requiring the clean-up of the Property caused by or resulting from any hazardous material, substance or waste introduced to the Property during the Term of this Lease. The foregoing indemnity shall survive the expiration or termination of this Lease, and the close of escrow in the event of Redeveloper's exercise of the option to purchase the Leasehold Parcels set forth below. However, Redeveloper shall not be liable on account of this indemnity if, prior to the date set forth in the Schedule of Performance, Redeveloper elects to terminate this Lease on account of Redeveloper's disapproval of the condition of the Property as provided in Section 10(a) hereof. Moreover, upon the expiration of this Lease, if Redeveloper has not purchased the Leasehold Parcels, then Redeveloper shall not thereafter be liable on account of this indemnity as a result of hazardous or toxic substances, materials, or waste that were located on the Leasehold Parcels prior to the Effective Date, except to the extent such hazardous or toxic substances, materials, or waste were deposited on the Property prior to the Effective Date by Redeveloper or Redeveloper's agents, officers, employees, contractors, sublessees, or assignees. (d) Other Conditions of Property. Redeveloper, on behalf itself and its successors, affiliates, partners, and assigns, hereby fully and entirely release and discharge the City (as a third party beneficiary hereof) and Agency (including the City's and Agency's servants, employees, agents, representatives, successors, descendants, heirs, executors, administrators, assigns, and attorneys), and of each of them alone, of and from any and all claims, causes of action, or demands, liabilities, damages, and losses, of whatever nature, anticipated or unanticipated, known or unknown, or in connection with, or in any way related to, the Property, or for the physical condition of the Property or any portion thereof, other than as provided hereinabove with respect to Hazardous Wastes. This release constitutes an explicit waiver by Redeveloper of each and all of the provisions of California Civil Code Section 1542, which states as follows: "A general release does not extend to claims which the creditor does not know or suspect to exist in his favor at the time of executing the release, which if known by him must have materially affected his settlement with the debtor." -17- Redeveloper's Initials: _____________________________________________ Redeveloper hereby declares and represents that Redeveloper is effecting and executing this release of the City and Agency after having read all of this release and with full understanding of its meaning and effect and after having received full legal advice as to Redeveloper's rights from an attorney. 11. Construction by Redeveloper. (a) Approval of Financing. Within ninety (90) days after the Effective Date, Redeveloper shall deliver to Agency, for Agency's approval, evidence of Redeveloper's construction and take-out financing for the Initial Improvement Costs for the Initial Improvements to be constructed or installed by Redeveloper on the Property pursuant to this Section 11 including any plan of self financing, which approval shall not be unreasonably withheld or delayed. In order to enable Agency to evaluate Redeveloper's financing, Redeveloper shall provide to Agency evidence of such financing including at a minimum Redeveloper's proforma and line-item budget, a copy of a binding commitment obtained by Redeveloper for a leasehold mortgage loan or loans financing, if applicable, (together with any equity capital contribution of Redeveloper) the hard and soft costs of constructing the Project, financial statements of Redeveloper and the lender, and other evidence satisfactory to Agency of sources of loans or capital, sufficient to demonstrate that Redeveloper has or will have adequate funds to cover all development and construction costs of the entire Project. The terms and conditions of such commitments, and the identity of the construction lender itself, shall be subject to Agency's approval, which approval shall not unreasonably be withheld, provided,however, that should the lender be a bank, savings and loan association, insurance company or other institutional lender, no approval of the identity of the lender or other source of funds shall be required. (b) Scope of Development. The Initial Improvements shall consist of the matters described in the Scope of Development attached hereto as Exhibit 5. The Initial Improvements shall include high quality landscaping as approved by Agency pursuant to the terms hereof (including, but not limited to, the Conditions of Construction set forth in Exhibit 4). -18- (c) Construction Schedule. Redeveloper shall diligently comply with all performance dates, including dates for submitting and obtaining approvals for plans and specifications, as set forth in the Schedule of Performance attached hereto as Exhibit 3 and incorporated herein by this reference (the "Schedule of Performance"). Redeveloper shall diligently seek approval of all plans and specifications, and permits, required to construct the improvements described in the Scope of Development. (d) Anti-discrimination During Construction. Redeveloper, for itself and its successors and assigns, agrees that it shall not discriminate against any employee or applicant for employment because of age, sex, marital status, race, handicap, color, religion, creed, ancestry, or national origin in the construction of the improvements constituting the Property. (e) Commencement of Construction. (i) Redeveloper shall commence construction and installation of the Initial Improvements, notwithstanding any other Section of this Lease to the contrary (including but not limited to Section 32), within the time period set forth in the Schedule of Performance. (ii) When necessary for Redeveloper to commence construction of the Initial Improvements, Redeveloper may use, sell, demolish, remove, or otherwise dispose of any improvements existing on the Property at the commencement of the Term of this Lease. Agency shall receive no compensation for such improvements other than the performance of Redeveloper's covenants expressed in this Lease, provided, however, that the proceeds from such disposition shall be credited against the Initial Improvement Costs, for purposes of computing the Rent Reduction/Credit under Section 6 hereof. (iii) After commencement of construction, Redeveloper shall diligently prosecute such construction to completion. Such construction shall comply with the Conditions of Construction set forth in Exhibit 4 attached hereto and incorporated herein by this reference. All work shall be performed in a good and workmanlike manner, shall substantially comply with the plans and specifications submitted to and approved by Agency and shall comply with all applicable governmental licenses, permits, laws, ordinances and regulations. (iv) No materials, equipment, fixtures, carpets, appliances, or any other part of the Initial Improvements shall be purchased or installed under conditional sales agreements, leases, or under other arrangements wherein the right is reserved or accrues to anyone to remove or to repossess any such items. Agency may, in the exercise of its good faith -19- business judgment, permit certain specialized equipment to be leased for the Project but only with its prior written approval and, then, only upon Redeveloper's execution and delivery of an assignment of the lease to Agency, together with the original lease and the equipment lessor's written approval of such assignment, in form satisfactory to Agency. (f) Completion Of Construction. Construction of the Initial Improvements shall be completed and the Hotel and Entertainment Center (including the Card Club) ready for occupancy and open for business by the date set forth in the Schedule of Performance; provided that the time for completion shall be extended for as long as Redeveloper shall be prevented from completing the construction by delays beyond Redeveloper's reasonable control, including but not limited to flood, earthquake, fire, acts of God, war, epidemic and civil commotion; provided, further, however, Redeveloper's failure to complete construction and equipage of the Card Club and Hotel and to open the Hotel for business within one year after Effective Date (subject to the term of any reasonable delay caused by force majeure) shall, at Agency's election, trigger Agency's right to terminate the Lease as provided herein; however, if this Lease is so terminated, then Redeveloper shall be released from liability for rent under this Lease accruing thereafter. (g) Minor Field Changes. The parties acknowledge that it is common practice in the construction industry to make minor changes during the course of construction without substantially altering the plans and specifications previously approved by Agency. On completion of the work, Redeveloper shall give Agency notice of all changes in plans and specifications made during the course of the work and shall, at the same time, supply Agency with "as built" drawings accurately reflecting all such changes. -20- (h) Easements, Zoning and Other Restrictions. (i) Easements and Dedications. In order to provide for the more orderly development of the Property, it may be necessary that street, water, sewer, drainage, gas, power line and other easements and dedications, and similar rights be granted or dedicated over or within portions of the Property. Agency shall, upon request of Redeveloper, join with Redeveloper in executing and delivering such documents as may reasonably be necessary for the purpose of granting such easements and dedications. (ii) Zoning. If necessary or appropriate to the Project, Agency agrees, from time to time upon request of Redeveloper, to execute such documents, petitions, applications and authorizations as may reasonably be appropriate or required for the purposes of obtaining conditional use permits, zoning and rezoning, tentative and final map approval, precise plan approval, and similar government approvals with respect to the Property or any part thereof. This paragraph shall apply to Agency solely in its capacity as owner of the Property and shall not in any way restrict or bind Agency acting in its governmental capacity. (iii) Street Vacation. If requested by Redeveloper and if consistent with the approved plan of development, Agency will apply for vacation of internal streets within the Property, provided that such vacation does not result in the creation of land locked parcels. (iv) Expenses. In each of the foregoing instances, Agency shall be without expense therefor. Redeveloper shall pay all costs and expenses thereof (including reimbursement of normal application and processing fees and other normal and necessary out-of-pocket costs) incurred by Agency. -21- (i) Ownership of Improvements. The Initial Improvements on the Property constructed or installed by Redeveloper shall be owned by Redeveloper until the expiration or sooner termination of the Term of this Lease; provided, however, if Redeveloper exercises the option described in Section 30 hereof and purchases the Property, then Redeveloper shall retain ownership of the Initial Improvements (in addition to all other Improvements, furniture, fixtures, and equipment) on the Property notwithstanding the termination of this Lease. Redeveloper shall not, however, remove any improvements from the Property (without Agency's prior written consent), nor waste, destroy or modify any improvements on the Property, except as permitted by this Lease. Anything in this Section 11(i) to the contrary notwithstanding, Redeveloper shall have the right to demolish or remove existing improvements on the Property if necessary or appropriate to permit development of the Property in accordance with the approved plans. The parties covenant and agree for themselves and all persons claiming under them that the improvements are real property. Upon expiration or sooner termination of the Term of this Lease (other than by reason of Redeveloper's exercise of its option to purchase under Section 30 hereof), all improvements on the Property, and all furniture, fixtures and equipment used by Redeveloper in operating the Property (including operation of the Hotel and Entertainment Center) shall, without additional compensation to Redeveloper, thereupon become Agency's property free and clear of all claims and encumbrances to or against them by Redeveloper or any third person, unless within ninety (90) days after such expiration or termination Agency requires that all or certain improvements or property be removed by Redeveloper at Redeveloper's expense or Redeveloper exercises the option described in Section 30 hereof and purchases the Leasehold Parcels. 12. Certificate of Completion. -22- (a) After completion of construction, development, and installation by Redeveloper of the Initial Improvements, Agency shall, promptly following written request by Redeveloper therefor, furnish Redeveloper with a Certificate of Completion, for such completed Initial Improvements. After issuance of a Certificate of Completion for such completed Initial Improvements, any party then owning or thereafter purchasing, leasing or otherwise acquiring any interest in the Project shall not (because of such ownership, purchase, lease or acquisition) incur any obligation or liability under this DDA as to such portion of the Project, except that such party shall be bound by any covenants, conditions or restrictions contained in this Lease, or other instruments executed in accordance with the provisions of this Lease. Neither Agency nor any other person, after recordation of a Certificate of Completion, shall have any rights, remedies or controls that it would otherwise have or be entitled to exercise as a result a breach of Redeveloper's construction obligations under this Lease, except that said Certificate of Completion shall have no effect on any other separate instrument signed by Redeveloper in favor of the City or Agency, nor shall it have any effect on Redeveloper's obligations under the environmental warranties and other indemnities provided herein, nor shall it waive any obligations of Redeveloper included hereunder to survive issuance of a Certificate of Completion. (b) If Agency refuses or fails to furnish a Certificate of Completion after written request from Redeveloper, Agency shall, within thirty (30) days after the written request, provide Redeveloper with a written statement of the reasons Agency refused or failed to furnish such Certificate of Completion. The statement shall also contain Agency's opinion of the action Redeveloper must take to obtain such Certificate of Completion. If the reason for such refusal is confined to the immediate availability of specific items or material for landscaping, and the estimated cost of completion does not exceed $250,000.00 and the particular item or matter is not essential to the operation of the Property, then Agency will issue its Certificate of Completion upon the posting by Redeveloper with Agency of a bond or other collateral satisfactory to Agency in an amount equal to 125% of the reasonable cost of completing the work not yet completed, but the posting of such bond shall not excuse Redeveloper from obligation to complete the work, and Redeveloper shall not be entitled to any Rental Credit for such work until it has, in fact, been completed. -23- (c) Such Certificate of Completion shall not constitute evidence of compliance with or satisfaction of any obligation of Redeveloper to any holder of a mortgage, trust other than with respect to Redeveloper's right to claim the Rent Reduction/Credit for work actually completed. Such Certificate of Completion shall not be construed as a notice of completion as described in California Civil Code Section 3093. 13. Utilities and Services. Redeveloper shall make all arrangements for and pay for all utilities and services furnished to or used by it or its licensees or subtenants, including, without limitation, gas, electricity, water, telephone service, communications, cable television, and trash collection, and for all connection charges. 14. Maintenance. (a) Throughout the Term, Redeveloper shall, at Redeveloper's sole cost and expense, maintain the Property in safe and first class condition and repair (ordinary wear and tear excepted) and in accordance with (i) all applicable laws, rules, ordinances, orders and regulations of federal, state, county, municipal, and other governmental agencies and bodies having or claiming jurisdiction and all their respective departments, bureaus, and officials; (ii) the insurance underwriting board or Insurance Services Office having jurisdiction over the Property; and (iii) all insurance companies insuring all or any part of the Property. Agency shall not have any responsibility to maintain the Property whatsoever. (b) Except as provided in Section 25 hereof, Redeveloper shall promptly and diligently repair, restore, and replace as required to maintain or comply as above, or to remedy all damage to or destruction of all or any part of the Property. The completed work of maintenance, compliance, repair, restoration, or replacement shall be equal in value, quality and use to the condition of the Property before the event giving rise to the work. Agency's election to perform any obligation of Redeveloper under this section on Redeveloper's failure or refusal to do so shall not constitute a waiver of any right or remedy for Redeveloper's default, and Redeveloper shall promptly reimburse, defend and indemnify Agency against all liability, loss, cost and expense arising from such election. (c) Redeveloper waives the provisions of California Civil Code sections 1941 and 1942 with respect to Agency's obligations for tenantability of the Leasehold Parcels and Redeveloper's right to make repairs and deduct the expenses of such repairs from rent. -24- 15. Alterations. Redeveloper shall not make any alterations or additions to the Leasehold Parcels (other than interior, non-structural, non- systemic alterations costing not more than $250,000 in any one instance) without the prior written consent of Agency's executive director, which shall not be unreasonably withheld. In constructing alterations or additions that exceed the cost of $250,000, or which affect the exterior or structural portions or the systems of the Leasehold Parcels, Redeveloper shall comply with (a) the Conditions of Construction set forth in Exhibit 4 and (b) the provisions of Section 11 hereof. If Redeveloper makes any alterations to the Leasehold Parcels as provided in this Section, the alterations or additions shall not be commenced until 20 days after Agency's executive director has received written notice from Redeveloper stating the date the construction of the alterations or additions is to commence so that Agency's executive director, on behalf of Agency, can post and record an appropriate notice of nonresponsibility. The provisions of this Section 15 shall not apply to the construction or installation of the Initial Improvements. 16. Destruction. (a) Partial Destruction; Restoration by Redeveloper. If less than fifty percent (50%) of the floor area of the improvements on the Property are rendered unusable by a casualty during the Term of this Lease and the proceeds of the casualty insurance are sufficient to do so or, if Redeveloper has failed to maintain the full amount of casualty insurance required by Section 17(c) hereof, whether or not the proceeds of the insurance are sufficient, then Redeveloper shall restore the Improvements on the Property to substantially the same condition as they were in immediately before such damage or destruction, in accordance with the original plans and specifications (except for changes as may be required by changed building and safety codes). Such damage or destruction shall not terminate this Lease. In reconstructing the improvements, Redeveloper shall comply with (i) the Conditions of Construction set forth in Exhibit 4 and (ii) the provisions of Section 11. In the event that, notwithstanding the fact that Redeveloper has maintained the full amount of casualty insurance required, the insurance proceeds are not adequate to fund the restoration of the Property, then Redeveloper may terminate the Lease in the manner provided herein below with respect to a destruction of more than 50% of the Property, as provided in Section 16(b) hereinbelow. -25- (b) Major Damage or Destruction; Redeveloper's Right to Terminate. - ------------------------------------------------------------------ If more than fifty percent (50%) of the floor area of the improvements on the Property are rendered unusable by a casualty during the Term of this Lease, then Redeveloper shall have the option of either repairing and reconstructing the Property or of terminating this Lease. If Redeveloper elects to repair and reconstruct, Redeveloper shall promptly do so and shall comply with (i) the Conditions of Construction set forth in Exhibit 4 and (ii) the provisions of Section 11. During the period of reconstruction, Redeveloper may continue to conduct business from the Property from temporary facilities such as a tent or temporary structures (subject to compliance with local building and safety codes or other applicable municipal codes). To exercise its right of termination, Redeveloper must comply with all of the following conditions: (i) Give Agency notice of termination within 30 days after the damage or destruction, specifying the date of termination which shall be not less than 60 days nor more than 120 days after the date such notice of termination is given; (ii) Prior to the termination date, cure any defaults on Redeveloper's part under this Lease; (iii) Continue to make all payments when due (including without limitation the prorated portion of any annual Base Rent becoming due after Redeveloper has given the notice of termination but prior to the date of termination), if any, as required by the provisions of this Lease until the date of termination, if Redeveloper continues to use the Property after the casualty but prior to the date of termination; (iv) Prior to the termination date, pay in full any outstanding indebtedness incurred by Redeveloper and secured by an encumbrance or encumbrances on the Property or any part thereof or an interest therein, or alternatively, deliver to Agency the written consent of the holders of all such encumbrances to the early termination of this Lease and extinguishment of their liens; (v) Prior to the termination date, cause to be discharged all liens and encumbrances encumbering the Property or Redeveloper's interest in the Leasehold Parcels resulting from any act or omission of Redeveloper; (vi) On or before the termination date, deliver possession of the Property to Agency, quitclaim all right, title and interest in the Property to Agency and cease to do business on the Property, and vacate the Property; -26- (vii) Prior to the termination date, effectively relinquish, assign, and deliver to Agency Agency's share of insurance proceeds resulting from the casualty as provided in subparagraph (d) below. In the event of any such termination, any Base Rent paid in advance for such Lease Year, if any, shall be pro-rated through the date the Lease is terminated. If Redeveloper does not either (i) terminate the Lease as provided herein, or (ii) restore the Property in a timely fashion, then the Redeveloper shall be in breach hereof. (c) No Abatement or Reduction of Rent. In case of any damage or destruction where this Lease is not terminated, there shall be no abatement or reduction of rent except to the extent such rent is paid through a rental continuation policy or rider. (d) Insurance Proceeds. (i) If Redeveloper is obligated or elects to restore the Property pursuant to this Section, the proceeds of any insurance maintained under this Lease or pursuant to the deed of trust (other than rental continuation insurance) shall be made available to Redeveloper for payment of costs and expenses of repair. If the insurance proceeds are insufficient to cover the cost of repair, then Redeveloper shall deposit the amount of the deficiency with Agency or shall otherwise provide assurances to Agency's reasonable satisfaction that such funds are and will be available, and such funds shall be disbursed by Redeveloper first, and the balance of the construction costs shall be disbursed from the insurance proceeds by Agency. (ii) In the event that the Lease is terminated by reason of the destruction of all or some part of the improvements on the Property, then the casualty insurance proceeds shall be divided between Agency and Redeveloper as follows: (A) Redeveloper shall receive the portion of the casualty insurance proceeds which bears the same relationship to the total casualty insurance proceeds as the value of the Initial Improvements not amortized through the Rent Reduction/Credit bears to the value of all of the improvements on the Property, both measured prior to the casualty loss. -27- (B) Any proceeds of fire and extended coverage insurance attributable to improvements on the Expansion Parcel, or any improvements that were purchased by Redeveloper, and that were constructed by Redeveloper at Redeveloper's cost and expense shall be retained by Redeveloper, except and to the extent of the credit, if any, given to Redeveloper by Agency on account of such improvements. (C) Agency shall receive the balance of the casualty insurance proceeds. Anything herein to the contrary notwithstanding, Agency alone shall be entitled to any rent continuation insurance proceeds. In the event that Redeveloper exercises its option to purchase under Section 30 hereof and, in fact, consummates such purchase, Redeveloper shall be entitled to all of the casualty insurance proceeds. (e) Lease to Govern Redeveloper's Rights. Redeveloper waives the provisions of Civil Code (S)1932(2) and Civil Code (S)1933(4), or any successor statutes, with respect to any destruction of the Leasehold Parcels, and agrees that Redeveloper's rights in case of destruction shall be governed solely by the provisions of this Lease. The provisions of this Lease shall also govern the Redeveloper's obligations with respect to insurance and restoration of casualty losses under the deed of trust. 17. Insurance and Indemnity. (a) Liability Insurance. -28- (i) Redeveloper shall procure at its sole cost and expense, and keep in effect from the date of this Lease and at all times until the end of the Term, Commercial General Public Liability Insurance applying to the use and occupancy of the Property, or any part thereof, and the business operated by Redeveloper, its sublessees, licensees, employees, agents, or any other occupant, on the Property. Such insurance shall include Broad Form Contractual liability insurance coverage insuring all of Redeveloper's indemnity obligations under this Lease. Such coverage shall have a minimum combined single limit of liability or the equivalent thereof of at least Five Million Dollars ($5,000,000). Redeveloper's public liability insurance shall include dram shop liability insurance or liquor liability insurance. All of Redeveloper's public liability insurance policies shall be written to apply to all bodily injury, property damage, personal injury and other covered loss, however occasioned, occurring during the policy term, shall be endorsed to provide that such coverage shall be primary and that any insurance maintained by Agency shall be excess insurance only. Such coverage shall also contain endorsements: (i) deleting any employee exclusion on personal injury coverage; (ii) deleting any liquor liability exclusion; and (iii) providing for coverage of employer's automobile non-ownership liability. All such insurance shall provide for severability of interests or a cross-liability endorsement; shall provide that an act or omission of one of the named insureds shall not reduce or avoid coverage to the other named insureds; and shall afford coverage for all claims based on acts, omissions, injury and damage, which claims occurred or arose (or the onset of which occurred or arose) in whole or in part during the policy period. The policy shall be endorsed to waive the insurer's rights of subrogation against Agency. (b) Workers' Compensation Insurance. Redeveloper shall also maintain Workers' Compensation insurance in accordance with California law, and an employer's liability insurance endorsement with customary limits. The policy shall be endorsed with a waiver of subrogation clause for Agency and the City and their members, council members, officers, employees, and agents. (c) Property Insurance. -29- (i) Redeveloper shall at Redeveloper's expense obtain and keep in force during the Term of this Lease a policy of Broad Form (fire and extended coverage) insurance covering loss or damage to the Property (including the Improvements), and all furniture, fixtures, equipment, and other personal property of Redeveloper, in the amount of the Full Replacement Cost Value thereof, as the same may exist from time to time, against all perils included within the classification of fire, extended coverage, builder's risk, vandalism, malicious mischief, and special extended perils ("Special Form," as that term is known in the insurance industry). Agency and Redeveloper shall be named as the loss payees on such policy, and any such coverage for the Convention Center Parcel shall include a Lender's Loss Payable endorsement in favor of Agency, but Agency's rights shall be subject to the provisions of this Lease. If such insurance coverage has a deductible clause, the deductible amount shall not exceed $100,000 per occurrence, and Redeveloper shall be liable for such deductible amount. Redeveloper shall, in addition, obtain and keep in force during the Term of this Lease a policy of rental interruption insurance covering a period of one year, with loss payable to Agency, which insurance shall also cover all Base Rent, Taxes and insurance premiums for said period. (ii) The "Full Replacement Cost Value" of the property to be insured under this Section shall be determined by Redeveloper subject to Redeveloper's exercise of its reasonable discretion. Not more frequently than once every three (3) years, either party shall have the right to notify the other party that it elects to have the Full Replacement Cost Value redetermined by an independent party. The determination and redeterminations shall be made promptly and in accordance with the rules and practices of the Insurance Services Office, or a like board recognized and generally accepted in the industry, and each party shall be promptly notified of the results by the party making the determination. The insurance policy shall be adjusted according to the redetermination. (d) Insurance Policies. (i) Not more frequently than once every three (3) years, if in the reasonable opinion of Agency the amount or type of any insurance at that time is not adequate, Redeveloper shall either acquire or increase the insurance coverage as reasonably required by Agency. -30- (ii) All insurance required under this Lease shall be issued by companies having a Best's rating of B++vi or better and otherwise reasonably satisfactory to Agency. Redeveloper shall deliver to Agency copies of policies of such insurance or certificates evidencing the existence and amounts of such insurance with loss payable clauses as required by this Section 28. No such policy shall be cancelable or subject to reduction of coverage or other modification except after thirty (30) days' prior written notice to Agency. Redeveloper shall, at least thirty (30) days prior to the expiration of such policies, furnish Agency with renewals or "binders" thereof. Redeveloper shall not do or permit to be done anything which shall invalidate the insurance policies referred to in this Section 28. All policies of insurance shall name Agency and the City and their members, council members, officers, employees and agents, and any additional parties designated by Agency, as additional insureds (except to the extent Agency is the loss payee or a Lenders Loss Payable endorsee). (iii) Redeveloper shall not use the Property in any manner, even if the use is for the purposes permitted herein, that will result in the cancellation of any insurance required under this Lease. Redeveloper further agrees not to keep on the Property or permit to be kept, used, or sold thereon, anything prohibited by any fire or other insurance policy covering the Property. (iv) If Redeveloper shall fail to obtain any insurance required under this Lease, Agency may, at its election, obtain such insurance and Redeveloper shall, as additional rent, reimburse Agency for the cost thereof plus a handling charge equal to Agency's costs in obtaining such insurance including but not limited to staff salaries and overhead, within five (5) days following demand therefor. If Redeveloper fails or refuses to maintain insurance as required hereunder, or fails to provide the proof of insurance, or fails to reimburse Agency for all costs of insurance including the handling charges, Agency shall have the right to declare this Lease in default without further notice to Redeveloper, and Agency shall be entitled to exercise all legal remedies for breach of this Lease. (v) All insurance required to be provided hereunder is in addition to, and not in lieu of, the indemnity provisions of Sections 17(f) and 17(g) hereof. The procuring of such required policies of insurance shall not be construed to limit Redeveloper's liability hereunder, nor to fulfill the indemnification provisions and requirements of this Lease. -31- (vi) Redeveloper shall maintain the insurance described herein from and after the earlier of (A) the close of escrow for the Convention Center Parcel or (B) the date Redeveloper accepts possession of any Parcel, through and until the expiration or sooner termination hereof. (e) Waiver of Subrogation. Redeveloper and Agency each hereby release and relieve each other and the City, and waive their entire right of recovery against the other and the City for loss or damage arising out of or incident to the perils insured against under Section 17(c), which perils occur in, on or about the Property, whether due to the negligence of Agency, the City or Redeveloper or their agents, employees, contractors and/or invitees. Redeveloper shall, upon obtaining the policies of insurance required hereunder, give notice to the insurance carrier or carriers that the foregoing mutual waiver of subrogation is contained in this Lease and obtain the insurance carrier's consent thereto. -32- (f) Indemnity. Redeveloper shall indemnify, defend, protect, and hold harmless Agency and the City (and Agency's and the City's members, employees, agents and contractors) from and against any and all claims, losses, proceedings, damages, causes of action, liability, costs and expenses (including reasonable attorneys' fees), arising from or in connection with, or caused by (i) any act, omission or negligence of Redeveloper or any sublessee of Redeveloper, or their respective contractors, licensees, invitees, agents, servants or employees, wheresoever on or adjacent to the Property the same may occur; (ii) any use of the Property, or any accident, injury, death or damage to any person or property occurring in, on or about the Property, or any part thereof, or from the conduct of Redeveloper's business or from any activity, work or thing done, permitted or suffered by Redeveloper or its sublessees, contractors, employees, or invitees, in or about the Property (other than to the extent arising as a result of Agency's or the City's sole active negligence or to the extent of any wilful misconduct of the Agency or the City, but excluding any matter with respect to which Agency or City has or enjoys the benefit of sovereign immunity); and (iii) any breach or default in the performance of any obligations on Redeveloper's part to be performed under the terms of this Lease, or arising from any negligence of Redeveloper, or any such claim or any action or proceeding brought thereon; and in case any action or proceeding be brought against Agency or the City (or Agency's or the City's agents, members, employees, agents and contractors) by reason of any such claim, Redeveloper upon notice from Agency shall defend the same at Redeveloper's expense by counsel satisfactory to Agency. Redeveloper, as a material part of the consideration to Agency, hereby assumes all risk of damage to property or injury to persons in, upon or about the Property arising from any cause other than Agency's gross negligence or intentional acts, and Redeveloper hereby waives all claims in respect thereof against Agency. These provisions are in addition to, and not in lieu of, the insurance required under this Section 17. Agency shall indemnify, defend, protect, and hold harmless Redeveloper from and against any and all claims, losses, proceedings, damages, causes of action, liability, costs and expenses (including attorneys' fees), arising from or in connection with, or caused by (i) any matter arising prior to the Effective Date (except when arising as a result of any inspection, investigation, entry or other activity of Redeveloper on the Property), or (ii) any litigation arising as the result of or in connection with a purported prior sale of the Property. -33- (g) Exemption of Agency from Liability. Except as provided to the contrary in Section 10(b) hereof, Redeveloper hereby assumes all risks and liabilities of a landowner in the possession, use or operation of the Property. Redeveloper hereby agrees that, Agency shall not be liable for injury to Redeveloper's business or any loss of income therefrom or for damage to the goods, wares, merchandise or other property of Redeveloper, Redeveloper's employees, invitees, customers, contractors, workers, or any other person in or about the Property, including any liability arising from the physical condition of the Property or the presence of any hazardous or toxic materials or substances on the Property, nor shall Agency be liable for injury to the person of Redeveloper, Redeveloper's employees, agents or contractors, whether such damage or injury is caused by or results from hazardous or toxic materials or substances, fire, steam, electricity, gas, water, or rain, or from the breakage, leakage, obstruction or other defects of pipes, sprinklers, wires, appliances, plumbing, air conditioning or lighting fixtures, or from any other cause, whether the said damage or injury results from conditions arising upon the Property or from other sources or places and regardless of whether the cause of such damage or injury or the means of repairing the same is inaccessible to Redeveloper. 18. Condemnation. (a) Definitions. (i) "Condemnation" means (A) the exercise of any governmental power, whether by legal proceedings or otherwise, by a Condemnor and (B) a voluntary sale or transfer by Agency to any Condemnor, either under threat of condemnation or while legal proceedings for condemnation are pending. (ii) "Date of Taking" means the date the Condemnor has the right to possession of the property being condemned. (iii) "Award" means all compensation, sums, or anything of value awarded, paid, or received on a total or partial condemnation. (iv) "Condemnor" means any public or quasi-public authority, or private corporation or individual, having the power of condemnation or eminent domain. -34- (b) Rights and Obligations Governed by Lease. If during the Term there is any taking of all or any part of the Property (including the Convention Center Parcel) or any interest in this Lease by Condemnation, the rights and obligations of the parties shall be determined pursuant to this Section. Each party waives the provisions of California Code of Civil Procedure Section 1265.130 allowing either party to petition the Superior Court to terminate this Lease in the event of a partial taking of the Property. (c) Total Taking. If the Property is totally taken by Condemnation, this Lease shall terminate on the Date of Taking. In the event of any such termination, any Base Rent paid in advance shall be pro-rated through the date the Lease is terminated. (d) Partial Taking. If any portion less than all of the Property is taken by Condemnation, this Lease shall remain in effect, except that Redeveloper can elect to terminate this Lease if the portion of the Property not so taken cannot be so repaired or reconstructed, taking into consideration the amount of the award available for repair, so as to be suitable for Redeveloper's continued use of the Property for the same use as the Property is being used immediately prior to the taking and the remaining premises would not be economically feasibly usable by Redeveloper. If Redeveloper elects to terminate this Lease, Redeveloper must exercise its right to terminate by giving notice to Agency within 90 days after the nature and the extent of the taking have been finally determined. If Redeveloper elects to terminate this Lease, Redeveloper also shall notify Agency of the date of termination, which date shall not be later than 180 days after Redeveloper has notified Agency of its election to terminate; except that this Lease shall terminate on the Date of Taking if the Date of Taking falls on a date before the date of termination as designated by Redeveloper. If Redeveloper does not terminate this Lease within the ninety-day period, this Lease shall continue in full force and effect. (e) Restoration of Property. If there is a partial taking of the Property and this Lease remains in full force and effect and pursuant to Section 18(d), Redeveloper shall accomplish all necessary restoration. -35- (f) Temporary Taking. On any taking of the temporary use of all or any part or parts of the Property for a period, or of any estate less than a fee, ending on or before the expiration date of the Term, the Term shall not be reduced, extended, or affected in any way, and Redeveloper shall be entitled to any Award for the use or estate taken. If a result of the taking is to necessitate expenditures for changes, repairs, alterations, modifications, or reconstruction of the improvements, Redeveloper shall accomplish all necessary changes, repairs, alterations, modifications, or reconstruction of the improvements at Redeveloper's sole cost and expense in accordance with Section 11 hereof. If any such taking is for a period extending beyond the expiration date of the Term, the taking shall be treated under the foregoing provisions for total and partial takings, depending upon whether the temporary taking is of all or only a part of the Property. (g) Effect on Rent. If any portion of the Property is taken by Condemnation and this Lease remains in full force and effect, there shall be no effect on or reduction of the Base Rent or other rent payable hereunder unless such Condemnation materially affects Redeveloper's ability to conduct business from the Property, in which case Base Rent shall be adjusted in a reasonable proportion reflecting the impact on Redeveloper's business by such Condemnation. -36- (h) Application of Award. Any award for any entire taking shall be apportioned between Agency and Redeveloper as their interests may appear. In the event of a partial taking, any part of the award attributable to improvements shall be divided between the parties in the manner provided in Section 16(d)(ii) hereof, and, in consideration of the abatement of rent, any part of the award attributable to land shall be paid to Agency; provided, however, that nothing contained herein shall be deemed to give Agency any interest in or require Redeveloper to assign to Agency any award made to Redeveloper for the unamortized value of any improvements or furniture, fixtures, or equipment or other personal property on the Property constructed or provided by Redeveloper at Redeveloper's sole cost and expense in accordance with this Lease (amortized on a straight line basis over the period in which the cost of such improvements or furniture, fixtures or equipment or personal property are credited to Base Rent), taking of personal property and fixtures belonging to Redeveloper and removable by Redeveloper at the expiration of the Term hereof (except to the extent Redeveloper has received a rent credit therefor), as provided hereunder, or for the interruption of, or damage to, Redeveloper's business or for relocation expenses recoverable against the condemning authority, or in the event of a partial taking, the cost of restoring the Property to a usable condition. Anything herein to the contrary notwithstanding, in the event of a termination of the Lease by reason of any such taking, Agency shall be relieved of any obligation to repay to Redeveloper the initial purchase price of the Convention Center Parcel, it being understood and agreed by the parties that Redeveloper's rights shall be limited to the allocation of the award or settlement in lieu thereof. (i) Waiver of Right to Take By Eminent Domain. Agency hereby waives its right to acquire the Property or any material part thereof by exercise of the power of eminent domain, for the five year period from and after the Effective Date, and any time after the opening of the Card Club for business. 19. Assignment, Subletting and Encumbering. -37- (a) Prohibition Against Voluntary Assignment, Subletting, and - -------------------------------------------------------------- Encumbering. Except as provided in this Section to the contrary, Redeveloper shall not, without Agency's prior written consent, voluntarily assign or encumber Redeveloper's interest in this Lease or in the Leasehold Parcels, or sublease substantially all or any part of the Leasehold Parcels, or allow any other person or entity (except Redeveloper's authorized representatives) to occupy or use all or any part of the Property. For the purposes hereof, an "encumbrance" shall mean mortgage, deed of trust, land sale contract, lease or other financing device. Any attempted assignment, encumbrance, or sublease shall be voidable by Agency and, at Agency's election, shall constitute a default hereunder. No consent to any assignment, encumbrance, or sublease shall constitute a further waiver of the provisions of this Section. Any sale or transfer of the Convention Center Parcel other than as permitted hereunder shall void the Agency's obligation to repurchase the Convention Center Parcel upon termination of the Lease but not its right to do so at its option. (b) Special Exceptions. Anything in Section 19(a) to the contrary notwithstanding, Agency hereby acknowledges that: (i) Redeveloper intends, immediately upon the commencement of the Term of the Lease, to convey the Convention Center Parcel and assign this Lease to Hollywood Park, Inc., and Hollywood Park, Inc., intends to let the operation of the Card Club to Compton Entertainment Inc., or a third party. Subject to Hollywood Park, Inc., assuming all obligations under this Lease, Agency hereby consents to said conveyance and assignment of this Lease and agrees that the original Redeveloper shall thereupon be relieved of all obligations hereunder other than those obligations which accrued prior to the date of the assignment, and other than those obligations specifically not assumed by Hollywood Park, Inc. (ii) At such time as Hollywood Park, Inc. qualifies to hold a gaming license, it intends to convey the Convention Center Parcel and assign this Lease to a joint venture composed of itself and CEI, and CEI intends to assign its rights under the lease of the Card Club and the City of Compton Gaming License to said joint venture. Provided that Hollywood Park, Inc., then holds a majority in interest in equity ownership and managerial control of the joint venture, Agency hereby consents to said conveyance and assignments. (iii) Nothing herein shall be deemed to waive Agency's rights under Section 19(a) with respect to any other or additional assignments or sublettings, whether of a similar or dissimilar nature. -38- (iv) The Agency shall not unreasonably withhold its consent to a sublease of the Hotel. No consent by the Agency to any sublease or assignment shall operate to release the Redeveloper or any assignee from any of obligations hereunder undertaken by Redeveloper or assumed by such assignee, except as provided in Section to the contrary. (c) Right to Sublease Restaurant, Bar, Night Club, and Parking Area. - --------------------------------------------------------------------- Notwithstanding the provisions of Section 19(a) hereof, Redeveloper shall have the right, without Agency's consent, to lease or sublease discrete portions of the Property, such as a restaurant, bar, nightclub, and parking areas, to an operator, provided that Redeveloper shall provide to Agency thirty (30) days prior written notice of the name of the sublessee and the name of the operator of the restaurant, bar or nightclub. Redeveloper shall not sublease or otherwise assign this DDA or the right to operate the Card Club area to any person or entity that has not qualified under Municipal Code 9-10 with respect to obtaining a license to operate a card club. (d) Corporate Reorganization. Any dissolution, merger, consolidation, or other reorganization of Redeveloper, or the sale or other transfer of a controlling percentage of the capital stock of Redeveloper, shall be deemed a voluntary assignment hereof. The phase "controlling percentage" means the ownership of, or the right to vote, stock possessing 50% or more of the total combined voting power of all classes of Redeveloper's capital stock issued, outstanding, and entitled to vote for the election of directors. As to any issuance or transfer of shares whatsoever, Redeveloper shall promptly notify the Agency of (i) the number of shares issued or transferred, (ii) the name of the recipient or transferee of such shares, and (iii) the number of all shares of Redeveloper then issued and outstanding, and the percentage of all shares so transferred or changed. In the event a corporation whose stock is publicly traded shall become a successor in interest to Redeveloper, then this preceding sentence shall apply only to a transfer of 5% more of the voting securities of such corporation. If Redeveloper changes to a partnership, the foregoing provisions shall similarly apply to partnership interests so transferred or created. (e) Encumbrance or Assignment as Security. -39- (i) Notwithstanding any other provision contained in this Lease, Redeveloper shall have the right to encumber or assign Redeveloper's interest in the Convention Center Parcel and in this Lease to any bank, savings and loan, insurance company, or other institutional lender for the purpose of financing the construction of the Initial Improvements or for purposes of expansion on the Property and for the purpose of providing a take-out loan (in a principal amount not to exceed the actual total cost of constructing such Initial Improvements or of constructing the expansion facilities), provided only that upon execution of such encumbrance (or any amendment, supplement or modification thereto) a true copy of such instrument and the obligation secured thereby be promptly delivered to Agency together with a written notice of the name and mailing address of the lender, the date and place of recording or filing of record thereof and recorder's instrument number, book and page reference or other recorder's index reference. Until such true copies and notice are delivered to Agency any such instrument shall have no force or effect whatsoever on the enforcement by Agency of any provisions of this Lease or any rights or remedies hereunder. During the existence of a permitted encumbrance and following delivery thereof there shall be no cancellation, surrender, acceptance of surrender or modification of this Lease except (i) by a written instrument executed by Agency, Redeveloper and the lender, (ii) by reason of Redeveloper's exercise of the option provided for in Section 30 hereof, or (iii) default under the Lease that is not timely cured by Redeveloper or the lender. Lessor's interest in this Lease shall at all times remain senior and superior to the lien of any deed of trust or mortgage securing any such loan, and any such deed of trust or mortgage shall be subject to Agency's right to reacquire the Convention Center Parcel upon termination of the Lease, as hereinbefore provided. (ii) All financing described in the preceding paragraph shall provide that Agency shall have the right but not the obligation to assume Redeveloper's financing for any improvement of the Property. Redeveloper shall cause the lender to execute all documentation necessary to facilitate this right. Agency's exercise of this right shall not constitute a waiver of any other right Agency may have against Redeveloper. 20. Default. (a) Redeveloper's Default. The occurrence of any of the following shall constitute a default by Redeveloper: -40- (i) Failure to pay rent or any other payment required to be made by Redeveloper hereunder as and when due and the continuation of such failure to pay rent for ten (10) days after delivery by Agency to Redeveloper of written of such failure (in which event a Notice to Pay Rent or Quit provided in accordance with Code of Civil Procedure Section 1161 (or any successor statute) shall constitute the notice required for this purpose). (ii) Failure to pay any Taxes which Redeveloper is obligated to pay, other than possessory interest taxes to be paid by Agency pursuant to Section 8(a) hereof, on a timely basis, or the failure to provide any insurance required hereunder, and the continuation of such failure for ten (10) days after delivery by Agency of written of such failure to Redeveloper (in which event a notice provided in accordance with Code of Civil Procedure Section 1161 (or any successor statute) shall constitute the notice required for this purpose). (iii) Abandonment or surrender of the Property or the leasehold estate by Redeveloper. (iv) Cessation in a material fashion of either the Hotel or Card Club business for thirty (30) consecutive days. As used herein, cessation of operation of the Hotel shall mean the failure to operate the main floor and at least one floor of guest rooms, including service to said rooms. Said thirty (30) day period shall be subject to Section 32 hereof and shall not include any reasonably necessary periods of closure for repair or remodeling. (v) Failure to comply timely with the obligations set forth in the Schedule of Performance attached hereto as Exhibit 3, and the continuation of such failure or the failure to commence performance and diligently pursue the same to completion for thirty (30) days after receipt of written notice thereof from Agency. (vi) Failure to perform any other covenant or provision of this Lease, if the failure to perform is not cured within thirty (30) days after written notice. If the failure to perform cannot reasonably be cured within thirty (30) days, Redeveloper shall not be in default of this Lease if Redeveloper commences to cure the failure to perform within the thirty (30) day period and thereafter diligently and in good faith prosecutes the cure to completion. (vii) The subjection of any right or interest to attachment, execution, or other levy, or to seizure under legal process, if not released within ninety (90) days after such levy. -41- (viii) An assignment by Redeveloper for the benefit of creditors or the filing of a voluntary or involuntary petition by or against Redeveloper under any law for the purpose of adjudicating Redeveloper a bankrupt; or for extending time for payment, adjustment, or satisfaction of Redeveloper's liabilities; or for reorganization, dissolution, or arrangement on account of or to prevent bankruptcy or insolvency; unless the assignment or proceeding, and all consequent orders, adjudications, custodies, and supervisions are dismissed, vacated, or otherwise permanently stayed or terminated within ninety (90) days after the assignment, filing, or other initial event. (ix) The appointment of a receiver, unless such receivership is terminated within ninety (90) days after the appointment of the receiver, to take possession of Redeveloper's interest in the Property or of Redeveloper's interest in the leasehold estate or of Redeveloper's operations on the Property for any reason, including but not limited to, assignment for benefit of creditors or voluntary or involuntary bankruptcy proceedings, but not including receivership (A) pursuant to a permitted first leasehold encumbrance, or (B) instituted by Agency, the event of default being not the appointment of a receiver at Agency's instance but the event justifying the receivership, or (C) commenced pursuant to any license dispute. (x) Failure to pay when due any license fee for the Card Club License as required by Section 9-10 of the Compton Municipal Code, or any additional sums set forth in the City's Resolution No. 17,087, as amended, and the continuation of such failure to pay such fee or sums for ten (10) days after delivery by the City of Compton or Agency to Redeveloper of written notice of such failure. -42- (xi) Termination, annulment, cancellation, revocation, repeal, or rescission of any of Redeveloper's licenses or permits to operate a Card Club from the Project, or any other failure of Redeveloper to keep in full force and effect any license or permit required to operate the Card Club from the Project, and the expiration of all appeals thereof or the expiration of the time period for applying for an appeal or other procedure to reinstate the license or permit pursuant to the terms of any applicable ordinances, statutes, or regulations and the entry of a fraud judgment, supporting such termination, punishment, cancellation, revocation, etc., of such licenses if judicially reviewed; provided, however, notwithstanding the foregoing, if the reason for the termination, annulment, cancellation, revocation, repeal, or rescission is Redeveloper's failure to pay any fees to the City of Compton or the State of California as and when due, then Redeveloper shall be in default hereunder if such fees are not paid within sixty (60) days after their due date. Anything herein to the contrary notwithstanding, in this event that the then Redeveloper is not also the operator of the Card Club, the Redeveloper shall have ninety (90) days within which to substitute an approved operator for the Card Club, provided that the Agency shall extend such period for a reasonable time upon a creditable showing that the reason for delay is a matter not within the control of Redeveloper or its successor in interest. (b) Security for Performance of Redeveloper's Duties. As additional collateral security for Redeveloper's performance of its obligations under this Lease, Redeveloper shall execute and deliver to Agency: (i) As provided in Section 1(d)(iii) hereof, a first deed of trust and fixture filing encumbering the Convention Center Parcel, all improvements thereon, and all rights attendant thereto. (ii) A security agreement and a Financing Statement (UCC 1) covering all furniture, fixtures and equipment and other personal property installed on or used in connection with the Convention Center Parcel and any and all replacements therefor or additions thereto. (iii) A security agreement and a Financing Statement (UCC 1) covering all furniture, fixtures and equipment and other personal property installed on or used in connection with the Leasehold Parcels and any and all replacements therefor or additions thereto. -43- Redeveloper, or its successors in interest, shall, at the request of Agency, execute any additional financing statements or continuation statements required to perfect and maintain the lien of such security agreements on the personalty so encumbered, including any replacements therefor or additions thereto, whether or not the filing period for any such continuation statement may have expired. (c) Remedies. (i) Cumulative Nature of Remedies. If any default by Redeveloper shall continue uncured, following notice of default as required by this Lease, for the period, if any, applicable to the default under the applicable provision of this Lease, Agency shall have the remedies described in this subsection (c) in addition to all other rights and remedies provided by the security instruments referred to in subsection (b) above or otherwise provided by law or equity, to which Agency may resort cumulatively or in the alternative. (ii) Termination for Breach. Agency may at Agency's election terminate this Lease for breach by giving Redeveloper written notice of termination. In the event Agency terminates this Lease, Agency may recover possession of the Property (which Redeveloper shall surrender and vacate upon demand) and remove all persons and property therefrom, and Agency shall be entitled to recover as damages all of the following: (A) The worth at the time of the award of any unpaid rent or other charges which have been earned at the time of termination; (B) The worth at the time of the award of the amount by which the unpaid rent and other charges which would have been earned after termination until the time of the award exceeds the amount of the loss of such rental or other charges that Redeveloper proves could have been reasonably avoided; (C) The worth at the time of the award of the amount by which the unpaid rent and other charges for the balance of the term after the time of the award exceeds the amount of the loss of such rental and other charges that Redeveloper proves could have been reasonably avoided; and (D) Any other amount necessary to compensate Agency for the detriment proximately caused by Redeveloper's failure to perform its obligations under this Lease or which in the ordinary course of things would be likely to result therefrom. -44- As used in subsections (A) and (B) above, the "worth at the time of the award" shall be computed by allowing interest at the rate of 10 percent per annum. As used in subsection (C) above, the "worth at the time of the award" shall be computed by discounting such amount at the discount rate of the Federal Reserve Bank of San Francisco at the time of the award, plus one percent. (iii) Continuation of the Lease. Even though Redeveloper has breached this Lease and abandoned the Property, at Agency's option this Lease shall continue in effect for so long as Agency does not terminate Redeveloper's right to possession, and Agency may enforce all of its rights and remedies hereunder, including the right to recover rent as it comes due under this Lease, and in such event Agency will permit Redeveloper to sublet the Property or to assign its interest in the Lease, or both, with the consent of Agency,which consent will not unreasonably be withheld provided the proposed assignee or sublessee is reasonably satisfactory to Agency as to credit and reputation and will occupy the Property for the same purposes specified herein. For purposes of this subsection, the following shall not constitute a termination of Redeveloper's right to possession: (i) acts of maintenance or preservation or efforts to relet the Property; or (ii) the appointment of a receiver under the initiative of Agency to protect Agency's interest under this Lease. (iv) Use of Redeveloper's Personal Property. In the event of termination of the Lease for breach, Agency may at Agency's election use Redeveloper's personal property and trade fixtures located on, about or appurtenant to the Property or any of such property and fixtures without compensation and without liability for use or damage, or store them for the account and at the cost of Redeveloper. The election of one remedy for any one item shall not foreclose an election of any other remedy for another item or for the same item at a later time. -45- (v) Assignment of Subrents. Redeveloper assigns to Agency all subrents and other sums falling due from tenants, subtenants, licensees, and concessionaires (herein collectively called "subtenants") during any period in which Agency has the right under this Lease, whether exercised or not, to reenter the Property for Redeveloper's default, and Redeveloper shall not have any right to such sums during that period. This assignment is subject and subordinate to any and all assignments of the same subrents and other sums to the lender under a permitted first leasehold encumbrance. Agency may at Agency's election upon the breach hereof by Redeveloper reenter the Property with or without process of law, without terminating this Lease, and either or both collect these sums or bring action for the recovery of the sums directly from such obligors. Agency shall receive and collect all subrents and proceeds from reletting, applying them: first, to the payment of reasonable expenses (including attorneys' fees or brokers' commissions or both) paid or incurred by or on behalf of Agency in recovering possession, placing the Property in good condition, and preparing or altering the Property for reletting; second, to the reasonable expense of securing new tenants or subtenants; third, to the fulfillment of Redeveloper's covenants to the end of the Term; and fourth, to Agency's uses and purposes. Redeveloper shall nevertheless pay to Agency on the due dates specified in this Lease the equivalent of all sums required of Redeveloper under this Lease, plus Agency's expenses, less the proceeds of the sums assigned and actually collected under this provision. (d) Late Charge. Redeveloper hereby acknowledges that late payment by Redeveloper to Agency of rent and other charges due under this Lease will cause Agency to incur costs not contemplated by this Lease, the exact amount of which will be extremely difficult to ascertain. Such costs include, but are not limited to processing and accounting charges, and late charges which may be imposed on Agency by the terms of any mortgage or trust deed covering the Property, or bond issues of Agency. Accordingly, if any installment of rent or any other charge due from Redeveloper is not received by Agency or Agency's designee within ten (10) days after such amount shall be due, then, at Agency's election and upon Agency's demand, Redeveloper shall pay to Agency a late charge equal to five percent (5%) of such overdue amount. The parties hereby agree that such late charge represents a fair and reasonable estimate of the costs Agency will incur by reason of the late payment by Redeveloper. No late charge may be imposed more than once for the same late rental payment. Acceptance of such late charge by Agency shall in no event constitute a waiver of Redeveloper's default with respect to such overdue amount, nor prevent Agency from exercising any other rights and remedies granted to it hereunder. (e) Lender's Right to Cure Defaults. -46- (i) Notice of Default. Concurrently with giving notice of default to Redeveloper under Section 20(a), above, Agency shall deliver a copy of such notice of default to the lender under a permitted encumbrance at its address as furnished to Agency in accordance with Section 19(e). (ii) Lender's Right to Cure. During the continuance in effect of a permitted encumbrance, Agency will not terminate this Lease because of any default on the part of Redeveloper if the lender, within 30 days after Agency has sent a written notice pursuant to Section 20(a): (A) Cures such default, if the default can be cured by the payment of money, or, if the default is not curable by the payment of money, commences or causes the trustee under the encumbrance to commence, and thereafter diligently pursues to completion proceedings to foreclose the encumbrance; and (B) Keeps and performs all of the covenants and conditions of this Lease requiring the payment or expenditure of money by Redeveloper until such time as Redeveloper's leasehold interest is sold upon foreclosure pursuant to the encumbrance, or transferred by an assignment in lieu of foreclosure. (iii) Transfer by Lender. Notwithstanding the provisions of Section 19(a) hereof restricting assignment of this Lease, this Lease may be assigned to the lender by judicial or non-judicial foreclosure or by assignment in lieu of foreclosure (without, however, releasing Redeveloper from any of its obligations hereunder) without further consent of Agency or any assumption agreement by the lender, the liability of the lender being limited to the period of its possession or ownership of this Lease. No other or further assignment shall be made except in accordance with the provisions of Section 19(a) of this Lease. (f) Waiver of Rights. Redeveloper hereby waives any right of redemption or relief from forfeiture under California Code of Civil Procedure Sections 1174 or 1179, or under any other present or future law, in the event Redeveloper is evicted or Agency takes possession of the Property by reason of any default by Redeveloper hereunder. -47- (g) Agency's Default. Agency shall not be deemed to be in default in the performance of any obligation required to be performed by it hereunder unless and until it has failed to perform such obligation within ninety (90) days after written notice by Redeveloper to Agency specifying wherein Agency has failed to perform such obligation; provided, however, that if the nature of Agency's obligation is such that more than ninety (90) days are required for its performance, then Agency shall not be deemed to be in default if it shall commence such performance within such ninety (90) day period and thereafter diligently and in good faith prosecute the cure to completion. 21. Agency's Entry on Property. Agency and its authorized representatives shall have the right to enter the Property at all reasonable times upon reasonable notice to Redeveloper for any of the following purposes: (a) To determine whether the Property is in good condition and whether Redeveloper is complying with its obligations under this Lease; (b) To do any necessary maintenance and to make any restoration to the Property that Agency has the right to perform; (c) To serve, post, or keep posted any legal notices required or allowed under the provisions of this Lease; (d) During the last two years of the Term hereof, to show the Property to prospective brokers, agents, buyers, lenders, or persons interested in an exchange, at any time during the Term. Agency shall not be liable in any manner for any inconvenience, disturbance, loss of business, nuisance, or other damage arising out of Agency's entry on the Property as provided in this Section, except damage resulting from the acts or omissions of Agency or its authorized representatives. Redeveloper shall not be entitled to an abatement or reduction of rent if Agency exercises any rights reserved in this Section. Agency shall conduct its activities on the Property as allowed in this Section in a manner that reasonably attempts to minimize any inconvenience, annoyance, or disturbance to Redeveloper's construction or business operations. -48- 22. Notices. Any notice, demand, request, consent, approval or communication that either party desires or is required to give to the other party shall be in writing and shall be given to the addresses set forth below, and shall be deemed delivered three days after deposit into the United States mail, postage prepaid, by registered or certified mail, return receipt requested. Unless notice of a different address has been given in accordance with this Section, all such notices shall be addressed as follows: If to Agency, to: Community Redevelopment Agency of the City of Compton 205 South Willowbrook Avenue Compton, California 90220 Attn: Executive Director With a copy to: Richards, Watson & Gershon 333 South Hope Street, 38th Floor Los Angeles, California 90071 Attn: William L. Strausz If to Redeveloper, to: Compton Entertainment, Inc. 15045 Salt Lake Avenue Industry, California 91746 Attn: President With a copy to: Mitchell, Silberberg & Knupp 11377 West Olympic Boulevard Los Angeles, California 90064 Attn: Jerry Neuman 23. Interest on Past-due Obligations. Any amount due to Agency which not paid when due shall bear interest at the maximum rate then allowable to be charged by non-exempt lenders under the usury and other applicable laws of the State of California from the date due until paid. Payment of such interest shall not excuse or cure any default by Redeveloper under this Lease. 24. Attorneys' Fees. (a) If either party becomes a party to any litigation concerning this Lease or the Property, by reason of any act or omission of the other party or its authorized representatives, the other party shall be liable to such party for such party's actual attorney's fees and court costs incurred by it in the litigation. In the event of any litigation is undertaken against Agency concerning the validity of this DDA, Redeveloper shall indemnify, defend, and hold harmless Agency for all costs and expenses incurred by Agency on account of such litigation. Such defense shall be undertaken by legal counsel mutually selected by Agency and Redeveloper. Provided, however, -49- if Agency shall become a defendant to any lawsuit concerning the validity of this DDA, and Redeveloper informs Agency that it does not wish to indemnify, hold harmless and defend Agency, then Agency may immediately cancel and terminate this DDA without any liability to Redeveloper whatsoever, and Redeveloper shall be relieved of all liability hereunder other than liability for matters (other than the defense of such litigation) which arose prior to such termination. -50- (b) If either party commences an action against the other party arising out of or in connection with this Lease, the prevailing party shall be entitled to have and recover from the losing party reasonable attorneys' fees and costs of suit. 25. Estoppel Certificates. At any time and from time to time, within thirty (30) days after notice of request by either party, the other party shall execute, acknowledge, and deliver to the requesting party, or to such other recipient as the notice shall direct, a statement certifying that this Lease is unmodified and in full force and effect; or, if there have been modifications, that it is in full force and effect as modified in the manner specified in the statement and acknowledging that there are no uncured defaults or failures to perform any covenant or provision of this Lease on the part of the requesting party or specifying any such defaults or failures which are claimed to exist. The statement shall also state the dates to which the rent and any other charges have been paid in advance. The statement shall be such that it can be relied on by any auditor, creditor, commercial banker, and investment banker of either party and by any prospective purchaser or the lender of the Property or all or any part or parts of Redeveloper's or Agency's interests under this Lease. Either party's failure to execute, acknowledge, and deliver, on request, the certified statement described above within the specified time shall constitute a breach of this Lease. 26. Surrender of Property. At the expiration or earlier termination of the Term (other than by reason of the exercise of the option set forth in Section 30 hereof), Redeveloper shall surrender to Agency the possession of the Property. Surrender or removal of improvements, fixtures and trade fixtures shall be as directed in the provisions of this Lease on ownership of improvements, fixtures and trade fixtures at expiration or termination. Except as provided in Section 25 hereof to the contrary, Redeveloper shall leave the surrendered property and any other property in good and broom clean condition. All personal property that Redeveloper is not required to surrender but that Redeveloper does abandon shall, at Agency's election, become Agency's property at the expiration or the sooner termination of this Lease. 27. Form of Nondiscrimination and Nonsegregation Clauses; Local - ---------------------------------------------------------------- HIRING AND AFFIRMATIVE ACTION. ------------------------------ (a) Redeveloper shall refrain from restricting the rental, sale or lease of the Property, or any portion thereof, on the basis of sex, age, handicap, marital status, race, color, religion, creed, ancestry or national origin of any person. All deeds, leases or contracts of sale shall contain or be subject to substantially the following nondiscrimination or nonsegregation clauses: -51- 1. In deeds: "The grantee herein covenants by and for himself, his heirs, executors, administrators and assigns, and all persons claiming under or through them, that there shall be no discrimination against or segregation of, any person or group of persons on account of sex, marital status, race, age, handicaps color, religion, creed, national origin or ancestry in the sale, lease, sublease, transfer, use, occupancy, tenure or enjoyment of the land herein conveyed, nor shall the grantee himself or any person claiming under or through him, establish or permit any such practice or practices of discrimination or segregation with reference to the selection, location, number, use or occupancy of tenants, lessees, subtenants, sublessees or vendees in the land herein conveyed. The foregoing covenants shall run with the land." 2. In leases: "The lessee herein covenants by and for himself, his heirs, executors, administrators and assigns, and all persons claiming under or through him, and this lease is made and accepted upon and subject to the following conditions: "That there shall be no discrimination against or segregation of any person or group of persons on account of sex, marital status, race, age, handicap, color, religion, creed, national origin or ancestry, in the leasing, subleasing, transferring, use, or enjoyment of the land herein leased, nor shall the lessee himself, or any person claiming under or through him, establish or permit any such practice or practices of discrimination or segregation with reference to the selection, location, number, use or occupancy, of tenants, lessees, sublessees, subtenants or vendees in the land herein leased." 3. In contracts relating to the sale or transfer of the Property or any interest therein: "There shall be no discrimination against or segregation of any person or group of persons on account of sex, marital status, race, age, handicap, color, religion, creed, national origin or ancestry in the sale, lease, sublease, transfer, use, occupancy, tenure or enjoyment of the land, nor shall the transferee himself or any person claiming under or through him, establish or permit any such practice or practices of discrimination or segregation with reference to the selection, location, number, use or occupancy, of tenants, lessees, subtenants, sublessees or vendees of the land." -52- (b) Redeveloper further understands and agrees that in fulfillment of the provisions of this DDA, including this Lease, and in complying with the request of the Agency and the City Council of the City, that the creation of new jobs from this Project shall be filled with residents of the City of Compton who have lived in the City of Compton for more than one year, to the extent that it is practical and reasonable. Redeveloper shall make every reasonable effort to fulfill the provisions of this DDA, including the Lease, by complying with Ordinance No. 1667 of the City of Compton, relating to an Affirmative Action Program. Redeveloper shall work with local institutions to establish training programs to assist in ensuring a qualified local applicant base is established for all levels of employment at the Hotel, the Entertainment Center, and any related enterprises. Further, preferences shall be given to local residents when such residents demonstrate equal capability relative to other applicants for the same job. The covenants and agreements set forth in this subsection (b) shall survive the expiration or termination of this Lease after acquisition of title to the Property by Redeveloper, whether by exercise of the Option to purchase or otherwise. 28. Local Contractors. Redeveloper shall make commercially reasonable efforts to allocate the work associated with the construction of the Initial Improvements in a manner which provides local contractors with an opportunity to participate in such work. Contracts for the Initial Improvements shall be let on the basis of price, quality of service and reputation. Further, preferences shall be give to local contractors and minority owned businesses when such contractors demonstrate equal capability and bondability relative to other contractors for the scope of work to be performed. 29. Expansion Parcels. -53- (a) Subject to the provisions of Section 29(b), during the first fifteen (15) years Lease Years of the Term, Agency shall have the full right to use the Expansion Parcels, without payment of consideration to Redeveloper. Any such use shall be of a type which shall not disturb Redeveloper's quiet enjoyment of the balance of the Property or otherwise adversely affect the use thereof. Agency shall retain all rentals and other revenues payable on account of the Expansion Parcels. Provided, however, that Redeveloper shall have the right, upon ninety (90) days notice in writing to Agency, to terminate Agency's use of the Expansion Parcels. Redeveloper shall terminate Agency's use of the Expansion Parcels only upon delivery to Agency of plans and specifications and financing commitments, as described in Section 11 hereof, for a new card club or casino or other use permitted by the Agency on the Expansion Parcels, together with reasonable evidence satisfactory to Agency that Redeveloper shall open the new card club or casino or other use permitted by the Agency for business within nine (9) months after the termination date of Agency's right to use the Expansion Parcels. (b) If Redeveloper does not open the new card club or casino or other use permitted by the Agency for business on the Expansion Parcels or another portion of the Property in compliance with Section 9(g) hereof prior to the expiration of the 15th Lease Year, and Agency receives a bona fide proposal, from a reputable third party developer with the capacity to perform, which proposal Agency wishes to accept, Agency shall give notice in writing thereof to Redeveloper. Unless, within said ninety (90) day notice period, Redeveloper irrevocably commits to either (i) open a new casino or card club or other permitted use on the Expansion Parcels within one year thereafter, or (ii) undertake the same type of development as has been proposed by the offeror or one meeting or exceeding the benefit to the Agency of that of the offeror, Agency shall have the right to proceed with the other transaction, and, upon the closing thereof, all Redeveloper's rights in the Expansion Parcels shall terminate and shall be of no further force or effect. In such event, the purchase price set forth in the Option (described below), shall be reduced as provided in Section 30(e) hereof, and the Base Rent shall be equitably reduced (based upon the values established in the Agency's original appraisal for the parcels comprising the Property), effective upon the closing of the transaction between Agency and the third party developer. Any attempt by Redeveloper to wrongfully interfere with the other transaction or the closing thereof, other than by committing to the expansion as provided hereinabove, may, at the option of Agency, be deemed default hereunder. -54- 30. Option to Purchase. Agency hereby grants to Redeveloper the option to purchase the Leasehold Parcels, including all buildings, furniture, furnishings and equipment and inventory of food, beverages and other supplies (the "Option"), subject to the following terms and conditions: (a) Subject to the provisions hereof, Redeveloper may deliver a written notice of Redeveloper's election exercise the Option at any time during the Term hereof. Escrow shall close on or before ninety (90) days after receipt by Agency of Redeveloper's written notice of Redeveloper's election to exercise the Option, and Agency shall deliver to Redeveloper marketable title to the Leasehold Parcels free and clear of any encumbrances other than those (i) in existence at the Effective Date, (ii) approved by Redeveloper pursuant to this Lease, or (iii) created or incurred by Redeveloper; provided, however, the Property shall be free and clear of all monetary liens in existence on the Effective Date other than those created by Redeveloper (including, without limitation, deeds of trust executed by the Redeveloper, its successors and assigns, and mechanics liens resulting from work performed at the request of the Redeveloper). Agency agrees that it will not voluntarily encumber title to the Leasehold Parcels without Redeveloper's prior written consent. At the closing, Agency shall deliver to Redeveloper a good and sufficient grant deed with respect to the Leasehold Parcels. (b) Redeveloper shall have no right to exercise the Option, notwithstanding any provision in the grant of option to the contrary (i) at any time when Redeveloper is in default hereunder and continuing until the default is cured, or (ii) during the period of time commencing on the day after a monetary obligation to Agency is due from Redeveloper and unpaid (without any necessity for notice thereof to Redeveloper) and continuing until the obligation is paid, or (iii) in the event that this Lease has been terminated for any reason, or (iv) during any time Redeveloper's payment of license fees required by Section 9-10 of the Compton Municipal Code, or additional sums set forth in the City's Resolution No. 17,087, as amended, is due and unpaid, or (v) during any time any license or permit of Redeveloper or any subtenant or operator to operate a Card Club from the Property is suspended and has not been reinstated, subject, however, to the right of Redeveloper to replace an operator pursuant to Section 20(a)(xi) hereof. -55- (c) All rights of Redeveloper under this Section shall terminate and be of no further force or effect, if this Lease is terminated for any reason, or if any license or permit from the City of Compton or the State of California to operate a Card Club from the Property is terminated, annulled, canceled, revoked, repealed, or rescinded, or any other failure of Redeveloper or an operator claiming under Redeveloper to keep in full force and effect any license or permit required to operate the Card Club from the Project, and the expiration of all appeals thereof or the expiration of the time period for applying for an appeal or other procedure to reinstate the license or permit pursuant to the terms of any applicable ordinances, statutes, or regulations; provided, however, notwithstanding the foregoing, if the reason for the termination, annulment, cancellation, revocation, repeal, or rescission is Redeveloper's failure to pay any fees to the City of Compton or the State of California as and when due, then Redeveloper's rights under this Option shall terminate if such fees are not paid within 60 days after their due date. (d) The Option granted to Redeveloper in this Lease is personal to Redeveloper, and may not be assigned voluntarily or involuntarily, or be exercised by any person or entity other than Redeveloper or a permitted assignee of Redeveloper. (e) Redeveloper shall have the right to elect to purchase only the Hotel Parcel and the Parking Parcels at the time Redeveloper exercises the Option. In such case,at the time Redeveloper exercises the Option, Redeveloper may elect either (i) to terminate this Lease as to the Expansion Parcels, or (ii) continue this Lease with respect to the Expansion Parcels. If Redeveloper elects to continue this Lease with respect to the Expansion Parcels, then upon the close of escrow for the Hotel Parcel and Parking Parcels, the Base Rent for the Expansion Parcels shall be fifty-nine percent (59%) of the Base Rent set forth in Section 10, and there shall be a termination of any remaining Rent Reduction/Credit pursuant to Section 10. Thereafter, the Redeveloper shall continue to have the option to purchase the Expansion Parcels, subject to the provisions hereof. -56- (f) (i) If Redeveloper purchases all the Leasehold Parcels at once, then the purchase price of the Leasehold Parcels shall be the sum of $8,082,500.00, increased at the rate of two percent (2%) per annum, simple interest, from the Effective Date, and decreased in an amount equal to interest at the rate of five percent (5%) per annum, simple interest, calculated on the purchase price of the Convention Center Parcel from the Effective Date to the date of closing of the purchase under the Option; provided, however, that the purchase price as so adjusted shall not be greater than the fair market value of the Property but, in no case, shall the ultimate purchase price be less than $8,082,500.00. (ii) If Redeveloper purchases only the Hotel Parcel and the Parking Parcels (whether due to the severing of the Expansion Parcel from this Lease due to the provisions of Section , or Redeveloper's election to purchase only the Hotel Parcel and Parking Parcels, as provided in Section ), then the purchase price of the Hotel Parcel and the Parking Parcels shall be the sum of $3,350,000.00, regardless of when purchased./1/ (iii) If upon acquisition of the Hotel Parcel and Parking Parcels Redeveloper has elected to continue this Lease, and thereafter purchases the Expansion Parcels, then the purchase price of the Expansion Parcels shall be calculated pursuant to the following formula: EPPP = 4,732,500 + (8,082,500 X .01 X (HPPD - ED)) + (4,732,500 X .02 X (EPPD - HPPD)) utilizing the following definitions: EPPP = Expansion Parcels Purchase Price HPPD = Hotel Parcel and Parking Parcels Date of Purchase ED = Effective Date EPPD = Expansion Parcels Date of Purchase utilizing the number of years, and any fraction thereof, between the HPPD, the ED, and the EPPD for the purpose of calculating the resulting factors. /1/ This is due to the fact that the parties had agreed to a base price of the Hotel Parcels and Parking Parcels in the sum of $3,350,000, increased at the rate of 2% per annum from the Effective Date, and reduced by the sum of the credit of 5% of the $2,000,000 purchase price for the Convention Center Parcel. However, due to the fact that such amount would result in a purchase price of less than $3,350,000, the parties have agreed to fix the purchase price of the Hotel Parcels and the Parking Parcels at $3,350,000. -57- (g) The purchase price shall be paid in all cash through the close of escrow. Agency will pay the cost of a CLTA policy of title insurance, any documentary transfer tax, and one half of the escrow fees. Redeveloper will pay cost of recording, the additional premium and any expenses (including survey costs) in the event Redeveloper desires to obtain an extended coverage policy of title insurance, and the other half of the escrow fees. In connection therewith, the parties shall execute normal and necessary escrow instructions and all documents reasonably called for thereunder, so long as such instructions and documents are not inconsistent herewith. 31. Holding Over. If Redeveloper, with Agency's consent, remains in possession of the Leasehold Parcels or any part thereof after the expiration or termination of the Term of this Lease, such occupancy shall be a tenancy from month to month upon all the provisions of this Lease pertaining to the obligations of Redeveloper, except that the annual Base Rent shall be 150% of the annual Base Rent set forth in Section 10, above (as, and if, adjusted pursuant hereto), and shall be payable monthly, in advance, in installments equal to 1/12th of the annual Base Rent so calculated. 32. Force Majeure; Extension of Times of Performance. (a) Force Majeure. Except as otherwise provided in this Lease, delay in performance by any party hereunder shall not be a default where delays or defaults are due to war; insurrection; strikes; lock-outs; riots; floods; earthquakes; fires; casualties; acts of God; acts of the public enemy; epidemics; quarantine restrictions; freight embargoes; shortages of transportation; unusually severe weather; or any other causes (other than financial inability) beyond the reasonable control or without the fault of the party claiming an extension of time to perform. An extension of time for any such cause shall only be for the period of the delay, which period shall commence to run from the time of the commencement of the cause, if written notice by the party claiming such extension is delivered to the other party within ten (10) days after commencement of the cause, and shall otherwise commence to run from the date of delivery of such notice. (b) Extension of Time. If prior to a date which is three months after the Effective Date, any lawsuit is filed by a third party against Agency on account of the California Environmental Quality Act ("CEQA") or otherwise challenging Agency's ability to enter into this transaction to lease the Property for the purposes hereof, or against the City of Compton on account of the card club license in favor of Redeveloper, then, to the extent permitted by law, the time periods provided herein shall be tolled until resolution of such lawsuits in favor of Agency or City, as the case may be or until there has been -58- compliance with CEQA, and the parties shall cooperate in the defense of such action, with the costs of such defense being borne as hereinabove provided, and/or shall take all steps necessary to comply with the requirements of CEQA. 33. Sale or Transfer by Agency. In the event of any transfer or transfers of Agency's interest in the Property, other than a transfer for security purposes only, the transferor shall automatically be relieved of any and all obligations and liabilities on the part of the Agency accruing from and after the date of such transfer; provided, however, that any funds in the hands of Agency in which Redeveloper has an interest, at the time of such transfer, shall be turned over to the transferee and upon such transfer, Agency shall be discharged from any further liability with reference to such funds. The covenants and obligations of Agency contained in this Lease shall be binding upon Agency, its successors and assigns only during their respective periods of ownership. Any transferee must, however, comply with the requirements of the Gaming Laws of the State of California to the extent applicable. 34. Limitation on Recourse Against Agency. Redeveloper agrees to look solely to Agency's interest in the Property and the real property of which it is a part (or the proceeds thereof) for the satisfaction of any remedy of Redeveloper, for the collection of a judgment (or other judicial process) requiring the payment of money by Agency in the event of any default by Agency hereunder (other than with respect to Agency's obligations pursuant to Section 10(b) hereof), and no other property or assets of Agency shall be subject to levy, execution, or other enforcement procedure for the satisfaction of Redeveloper's remedies under or with respect to this Lease, the relationship of Agency and Redeveloper hereunder, or Redeveloper's use or occupancy of the Property. Under no circumstances shall Redeveloper have any recourse against any tax increment revenues of Agency. Any obligations of Agency hereunder to deliver any funds to Redeveloper shall not be secured by any lien upon or pledge of the Agency's tax increment, and such obligations shall be subordinate and inferior to any and all rights, including but not limited to a pledge of any such moneys, created by (A) any bonded indebtedness now or hereafter created by the Agency, and (B) any loan agreement, lease agreement, or other obligation or agreement now or hereafter entered into by the Agency, or otherwise from time to time outstanding that is secured by a pledge of tax increment. 35. Redeveloper's Representations and Warranties. Redeveloper makes the following representations and warranties as of the date of this Lease and agrees that such representations and warranties shall survive and continue thereafter: -59- (a) Status. If Redeveloper is a corporation, it is duly organized, validly existing, in good standing under the laws of the state of its incorporation, has stock outstanding, which has been duly and validly issued, and is qualified to do business and is in good standing in the State of California with full power and authority to perform the obligations contemplated hereby. If Redeveloper is a partnership, it is duly formed and validly existing and has all power and authority to consummate the transactions contemplated hereby. If Redeveloper is a limited liability company, it is duly formed and validly existing and has all power and authority to perform the obligations contemplated hereby. (b) Authority. Redeveloper has complied with all laws and regulations concerning its organization, existence and transaction of business. Redeveloper has the right and power to own and develop the Project and Initial Improvements thereon as contemplated in this Lease. (c) No Litigation. There is no litigation, action, suit, or other proceeding pending or threatened against Redeveloper, the Property, or the Project which may in any manner whatsoever substantially adversely affect the validity, priority, or enforceability of this Lease or the construction, use, occupancy or operation of the Project. (d) Enforceability. Redeveloper has full right, power and authority to execute and deliver this Lease and all instruments executed pursuant hereto, and to perform the undertakings of Redeveloper contained in this Lease and all agreements executed pursuant hereto. This Lease and all agreements executed pursuant hereto constitute valid and binding obligations of Redeveloper which are legally enforceable in accordance with their terms, subject to the laws of bankruptcy, creditor's rights exceptions, and equity. (e) No Breach. None of the undertakings of Redeveloper contained in this Lease and all agreements executed pursuant hereto violates or any applicable statute, law, regulation or ordinance or any order or ruling of any court or governmental entity, or conflicts with, or constitutes a breach or default under, any agreement by which Redeveloper is, or the Project and Improvements thereon are, bound or regulated. (f) Financial Information. All financial information delivered to Agency by Redeveloper, including, without limit, information relating to Redeveloper, the Property, the Project, and the Improvements thereon, fairly and accurately represents such financial condition. No material adverse change in such financial condition has occurred. (g) Proceedings. To the best of Redeveloper's knowledge, Redeveloper is not in violation of any statute, law, -60- regulation or ordinance, or of any order of any court or governmental entity. (h) Accuracy. To the best of Redeveloper's knowledge, all documents, reports, instruments, papers, data, information and forms of evidence delivered to Agency by Redeveloper with respect to this Lease and all agreements executed pursuant hereto are accurate and correct, are complete insofar as completeness may be necessary to give Agency true and accurate knowledge of the subject matter thereof, and do not contain any material misrepresentation or omission. Agency may rely on such reports, documents, instruments, papers, data, information and forms of evidence without any investigation or inquiry. (i) Taxes. To the best of Redeveloper's knowledge, Redeveloper has filed all federal, state, county and municipal tax returns required to have been filed by Redeveloper, and has paid all taxes which have become due pursuant to such returns or to any notice of assessment received by Redeveloper. Redeveloper has no knowledge of any basis for additional assessment with respect to such taxes. 36. Agency's Representations and Warranties. Agency makes the following representations and warranties as of the date of this Lease and agrees that such representations and warranties shall survive and continue thereafter: (a) No Litigation. There is no litigation, action, suit, or other proceeding pending or threatened against Agency, the Property, or the Project which may in any manner whatsoever substantially adversely affect the validity, priority, or enforceability of this Lease or the construction, use, occupancy or operation of the Project. (b) Enforceability. Agency has full right, power and authority to execute and deliver this Lease and all instruments executed pursuant hereto, and to perform the undertakings of Agency contained in this Lease and all agreements executed pursuant hereto. This Lease and all agreements executed pursuant hereto constitute valid and binding obligations of Agency which are legally enforceable in accordance with their terms, subject to the laws of bankruptcy, creditor's rights exceptions, and equity. (c) No Breach. None of the undertakings of Agency contained in this Lease and all agreements executed pursuant hereto violates or any applicable order or ruling of any court or governmental entity, or conflicts with, or constitutes a breach or default under, any agreement by which Agency is, or the Project and Improvements thereon are, bound or regulated. -61- (d) Entitlements. The proposed development and use of the Property is consistent with City's General Plan and all applicable zoning and land use ordinances and regulations. 37. Miscellaneous. (a) Governing Law. This Lease shall be construed and interpreted in accordance with the laws of the State of California. (b) Time of Essence. Time is of the essence herein. (c) Additional Rent. Any monetary obligations of Redeveloper to Agency under the terms of this Lease shall be deemed to be rent. (d) Quiet Enjoyment. Upon Redeveloper's paying the Base Rent and other sums provided hereunder when due, and observing and performing all of the covenants, conditions, and provisions on Redeveloper's part to be observed and performed hereunder, Redeveloper shall enjoy the quiet possession of the Leasehold Parcels for the entire term hereof, subject to all of the provisions of this Lease. (e) Transfer of Agency's Interest. In the event of any transfer or transfers of Agency's interest in the Property, the transferor shall be automatically relieved of any and all obligations and liabilities on the part of Agency accruing from and after the date of such transfer. (f) Waiver. The waiver by Agency or Redeveloper of any breach by the other party of any term, covenant, or condition herein contained shall not be deemed to be a waiver of such term, covenant, or condition or any subsequent breach of the same or any other term, covenant, or condition herein contained. The subsequent acceptance of all or part of the rent due hereunder by Agency shall not be deemed to be a waiver of any preceding breach by Redeveloper of any term, covenant, or condition of this Lease, other than the failure to pay the particular rent so accepted, regardless of Agency's knowledge of such preceding breach at the time of acceptance of such rent. Acceptance by Agency of a part payment of the rent due shall not be construed as a waiver by Agency of any rights to collect the balance of the rent due. (g) Brokers. Each party warrants to and for the benefit of the other that it has had no dealings with any real estate broker or other agent (attorneys excepted) in connection with the negotiation or making of this Lease. Agency shall indemnify Redeveloper for breaches by Agency of this warranty, -62- and Redeveloper shall indemnify Agency for any breaches by Redeveloper of this warranty. (h) Headings. The captions of the various sections of this Lease are for convenience and ease of reference only and do not define, limit, augment, or describe the scope, content, or intent of this Lease or of any part or parts of this Lease. (i) Inspection Of Books and Records. Agency shall have the right at all reasonable times to inspect the books and records of Redeveloper relevant to the purposes of this Lease. (j) Merger. The voluntary or other surrender of this Lease by Redeveloper, or a mutual cancellation thereof, or a termination by Agency, shall not work a merger, but instead, at the option of Agency, shall either terminate all or any existing subtenancies, or at the option of Agency, operate as an assignment to Agency of any or all of such subtenancies. (k) Gender; Number. The neuter gender includes the feminine and masculine, the masculine includes the feminine and neuter, and the feminine includes the masculine and neuter, and each includes corporations, partnerships and other legal entities whenever the context so requires. The singular number includes the plural whenever the context so requires. (l) No Joint Venture. Nothing contained herein shall be construed to render the Agency in any way or for any purpose a partner, joint venturer, or associated in any relationship with Redeveloper other than that of Agency and Redeveloper, nor shall this Lease be construed to authorize either party to act as agent for the other. (m) Exhibits. All exhibits to which reference is made in this Lease are hereby incorporated by reference. Any reference to "this Lease" includes matters incorporated by reference. (n) Entire Agreement; Modification. This Lease contains the entire agreement between the parties. No verbal agreement or implied covenant shall be held to vary the provisions hereof, any statements, law or custom to the contrary notwithstanding. No promise, representation, warranty, or covenant not included in this Lease has been or is relied on by either party. Each party has relied on its own inspection of the Property and examination of this Lease, the counsel of its own advisors, and the warranties, representations, and covenants in this Lease itself. The failure or refusal of either party to inspect the Property, to read this Lease or other documents, or to obtain legal or other advice relevant to this transaction constitutes a waiver of any objection, contention, or claim that -63- might have been based on such reading, inspection, or advice. No provision of this Lease may be amended or varied except by an agreement in writing signed by the parties hereto and the lender under a permitted first leasehold encumbrance or their respective permitted successors. (o) Joint and Several Obligations. "Party" shall mean Agency or Redeveloper; and if more than one person is Agency or Redeveloper, the obligations imposed on that party shall be joint and several. (p) Severability. The invalidity or illegality of any provision shall not affect the remainder of this Lease and all remaining provisions shall, notwithstanding any such invalidity or illegality, continue in full force and effect. (q) Consents of Agency. Neither Agency's execution of this Lease nor any consent or approval given by Agency hereunder in its capacity as Agency shall waive, abridge, impair or otherwise affect Agency's powers and duties as a governmental body. Any requirements under this Lease that Redeveloper obtain consents or approvals of Agency or the City are in addition to and not in lieu of any requirements of law that Redeveloper obtain approvals, licenses, or permits. (r) Records. Agency or any representative or designee thereof may at any time during normal business hours, upon 48 hours' notice, examine the books and records of Redeveloper, or any officer, employee, agent, contractor, affiliate, related person, assignee or franchise, to the extent that such books and records relate, directly or indirectly, to the operation and income of the Card Club from the Property. Redeveloper shall keep all such records at the Property or at another location in Los Angeles County approved by Agency. (s) Recordation of Memorandum of Lease With Option to Purchase. This Lease shall not be recorded. A memorandum of the Lease with Option to Purchase shall be recorded. The parties shall execute the memorandum in form and substance approved by Agency and as required by the title insurance company insuring Redeveloper's leasehold estate, and sufficient to give constructive notice of this Lease and the option to purchase set forth herein to subsequent purchasers and lenders. (t) Execution in Counterparts. This Lease, or the memorandum of this Lease, or both, may be executed in two or more counterparts, each of which shall be an original, but all of which shall constitute one and the same instrument. IN WITNESS WHEREOF, the undersigned have executed this Agreement at Compton, California, as of the date first written above. -64- COMMUNITY REDEVELOPMENT AGENCY OF THE CITY OF COMPTON ("Agency") By:__________________________________________ Chairman ATTEST: SECRETARY COMPTON ENTERTAINMENT, INC., a California corporation ("Redeveloper") By:__________________________________________ ROUBEN KANDILIAN, President -65- EXHIBIT 1 LEGAL DESCRIPTIONS ENTIRE PROPERTY - --------------- Parcels 2, 7, 8, 9, and 11, of Parcel Map No. 7899, in the City of Compton, per map recorded in Book 79, Pages 47-49, of Parcel Maps, Official Records, Los Angeles County, California. Parcels 1 and 2 of Parcel Map No. 8669, in the City of Compton, per map recorded in Book 87, Page 9, of Parcel Maps, Official Records, Los Angeles County, California. Parcels 1, 2, 3, and 4 Parcel Map No. 10784, in the City of Compton, per map recorded in Book 112, Pages 96 and 97, of Parcel Maps, Official Records, Los Angeles County, California. CONVENTION CENTER PARCEL/2/ - --------------------------- Parcel 1 of Parcel Map No. 10784, in the City of Compton, per map recorded in Book 112, Pages 96 and 97, of Parcel Maps, Official Records, Los Angeles County, California, reserving and excepting therefrom easements for access to, support of and parking for the Hotel Parcel. HOTEL PARCEL/1/ - --------------- A parcel of air space which includes a nine (9) story hotel containing 290 guest rooms and ancillary areas such as lobbies, restaurant, kitchen, bars, commercial areas and the like, on Parcel 1 of Parcel Map No. 10784, in the City of Comptom, per map recorded in Book 112, Pages 96 and 97, of Parcel Maps, Official Records, Los Angeles County, California. PARKING PARCELS - --------------- Parcels 2, 3, and 4 Parcel Map No. 10784, in the City of Compton, per map recorded in Book 112, Pages 96 and 97, of Parcel Maps, Official Records, Los Angeles County, California. EXPANSION PARCELS - ----------------- /2/ The legal descriptions of the Hotel Parcel and the Convention Center Parcel are subject to change based upon legal descriptions prepared by a licensed civil engineer and approved by Agency and Redeveloper prior to the close of escrow for the Convention Center Parcel. -66- Parcels 2, 7, 8, 9, and 11, of Parcel Map No. 7899, in the City of Compton, per map recorded in Book 79, Pages 47-49, of Parcel Maps, Official Records, Los Angeles County, California. Parcels 1 and 2 of Parcel Map No. 8669, in the City of Compton, per map recorded in Book 87, Page 9, of Parcel Maps, Official Records, Los Angeles County, California. -67- EXHIBIT 2 SITE PLAN [to be inserted] -68- EXHIBIT 3 SCHEDULE OF PERFORMANCE 1. Execution of the DDA by Agency and Within 15 days of Agency Redeveloper approval 2. Amendment of Redeveloper's Card Club Within 60 days of Agency License from the City of Compton and approval the City's adoption of an ordinance to waive transient occupancy taxes and valet taxes until the valet parking operation at the Hotel is profitable 3. Redeveloper's Approval of Preliminary By May __, 1995 Title Report 4. Redeveloper's Approval of ALTA Survey By June 15, 1995 5. Redeveloper's approval of Physical By June 15, 1995 Condition of the Property 6. Recordation of Memorandum of Lease for On the close of escrow for the the Project and issuance of leasehold Convention Center Parcel or policy of title insurance July 31, 1995, whichever first occurs (the "Effective Date") 7. Redeveloper's submission of Design Within 45 days after Agency's Development Drawings execution of the DDA 8. Agency's approval or disapproval of Within 30 days after receipt of Design Development Drawings same from Redeveloper 9. Redeveloper's delivery to Agency of Within 90 days after the financing commitments for the Project Effective Date 10. Agency's approval of Redeveloper's Within 30 days from submittal financing for the Project 11. Redeveloper's Submission of the Final Within 120 days after the Construction Plans for Development Effective Date of the Project (including construction drawings) sufficient to obtain building permits for the Initial Improvements 12. Agency's Approval of Final Construction 60 days after delivery of same Plans (including construction drawings, to City and Agency, provided and final grading and landscaping plans) they are acceptable to City and Agency 13. Payment of fees and issuance of permits Within 30 days of approval of for grading and site work, and plans commencement of grading and site work
-69- 14. Payment of fees and issuance of building Within 10 days after issuance permits and commencement of construction of grading permit of the Initial Improvements 15. Commencement of Construction of Within 10 days from approval of remaining work any construction plans 16. Completion of Construction of the Initial Within 12 months after the Improvements and rehabilitation of Hotel, Effective Date, subject to the and opening of the Hotel for business length of any delays by the Agency or City in approving plans or specifications from the time periods set forth herein, and subject to Force Majeure 17. Opening of the Card Club for business Within 30 days of issuance of a state license
-70- EXHIBIT 4 CONDITIONS OF CONSTRUCTION 1. Submittal of Design Development Drawings and Preliminary Construction - ------------------------------------------------------------------------- Budgets. Redeveloper shall prepare and deliver to Agency Design Development Drawings and a Preliminary Construction Budget for the proposed Initial Improvements to the Property. Upon Agency's reasonable approval of both the Design Development Drawings and the Preliminary Budget, Redeveloper shall have the right to partition the work represented by the Design Drawings in a manner which will promote the most expeditious construction and completion of the Initial Improvements. Notwithstanding the foregoing Redeveloper shall not commence construction as to any portion of the work until such time as Agency has approved complete Final Construction Plans, or if applicable, Final Interior Design Documents, and the Budget relative to the portion of work for which Redeveloper desires to commence construction. "Design Development Drawings" shall be prepared by a licensed architect or engineer, and shall include, but not be limited to, preliminary grading and drainage plans, soil tests, utilities, sewer and service connections, locations of ingress and egress to and from public thoroughfares, curbs, gutters, parkways, street lighting, designs and locations for outdoor signs, storage areas, and landscaping. The Design Development Drawings shall be based upon the Scope of Development, and shall enable Agency to make an informed judgment about the design and quality of construction. They shall also include delineation of landscape and architectural features, floor plans, sections and elevations, site treatment, proposed building materials and proposed colors, and other features. The Design Development Drawings shall describe all major design features, as well as the size, character and quality of the Project as to architectural and structural systems. Key details of the Project will be provided and samples of key materials to be used in public visible areas shall accompany the drawings. With the Design Development Drawings, Redeveloper shall deliver to Agency the certificate of the person who prepared the plans and specifications certifying that Agency has fully paid for them or waiving payment and waiving any right to a lien for preparing them and permitting Agency to use the Design Development Drawings without payment for purposes relevant to and consistent with this DDA. "Final Interior Design Documents" are those Final Construction Plans relating to the interior design of the Initial Improvements. -71- 2. Submittal of Final Construction Plans and Final Interior Design - ------------------------------------------------------------------- Documents. Prior to the commencement of construction of any portion of the Initial Improvements, Redeveloper shall prepare complete Final Construction Documents or, if applicable, Final Interior Design Documents, and submit such documents to Agency for its approval. Upon receipt of approval from Agency, Redeveloper may commence construction in a manner consistent with the approved Final Construction Plans or Final Interior Design Documents. 3. Submittal of Construction Budgets. Upon obtaining bids relative to approved Construction Documents or Interior Design Documents, Redeveloper shall submit to Agency a "bid based" Construction Budget outlining specific costs associated with the work to be performed pursuant to the approved Construction Documents or Interior Design Documents. Agency shall have the right to review such bid based budgets and request any additional information reasonably necessary to ascertain the appropriateness and reasonableness of the items contained within such bid based Construction Budget. Agency may, in the exercise of its reasonable, good faith judgment, determine whether the proposed budget is unreasonable, and in such case, then the unreasonable portion shall not be included in the Rent Reduction/Credit, unless such cost is shown to be reasonable pursuant to the arbitration provisions of this paragraph. If the parties cannot agree on a final budget, the question of whether such charge is appropriate and reasonable shall be submitted to binding arbitration in accordance with the Construction Industry Rules of the American Arbitration Association. In no case shall payments be made to affiliates of the Redeveloper without the Agency's prior written consent. 4. Final Construction Plan Documents. Redeveloper shall submit to Agency all Final Construction Plans approved by the appropriate governmental agencies for issuance of the necessary permits to complete the Initial Improvements. Changes from the Final Construction Plans may be made without the prior written approval by Agency only if: a) they are not substantial or are made to comply with exceptions, requests or requirements of any governmental agency or official in connection with the inspection or approval of the work undertaken; or b) if they do not materially depart in size, utility or value from the Initial Improvements described in the Construction Documents or, if applicable, the Interior Design Documents previously submitted to Agency. -72- 5. Final Cost Breakdowns. Upon completion of the Initial Improvements, Redeveloper shall deliver to Agency a Final Cost Breakdown relative to the Initial Improvements for which Redeveloper is requesting a rent credit pursuant to Section 6 of the DDA. The form and content of the Final Cost Breakdown shall be subject to Agency's reasonable approval and shall not deviate materially from the Construction Budget absent good cause therefor (other than negligence or mismanagement on the part of Redeveloper) being shown. Any dispute with respect to such deviation shall be submitted to arbitration as provided herein above. 6. Procedure for Qualification of Rent Credits. As a condition precedent to Agency's, application of the rent credit described in Section 6 of the DDA, Redeveloper shall provide to Agency evidence verifying the expenditures represented in the Final Cost Breakdown. Such evidence may include, but not be limited to, original paid invoices, names and addresses of persons or firms who have furnished any work, labor or materials in connection with items contained in the Final Cost Breakdown and/or receipts indicating full payment of particular items contained in the Final Cost Breakdown. Agency reserves the right to refuse to provide a rent credit as to particular items for which Agency has evidence that such item was either not expended or paid in full; provided, however, that Redeveloper shall have the right to cure any alleged misallocation by presenting any contrary evidence to Agency. Redeveloper shall pay for and may include in the cost of the Initial Improvements any construction manager, project manager, accountants, auditors or supervisors hired by Agency, at Agency's reasonable discretion, for the purposes of reviewing and inspecting the course of construction and determining or confirming the appropriate rent credit to be applied. Agency's representatives shall have the right to attend regular construction meetings held by Redeveloper and its superintendents, contractors and subcontractors. Redeveloper shall not be entitled to receive any rent credit for materials or labor not actually incorporated into or used for the Initial Improvements. During the course of construction, Redeveloper shall provide Agency's representative (or Agency's Executive Director if no representative has been appointed) with copies of all periodic or special reports with respect to the work received by Redeveloper from its contractors, subcontractors, architects, engineers or other consultants and, at least monthly, with a statement of expenditures made to date. 7. Performance Bonds. Redeveloper shall -73- provide a labor and material payment bond and a performance bond acceptable to the Agency naming the Agency as co-obligee thereon; provided, however, if Hollywood Park, Inc., shall guaranty to the Agency's satisfaction completion of the Initial Improvements, then the Redeveloper shall not be required to provide a labor and material payment bond or performance bond. 8. City and Other Governmental Agency Permits and Approvals. Before commencement of construction, Redeveloper shall secure, or cause to be secured, any and all permits which may be required by the City of Compton or any other governmental agency having jurisdiction over the construction or development of the Project. Redeveloper shall carry out the construction of the Initial Improvements in conformity with all applicable laws, including all applicable Federal, State and local occupation, safety and health laws, rules, regulations and standards. 9. Selection of Consultants. Redeveloper shall have the sole right to select architects, landscape architects, consultants, engineers, interior designers, and contractors for the Project, provided such selection does not in any way violate or contradict any portion of the DDA. Agency shall select any consultants to perform the services described in Section 6 hereof. 10. Cooperation of Agency. Agency shall cooperate with Redeveloper in providing a "fast track" basis of construction to expedite the design, construction and furnishing of the Initial Improvements. Additionally, Agency shall cooperate with Redeveloper in expediting any necessary permits or approvals on the part of the City of Compton for any portions of the work to be performed. 11. Plans and Data. If the DDA is terminated for any reason, Redeveloper shall deliver to Agency, without a cost or expense to Agency, copies of any and all maps, architectural designs, engineering plans, drawings, studies, reports, surveys or data pertaining to the Project, provided Redeveloper has title to such items and the right to transfer such items free of claims or interest of any third party. Additionally, upon completion of the work, Redeveloper shall provide Agency with a set of "as built" plans for the Project. 12. Notification of Commencement of Work. Redeveloper shall notify Agency of Redeveloper's intention to commence a work of improvement at least twenty (20) days before commencement of any such work or delivery of any materials in connection therewith. The notice shall -74- specify the approximate location and nature of the intended improvements. Agency shall have the right to post and maintain on the Property any notices of nonresponsibility provided for under applicable law, and to inspect the property in relation to the construction at all reasonable times. 13. Cost of Construction; Mechanics' Liens. Except to the extent of any credit to Base Rent received by Redeveloper, the entire cost of constructing the Initial Capital Improvements shall be borne by Redeveloper. Redeveloper shall keep the Property free and clear of all mechanics' and materialmen's liens resulting from construction done by or for Redeveloper. Redeveloper shall have the right to contest the correctness or the validity of any such lien if, immediately on demand by Agency, Redeveloper procures and records a lien release bond issued by a corporation authorized to issue surety bonds in California in an amount equal to one and one-half times the amount of the claim of lien. The bond shall meet the requirements of Civil Code (S)(S)3143 and shall provide for the payment of any sum that the claimant may recover on the claim (together with costs of suit, if it recovers in the action). Redeveloper shall hold harmless, defend and indemnify Agency and the Property and the property against all liability and loss of any type arising out of work performed on the Property by Redeveloper, together with reasonable attorneys' fees and all costs and expenses reasonably incurred by Agency in negotiating, settling, defending or otherwise protecting against such claims. If Redeveloper does not cause to be recorded the bond described in California Civil Code Section 3142 or otherwise protect the Property under any alternative or successor statue, and a final judgment has been rendered against Redeveloper by a court of competent jurisdiction for the foreclosure of a mechanics' materialman's, contractor's or subcontractor's lien claim, and if Redeveloper fails to stay the execution of the judgment by lawful means or to pay the judgment, Agency shall have the right, but not the duty, to pay or otherwise discharge, stay or prevent the execution of any such judgment or lien or both. Redeveloper shall reimburse Agency for all sums paid by Agency under this section, together with all Agency's attorneys fees and costs, plus interest on those sums, fees, and costs, at the maximum legal rate that may be charged by non-exempt lenders under the usury laws of the State of California. On completion of any substantial work of improvement during the term, Redeveloper shall file or cause to be filed a notice of completion. Redeveloper hereby appoints Agency as Redeveloper's attorney-in-fact to file the notice of completion on Redeveloper's failure to do so after the work of improvement has been substantially completed. -75- EXHIBIT 5 SCOPE OF DEVELOPMENT [To Be Inserted] EX-10.4 4 dex104.txt GUARANTY DATED 7/31/95 EXHIBIT 10.4 GUARANTY -------- THIS GUARANTY is made this 31st day of July, 1995, by HOLLYWOOD PARK, INC., a Delaware corporation ("Guarantor") in favor of the COMMUNITY REDEVELOPMENT AGENCY OF THE CITY OF COMPTON, a public body, corporate and politic ("Agency"). RECITALS A. The Agency (as the "Agency" therein) and Compton Entertainment, Inc., a California corporation ("CEI") (as the "Redeveloper" therein), are parties to that certain Amended and Restated Disposition and Development Agreement, Agreement of Purchase and Sale, and Lease with Option to Purchase dated as of April 4, 1995 (the "DDA"), covering the real property (the "Property") described in Exhibit A hereto. The DDA provides, among other things, for the development of a hotel and card club (the "Project") on the Property. B. CEI has agreed to complete the construction and development of certain improvements and the development of the Project on the Property consistent with the Scope of Development attached as Exhibit 5 to the DDA, and within the times specified in the Schedule of Performance attached as Exhibit 3 to the DDA. C. Concurrently herewith, CEI is assigning all of its rights under the DDA to HP/Compton, Inc., a California corporation ("HP/Compton"), and HP/Compton is assuming all of CEI's obligations as Redeveloper under the DDA, pursuant to an Assignment, Assumption and Consent Agreement (the "Assignment"). D. HP/Compton is a wholly owned subsidiary of Guarantor. E. Guarantor is substantially and financially interested in the business and affairs of HP/Compton; and it will be of substantial economic benefit to Guarantor for HP/Compton to construct, develop and operate the Project and perform all other obligations of Redeveloper pursuant to the DDA. F. Agency would be unwilling to consent to the Assignment absent assurances and guarantees from Guarantor that the construction of the Project will be completed and the other obligations of the Redeveloper shall be performed in accordance with the DDA. NOW, THEREFORE, to induce Agency to consent to the assignment of the DDA, Guarantor hereby guaranties, represents, warrants and covenants as follows: -1- 1. Guaranty The Guarantor unconditionally promises and agrees to perform and comply with all provisions and conditions of the DDA and any modifications, additions, amendments and supplements thereto, and the agreements, provisions and conditions of any rider or exhibit thereto now or hereafter existing, or to cause the same to be performed and complied with. The words "perform and comply with" are used in their most comprehensive sense and include (i) payment of any and all rental and other obligations of Redeveloper to pay money to Agency arising under the DDA, including, without limitation, the obligation to pay any and all interest on past due obligations of Redeveloper, any and all costs advanced by Redeveloper, and all expenses (including, without limitation, court costs and reasonable attorney's fees) that may arise in consequence of Redeveloper's default under the DDA, (ii) payment and performance of all obligations of Redeveloper to purchase the Property arising under the DDA, and (iii) construction of the Project within the times and in the manner provided for in or contemplated by the provisions of the DDA, including, to the extent required by the DDA, payment of all costs and expenses thereof and payment of and satisfaction or discharge of all liens, charges or claims that are or may be imposed upon or claimed against the Property or any portion thereof. As a condition to the Guarantor's obligations under this Guaranty, Agency shall confer upon Guarantor all rights and benefits of Redeveloper under the DDA, including, without limitation, the right to occupy and operate the Property and the Project and any business thereon, notwithstanding any breach or default by Redeveloper under the DDA. If within thirty (30) days following written demand from the Agency, Guarantor fails to commence performance of and compliance with all provisions and conditions of the DDA and thereafter to diligently perform and comply therewith, Agency may, but shall have no obligation to, take such actions as Agency deems appropriate with respect to the Project and the Property, and Guarantor shall be liable to Agency as if Guarantor were the Redeveloper under the DDA for failure to perform and comply with the provisions and conditions of the DDA. 2. General (a) Guarantor authorizes Agency, without notice or demand and without affecting Guarantor's liability under this Guaranty, to: -2- (i) consent to any extensions, accelerations, or other changes in the time for any payment or performance of obligations provided for in the DDA, or consent to any other alteration of any covenant, term, or condition of the DDA in any respect, and to consent to any assignment, subletting, or reassignment of the DDA; (ii) take and hold security for any payment provided for in the DDA or for the performance of any covenant, term, or condition of the DDA, or exchange, subordinate, waive, or release any security; and (iii) apply this security and direct the order or manner of its sale as Agency may determine. (b) Notwithstanding any termination, renewal, extension or holding over of the DDA, this Guaranty shall continue until all of the covenants and obligations on the part of Redeveloper to be performed have been fully and completely performed by Redeveloper and Guarantor shall not be released of any obligation or liability under this Guaranty so long as there is any claim against Redeveloper arising out of the DDA that has not been settled or discharged in full. (c) The liability of Guarantor hereunder shall be unaffected by (i) any amendment or modification of the provisions of the DDA or any other instrument delivered to or made with Agency by Redeveloper (including, without limitation, the deed of trust described in Section 1(d)(iii) of the DDA (the "Deed of Trust")), (ii) the release of Redeveloper from the performance or observance of any of the agreements, covenants, terms or conditions contained in any of said instruments by operation of law, foreclosure, deed in lieu of foreclosure, termination of lease, or otherwise, (iii) the release, substitution or addition of any one or more guarantors or endorsers, or (iv) the assignment of this Guaranty in whole or in part, irrespective of the terms and conditions upon which such actions are taken and whether made with or without the consent of or notice to Guarantor. -3- 3. Independent Obligations. The obligations of Guarantor under this Guaranty are independent of, and may exceed, the obligations of Redeveloper. A separate action may, at Agency's option, be brought and prosecuted against Guarantor, whether or not any action is first or subsequently brought against Redeveloper, or whether or not Redeveloper is joined in any action, and Guarantor may be joined in any action or proceeding commenced by Agency against Redeveloper arising out of, in connection with, or based upon the DDA. Agency's rights hereunder shall not be exhausted by its exercise of any of its rights or remedies or by any such action or by any number of successive actions until and unless all indebtedness and obligations hereby guaranteed have been paid and fully performed. All of Agency's remedies against Guarantor are cumulative. 4. Waivers. Guarantor waives any right to: (a) require Agency to proceed against Redeveloper or any other person or entity or pursue any other remedy in Agency's power before proceeding against Guarantor; (b) complain of delay or failure by Agency to exercise any right, power or privilege under the DDA, this Guaranty, or any other document made to or with Agency by Redeveloper; and (c) require Agency to proceed against or exhaust any security held by Agency. -4- Guarantor waives any defense arising by reason of any disability or other defense of Redeveloper or by reason of the cessation from any cause of the liability of Redeveloper. Guarantor waives all demands upon and notices to Redeveloper and to Guarantor, including, without limitation, demands for performance, notices of nonperformance, notices of non-payment, and notices of acceptance of this Guaranty. Guarantor waives (i) the defense of all statutes of limitations in any action hereunder or for the performance of any obligation hereby guaranteed; (ii) any defense that may arise by reason of the incapacity, lack of authority, or disability of Redeveloper, or by Agency's failure to file or enforce a claim against the estate (either in bankruptcy or any other proceeding) of Redeveloper or any other person; (iv) any defense based upon or arising out of any defense which Redeveloper may have to the payment or performance of any part of the obligations hereby guaranteed; (v) presentment, demand, protest and notice of any kind, including, without limiting the generality of the foregoing, notice of the existence, creation or incurring of any new or additional obligation or indebtedness or of any action or non-action on the part of Redeveloper, Agency, any creditor of Redeveloper or any other person whomsoever, in connection with any obligation or evidence of indebtedness held by Agency as collateral or in connection with any obligation hereby guaranteed; (vi) any defense based upon an election of remedies by Agency, including, without limitation, an election to proceed by non-judicial rather than judicial foreclosure, or to terminate the leasehold or other interests in the DDA which destroys or otherwise impairs the subrogation rights of Guarantor or the right of Guarantor to proceed against Redeveloper for reimbursement, or both; (viii) diligence by Agency in the collection of the obligations set forth in the DDA; (ix) any defense based upon any statute or rule of law which provides that the obligation of a surety must be neither larger in amount nor in other respects more burdensome than that of the principal; (x) any defense based upon, or upon the effect of, California Code of Civil Procedure Sections 580a, 580b, 580d, and 726 or California Civil Code Sections 2809, 2810, 2819, 2839, 2845, 2849, 2850, 2899, 2924 and 3433 et seq.; (xi) any duty on Agency's part to disclose to Guarantor any facts Agency may now or hereafter know about Redeveloper regardless of whether Agency has reason to believe that any such facts materially increase the risk beyond that which Guarantor intends to assume or whether Agency has reason to believe that such facts are unknown to Guarantor and whether Agency has a reasonable opportunity to communicate such facts to Guarantor, it being understood and agreed that Guarantor is fully responsible for being and keeping informed of the financial condition of Redeveloper and of all circumstances bearing on the risk of non-performance of any obligations hereby guaranteed; (xii) any defense arising because of Agency's election, in any proceeding instituted under the federal Bankruptcy Code, of the application of Section 1111(b)(2) of the -5- federal Bankruptcy Code; and (xiii) any defense based on any borrowing or grant of a security interest under Section 364 of the federal Bankruptcy Code, it being agreed by the Guarantor that this Guaranty is an absolute guaranty of payment and not of collection, that the failure of Agency to exercise any rights or remedies it has or may have against Redeveloper shall in no way impair the obligation of such guaranty and that the liability of the Guarantor hereunder is and shall be direct and unconditional. 5. No Reporting Duty. Guarantor assumes full responsibility for keeping fully informed of the financial condition of Redeveloper and all other circumstances affecting Redeveloper's ability to perform Redeveloper's obligations under the DDA, and agrees that Agency will have no duty to report to Guarantor any information that Agency receives about Redeveloper's financial condition or any circumstances bearing on Redeveloper's ability to perform such obligations. 6. Continuing Guaranty. This Guaranty shall remain in full force notwithstanding the appointment of a receiver to take possession of all or substantially all of the assets of Redeveloper, or an assignment by Redeveloper for the benefit of creditors, or any action taken or suffered by Redeveloper under any insolvency, bankruptcy, reorganization, moratorium, or other debtor relief act or statute, whether now existing or later amended or enacted, or the disaffirmance of the DDA in any action or otherwise. 7. Joint and Several Obligations. If this Guaranty is signed, or if the obligations of Redeveloper are otherwise guaranteed, by more than one party, their obligations shall be joint and several, and the release or limitation of liability of any one or more of the guarantors shall not release or limit the liability of any other guarantors. 8. Successors and Assigns. This Guaranty shall be binding upon Guarantor and Guarantor's heirs, administrators, personal and legal representatives, successors, and assigns, and shall inure to the benefit of Agency and Agency's successors and assigns. Agency may, without notice, assign this Guaranty, the DDA, or the rents and other sums payable under the DDA, in whole or in part. 9. Guaranty of Costs and Fees. In addition to the amounts guaranteed, Guarantor agrees to pay reasonable attorney fees and all other costs and expenses incurred by Agency in enforcing this Guaranty or in any action or proceeding arising out of, or relating to, this Guaranty, whether or not any suit is filed. Until paid to Agency such sums shall bear interest at the rate of two (2) percentage points per annum in excess of the Bank of America Reference Rate. -6- 10. Governing Law. This Guaranty shall be deemed to be made under and shall be governed by California law in all respects, including matters of construction, validity, and performance, and the terms and provisions of this Guaranty may not be waived, altered, modified, or amended except in a writing signed by an authorized officer of Agency and by Guarantor. 11. Waiver of Subrogation Rights. Guarantor waives all rights and defenses arising out of an election remedies by the Agency, even though that election of remedies, such as a nonjudicial foreclosure with respect to security for a guaranteed obligation, has destroyed the Guarantor's rights of subrogation and reimbursement against the Guarantor by the operation of Section 580d of the Code of Civil Procedure or otherwise. 12. Bankruptcy Claims. Guarantor shall file in any bankruptcy or other proceeding in which the filing of claims is required by law all claims which Guarantor may have against Redeveloper relating to any indebtedness of Redeveloper to Guarantor and will assign to Agency all rights of Guarantor thereunder. If Guarantor does not file any such claim, Agency, as attorney-in- fact for Guarantor, is hereby authorized to do so in the name of Guarantor or, in Agency's discretion, to assign the claim to a nominee and to cause proof of claim to be filed in the name of Agency's nominee. The foregoing power of attorney is coupled with an interest and cannot be revoked. Agency or its nominee shall have the sole right to accept or reject any plan proposed in such proceeding and to take any other action which a party filing a claim is entitled to do. In all such cases, whether in administration, bankruptcy or otherwise, the person or persons authorized to pay such claim shall pay to Agency the amount payable on such claim and, to the full extent necessary for that purpose, Guarantor hereby assigns to Agency all of Guarantor's rights to any such payments or distributions to which Guarantor would otherwise be entitled; provided, however, Guarantor's obligations hereunder shall not be satisfied except to the extent that Agency receives cash by reason of any such payment or distribution in such amount as is necessary to satisfy all amounts due under the DDA; and provided further that Agency or its nominee shall remit to Guarantor any amounts received which exceed the amounts owed to Agency under the terms of the DDA. However, should any dispute arise as between Guarantor and any third party (including the principal obligor) with respect to the rights to such funds, Agency may interplead such funds and shall thereupon be released from any obligation to pay such funds to Guarantor and shall be entitled to all costs, including attorney's fees, incurred in the filing of such interpleader action. If Agency receives anything hereunder other than cash, the same shall be held as collateral for amounts due under this Guaranty. -7- 13. Change of Title. Guarantor agrees that no change of ownership or legal title to the Property, whether effected with or without the consent of the Agency, shall affect or change or discharge the obligations of the Guarantor hereunder. 14. Receipt of DDA. Guarantor acknowledges receipt of a copy of the DDA, and all of the instruments described therein, or attached thereto as exhibits. All of the terms defined in the DDA, when used herein, shall have the same meanings as defined in the DDA. 15. Warranties. Guarantor hereby represents and warrants to Agency that: (a) Any financial statements and other information concerning Guarantor heretofore delivered by Guarantor to Agency are true and correct in all respects, have been prepared in accordance with generally accepted accounting practices consistently applied, fairly present the financial condition of Guarantor as of the dates thereof, and no material adverse change has occurred in the financial condition of Guarantor reflected therein since the respective dates thereof. Guarantor shall deliver to Agency updated financial statements annually or upon the happening of any material adverse change in the financial condition of Guarantor. (b) The assumption by Guarantor of the obligations of the DDA will result in direct financial and material benefits to Guarantor. (c) The assumption of the DDA by HP/Compton has been duly authorized and executed by HP/Compton and is a legal, valid and binding instrument, enforceable against HP/Compton in accordance with its terms. (d) Guarantor (i) is a corporation duly organized, validly existing, and in good standing under the laws of the State of Delaware; (ii) has the power and authority to own its properties and assets to carry on its business as now being conducted (and as now contemplated); and (iii) has the power to execute and perform all the undertakings of this Guaranty. -8- (e) The execution and performance of this Guaranty by Guarantor (i) has been duly authorized by all requisite corporate action, (ii) will not violate any provision of law, rule, or regulation, any order of any court or other agency of government, any provision of any charter document, or by-law of Guarantor, and (iii) will not violate any provision of any indenture, agreement, or other instrument, binding upon Guarantor or result in the creation or imposition of any lien, charge or encumbrance of any nature on any asset of Guarantor. 16. Severance. If any of the provisions of this Guaranty shall contravene or be held invalid under the laws of any jurisdiction, this Guaranty shall be construed as if it did not contain those provisions, and the rights and obligations of the parties shall be construed and enforced accordingly. 17. Successors. The provisions of this Guaranty shall bind and inure to the benefit of the heirs, executors, administrators, legal representatives, successors and assigns of Agency and Guarantor. Whenever the context requires, all terms used in the singular will be construed in the plural and vice-versa. The term "Redeveloper" as used herein refers to both named Redeveloper and any other person or entity at any time assuming or otherwise becoming primarily liable on all or any part of the obligations of the DDA. IN WITNESS WHEREOF, Guarantor has executed this Guaranty as of the date first written above. HOLLYWOOD PARK, INC., a Delaware corporation By: /s/ G. Michael Finnigan -------------------------------- President Gaming & Entertainment By: /s/ Donald M. Robbins -------------------------------- Assistant Secretary "Guarantor" -9- EX-10.5 5 dex105.txt ASSIGNMENT, ASSUMPTION & CONSENT AGRMNT. EXHIBIT 10.5 ASSIGNMENT, ASSUMPTION AND CONSENT AGREEMENT THIS ASSIGNMENT, ASSUMPTION AND CONSENT AGREEMENT (this "Agreement"), is entered into as of the 18th day of July, 1996, by and among HP/COMPTON, INC., a California corporation (hereinafter called "Assignor"); CRYSTAL PARK HOTEL AND DEVELOPMENT COMPANY, LLC, a California limited liability company (hereinafter called "Assignee"); HOLLYWOOD PARK, INC., a Delaware corporation (hereinafter called "Guarantor"); and THE COMMUNITY REDEVELOPMENT AGENCY OF THE CITY OF COMPTON (the "Agency") WITNESSETH: A. The Agency and Assignor are parties to that certain Amended and Restated Disposition and Development Agreement, Agreement of Purchase and Sale, and Lease with Option to Purchase, dated as of April 4, 1995 (the "DDA"), covering the real property described on Exhibit A hereto. The Agency and Assignor are also parties to those agreements set forth on Schedule 1 attached hereto (the "Related Agreements"). B. Assignor is a wholly owned subsidiary of Guarantor. Assignee is a limited liability company comprised of Assignor, Redwood Gaming LLC and First Park Investments, LLC. C. Assignor now desires to assign to Assignee all of its right, title and interest under said DDA and the Related Agreements, and Agency is willing to consent to such assignment, provided Assignee executes this Agreement hereinafter, and provided Guarantor reaffirms that certain Guaranty, dated July 31, 1995, made by Guarantor in favor of Agency. NOW, THEREFORE, in consideration of the mutual covenants herein contained, the parties hereto do hereby agrees as follows: 1. ASSIGNMENT. For value received, effective as of the date set forth above, Assignor hereby assigns to Assignee all of its right, title and interest in and to the DDA and the Related Agreements. 2. ASSUMPTION. Effective as of the date set forth above, Assignee hereby accepts such assignment; acknowledges that it has read the DDA and the Related Agreements and understands all of the terms and provisions thereof; and hereby (a) assumes and agrees to perform all of the obligations of Assignor set forth in the DDA and the Related Agreements and (b) confirms each and all of the provisions of the DDA and the Related Agreements, except those rights and obligations expressly reserved unto CEI thereunder. 3. CONSENT. Agency hereby consents to the aforementioned assignment, provided, however, that such consent shall not be deemed a consent to any further or future assignment; nor shall such consent be deemed a waiver of the provisions of the DDA requiring the written consent of Agency to any assignment. 4. REAFFIRMATION OF GUARANTY AND CONSENT. Guarantor hereby consents to the assignment and assumption set forth below. Guarantor hereby renews, reaffirms, ratifies and confirms the Guaranty and agrees that it shall remain in full force and effect. 5. SUCCESSORS AND ASSIGNS. This Agreement, and each and all of the provisions hereof, shall inure to the benefit of, or bind, as the case may require, the parties hereto, and as well, their respective heirs, successors and assigns. 6. GOVERNING LAW. This Agreement shall be governed by and construed in accordance with the laws of the State of California. IN WITNESS WHEREOF, the parties hereto have executed this Agreement the day and year first above written. AGENCY: ASSIGNOR: THE COMMUNITY REDEVELOPMENT HP/COMPTON, INC, a California AGENCY OF THE CITY OF COMPTON, corporation a public body, corporate and politic By: /s/ G. Michael Finnigan By: /s/ Howard Caldwell -------------------------- ------------------------ G. Michael Finnigan Title: Executive Secretary Its: Vice President ATTEST: ASSIGNEE: /s/ Charles Davis CRYSTAL PARK HOTEL AND - ----------------------------- DEVELOPMENT COMPANY, LLC, Secretary a California limited liability company By: HP/COMPTON, INC., a California corporation, Manager By: /s/ G. Michael Finnigan --------------------------- G. Michael Finnigan Its: Vice President GUARANTOR: HOLLYWOOD PARK, INC., a Delaware corporation By: /s/ G. Michael Finnigan --------------------------- G. Michael Finnigan Its: President, Sports & Entertainment
EX-10.6 6 dex106.txt OPERATING AGREEMENT DATED 7/18/96 EXHIBIT 10.6 OPERATING AGREEMENT FOR CRYSTAL PARK HOTEL AND CASINO DEVELOPMENT COMPANY, LLC A CALIFORNIA LIMITED LIABILITY COMPANY THE SECURITIES REPRESENTED BY THIS AGREEMENT HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933 NOR REGISTERED OR QUALIFIED UNDER ANY STATE SECURITIES LAWS. SUCH SECURITIES MAY NOT BE OFFERED FOR SALE, SOLD, DELIVERED AFTER SALE, TRANSFERRED, PLEDGED, OR HYPOTHECATED UNLESS QUALIFIED AND REGISTERED UNDER APPLICABLE STATE AND FEDERAL SECURITIES LAWS OR UNLESS, IN THE OPINION OF COUNSEL SATISFACTORY TO THE COMPANY, SUCH QUALIFICATION AND REGISTRATION IS NOT REQUIRED. ANY TRANSFER OF THE SECURITIES REPRESENTED BY THIS AGREEMENT IS FURTHER SUBJECT TO OTHER RESTRICTIONS, TERMS AND CONDITIONS WHICH ARE SET FORTH HEREIN. TABLE OF CONTENTS ------------------ Page ---- ARTICLE 1 ORGANIZATIONAL MATTERS 2 1.1 FORMATION 2 1.2 NAME 2 1.3 TERM 3 1.4 COMPANY PROPERTY 3 1.5 OFFICE AND AGENT 3 1.6 ADDRESSES OF THE MEMBERS 3 1.7 PURPOSE OF COMPANY 3 ARTICLE 2 CAPITAL CONTRIBUTIONS 4 2.1 INITIAL CAPITAL CONTRIBUTIONS 4 2.2 ADDITIONAL CAPITAL CONTRIBUTIONS 5 2.3 CAPITAL ACCOUNTS 5 2.4 NO INTEREST ON OR WITHDRAWAL OF CAPITAL 6 2.5 THIRD PARTY LOANS. 6 2.6 SHORT-TERM ADVANCES 6 2.7 DILUTION 6 ARTICLE 3 ALLOCATIONS OF NET PROFITS AND NET LOSSES 7 3.1 ALLOCATIONS OF INCOME AND NET PROFITS 7 3.2 ALLOCATIONS OF NET LOSSES 7 3.2.1 POSITIVE CAPITAL ACCOUNTS 7 3.2.2 PROFIT PERCENTAGE INTERESTS 7 3.3 SPECIAL ALLOCATIONS 7 3.3.1 MEMBER NONRECOURSE DEDUCTIONS 7 Page ---- 3.3.2 NONRECOURSE DEDUCTIONS REFERABLE TO LIABILITIES OWED TO NON-MEMBERS 8 3.3.3 MEMBER MINIMUM GAIN CHARGEBACK 8 3.3.4 MINIMUM GAIN CHARGEBACK 8 3.3.5 QUALIFIED INCOME OFFSET 9 3.4 CURATIVE ALLOCATIONS 9 3.5 APPLICATION OF SECTION 704(C) PRINCIPLES 9 3.6 ALLOCATION OF EXCESS NON-RECOURSE LIABILITIES 9 3.7 INTENTION TO BE TAXED AS A PARTNERSHIP 9 3.8 ALLOCATION OF NET PROFITS AND LOSSES IN RESPECT OF A TRANSFERRED INTEREST 9 3.9 OBLIGATIONS OF MEMBERS TO REPORT ALLOCATIONS 10 ARTICLE 4 DISTRIBUTIONS 10 4.1 DISTRIBUTION OF ASSETS BY THE COMPANY 10 4.2 NET CASH FLOW 10 4.3 PERSONS TO RECEIVE DISTRIBUTION 10 4.4 FORM OF DISTRIBUTION 10 4.5 WITHHOLDING ON DISTRIBUTIONS 10 4.6 RETURN OF DISTRIBUTIONS 11 ARTICLE 5 MEMBERS 11 5.1 LIMITED LIABILITY 11 5.2 ADMISSION OF ADDITIONAL MEMBERS 11 5.3 TRANSACTIONS WITH THE COMPANY 11 5.4 MEMBERS ARE NOT AGENTS 12 Page ---- 5.5 VOTING RIGHTS 12 5.5.1 GENERAL RULE 12 5.5.2 MEETINGS OF MEMBERS 12 5.5.3 PROXIES 12 5.6 WITHDRAWAL, RESIGNATION AND RETIREMENT 13 ARTICLE 6 MANAGEMENT AND CONTROL OF THE COMPANY 13 6.1 MANAGEMENT OF THE COMPANY BY THE MANAGER 13 6.1.1 EXCLUSIVE MANAGEMENT BY THE MANAGER 13 6.1.2 AGENCY AUTHORITY OF THE MANAGER 13 6.2 MANAGER 14 6.2.1 INITIAL MANAGER 14 6.2.2 TERM OF OFFICE; SUCCESSOR MANAGER 14 6.2.3 RESIGNATION 14 6.3 LIMITATIONS ON MANAGER'S AUTHORITY 14 6.4 CARD CLUB OPERATOR; HOTEL OPERATOR; OTHER OFFICERS 15 6.4.1 CARD CLUB OPERATOR; HOTEL OPERATOR 15 6.4.2 OTHER OFFICERS 15 6.5 REMUNERATION AND REIMBURSEMENT OF MEMBERS 15 6.6 BUDGETS 16 6.7 BANK ACCOUNTS 16 6.8 INSURANCE 16 ARTICLE 7 TRANSFER AND ASSIGNMENT OF INTERESTS 16 Page ---- 7.1 RESTRICTIONS ON TRANSFER; TRANSFERS OF ECONOMIC INTERESTS 16 7.2 RIGHTS OF FIRST REFUSAL 17 7.3 TRANSFERS SUBJECT TO LICENSES AND APPROVALS 18 7.4 EFFECT OF NON-COMPLIANCE 18 7.5 EFFECT OF TRANSFER 18 7.6 RIGHTS OF LEGAL REPRESENTATIVES 18 7.7 OBLIGATION TO COMPLY WITH APPLICABLE LAW 19 7.8 CHANGES OF CONTROL -- DEBARTOLO AND CHU 19 7.9 PUT/CALL 20 7.9.1 CHU/HPC 20 7.9.2 DEBARTOLO/HPC 20 7.9.3 DETERMINATION OF FAIR VALUE 21 7.9.4 HPC OPTION 22 7.9.5 CLOSING 23 7.10 TAG-ALONG RIGHTS 23 7.10.1 RIGHT TO PARTICIPATE IN SALE 23 7.10.2 SALE NOTICE 24 7.10.3 TAG-ALONG NOTICE 24 7.10.4 VOID TRANSFERS 24 7.10.5 EXEMPT TRANSFERS 25 ARTICLE 8 ACCOUNTING, RECORDS, REPORTING BY MEMBERS 25 8.1 FISCAL YEAR 25 8.2 BOOKS AND RECORDS 25 8.3 STATEMENTS 26 Page ---- 8.3.1 ANNUAL REPORT 26 8.3.2 TAX INFORMATION 26 8.3.3 ANNUAL STATE REPORT 26 8.3.4 MONTHLY REPORTS 26 8.4 FILINGS 27 8.5 BANK ACCOUNTS 27 8.6 TAX MATTERS FOR THE COMPANY HANDLED BY THE MANAGER AND TAX MATTERS PARTNER 27 ARTICLE 9 DISSOLUTION AND WINDING UP 27 9.1 EVENTS OF DISSOLUTION 27 9.2 EFFECT OF A DISSOLUTION EVENT (OTHER THAN DISSOLUTION) 28 9.3 CERTIFICATE OF DISSOLUTION 28 9.4 WINDING UP 28 9.5 DISTRIBUTIONS IN KIND 29 9.6 ORDER OF PAYMENT UPON DISSOLUTION 29 9.7 COMPLIANCE WITH REGULATIONS 29 9.8 LIMITATIONS ON PAYMENTS MADE IN DISSOLUTION 29 9.9 CERTIFICATE OF CANCELLATION 30 9.10 NO ACTION FOR DISSOLUTION 30 ARTICLE 10 INDEMNIFICATION AND INSURANCE 30 10.1 INDEMNIFICATION OF COMPANY PERSONS 30 10.2 SUCCESSFUL DEFENSE 31 10.3 INDEMNIFICATION OF OTHER AGENTS 31 10.4 RIGHT TO INDEMNIFICATION UPON APPLICATION 32 10.4.1 TIMING 32 Page ---- 10.4.2 ENFORCEMENT 32 10.5 PAYMENT OF EXPENSES IN ADVANCE 32 10.6 LIMITATIONS ON INDEMNIFICATION 32 10.7 OTHER TERMS OF INDEMNIFICATION 33 10.7.1 PARTIAL INDEMNIFICATION 33 10.7.2 INDEMNITY NOT EXCLUSIVE 33 10.7.3 INSURANCE 33 10.7.4 HEIRS, EXECUTORS AND ADMINISTRATORS 34 ARTICLE 11 REGISTRATION RIGHTS 34 11.1 INCIDENTAL REGISTRATION 34 11.1.1 NOTICE 35 11.1.2 INCLUSION OF SHARES 35 11.1A DEMAND REGISTRATION 35 11.1A.1 NOTICE OF DEMAND 35 11.1A.2 HOLDER AND REGISTRATION 36 11.1A.3 HOLDBACK 36 11.2 REGISTRATION PROCEDURES 36 11.2.1 SELLING HOLDER INFORMATION 36 11.2.2 CONSULTATION 36 11.2.3 PROVISION OF PROSPECTUSES 36 11.2.4 BLUE SKY COMPLIANCE 36 11.2.5 AMENDMENTS 37 11.2.6 PROSPECTUS DELIVERY 37 11.2.7 STOP-ORDERS 37 11.2.8 UNDERWRITING AGREEMENT 37 11.2.9 COMPLIANCE WITH LAWS 37 Page ---- 11.3 REGISTRATION NOT REQUIRED 38 11.4 DELAY OF REGISTRATION 38 11.5 INDEMNITY 38 11.5.1 HPI'S INDEMNITY 38 11.5.2 THE HOLDER'S INDEMNITY 38 11.6 EXPENSES OF REGISTRATION 39 11.7 TERMINATION 39 ARTICLE 12 MISCELLANEOUS 39 12.1 OTHER VENTURES; COMPETITION 39 12.2 COUNSEL TO THE COMPANY 40 12.3 GENERAL PROVISIONS 40 12.3.1 COMPLETE AGREEMENT 40 12.3.2 DISPUTES 40 12.3.2.1 GOVERNING LAW; JURISDICTION 40 12.3.2.2 ARBITRATION AS EXCLUSIVE REMEDY 40 12.3.3 ADDITIONAL DOCUMENTS 41 12.3.4 NOTICES 41 12.3.5 PARTIES 42 12.3.5.1 NO THIRD-PARTY BENEFITS 42 12.3.5.2 SUCCESSORS AND ASSIGNS 42 12.3.6 GOVERNING LAW; JURISDICTION 42 12.3.7 WAIVER OF JURY 42 12.3.8 WAIVERS STRICTLY CONSTRUED 42 12.3.9 RULES OF CONSTRUCTION 42 12.3.9.1 HEADINGS 42 Page ---- 12.3.9.2 TENSE AND CASE 43 12.3.9.3 SEVERABILITY 43 12.3.9.4 AGREEMENT NEGOTIATED 43 12.3.10 COUNTERPARTS 43 12.4 AMENDMENTS 43 12.5 RELIANCE ON AUTHORITY OF PERSON SIGNING AGREEMENT 43 12.6 INVESTMENT REPRESENTATION 43 12.7 LLC AS CARD CLUB OPERATOR 44 OPERATING AGREEMENT FOR CRYSTAL PARK HOTEL AND CASINO DEVELOPMENT COMPANY, LLC A CALIFORNIA LIMITED LIABILITY COMPANY This Operating Agreement is made as of July 18, 1996, by and among HP/COMPTON, INC., a California corporation ("HPC"), REDWOOD GAMING LLC, a California limited liability company ("DeBartolo") and FIRST PARK INVESTMENTS, LLC, a California limited liability company ("Chu"), with reference to the following facts: A. Compton Entertainment, Inc., a California corporation ("CEI") and each of its officers, directors and shareholders has been licensed (the "City License") by the City of Compton (the "City") to own and operate a card club (the "Card Club") located in the area known as Alameda Auto Plaza in the City (the "Card Club Site"). B. Pursuant to an Amended and Restated Agreement Respecting Pyramid Casino by and between Hollywood Park, Inc., a Delaware corporation and the parent corporation of HPC ("HPI"), on the one hand, and CEI and the principal shareholder of CEI, Rouben Kandilian, on the other hand (the "Purchase Agreement"), HPC (by assignment of HPI's rights thereunder) acquired CEI's rights to the Card Club Site, including its rights under that certain Amended and Restated Disposition and Development Agreement, Agreement of Purchase and Sale, and Lease with Option to Purchase (the "DDA") with The Community Redevelopment Agency of the City (the "Real Property Rights"), the plans and specifications for the construction of the Card Club (the "Plans"), an option (the "License Rights Option") to acquire the City License and all other assets held by CEI pertaining to the Card Club. C. Pursuant to the DDA, HPC has leased certain improvements on the Card Club Site adjacent to the Card Club which HPC is obligated to remodel, furnish and operate as a hotel (the "Hotel"). D. HPC and CEI have entered into a Lease of the Card Club, dated as of August 3, 1995, with HPC as Landlord and CEI as Tenant (the "Lease"). Pursuant to the Lease, HPC is to construct, develop and furnish the Card Club on the Card Club Site pursuant to the Plans. Costs of construction, development and furnishing of the Card Club and the Hotel and related start-up matters (collectively, "Project Costs") are expected to be approximately $25,000,000, including an aggregate $5,000,000 paid or to be paid by HPC to CEI for the Real Property Rights, the Plans, the License Rights Option and the exercise price -1- under the License Rights Option. HPC has expended approximately $9,200,000 to date on Project Costs and related matters. E. Section 5.4.1 of the Purchase Agreement provides that at such time as HPI is licensed as an operator of the Card Club under applicable California law and City ordinances, the Lease shall terminate and CEI and HPI shall enter into a partnership agreement (or limited liability company operating agreement) for the ownership and operation of the Card Club. F. HPC, DeBartolo and Chu wish to form a limited liability company to acquire all of HPC's rights to construct and own the Card Club, to acquire HPC's rights under the Lease, the DDA and the Purchase Agreement and to enter into this Agreement for the management and operation of the Company (as hereinafter defined). G. The Members have executed, and have filed or will cause to be filed with the California Secretary of State, Articles of Organization ("Articles") of Crystal Park Hotel and Casino Development Company, LLC, a California limited liability company (the "Company"), pursuant to the provisions of California Corporations Code, Title 2.5, also known as the Beverly-Killea Limited Liability Company Act (the "Act"). NOW, THEREFORE, for good and valuable consideration, the receipt of which is hereby acknowledged, the Members (capitalized terms are generally defined in Schedule I) by this Agreement set forth the operating agreement for the Company under the laws of the State of California. ARTICLE 1 ORGANIZATIONAL MATTERS 1.1 FORMATION. Pursuant to the Act, the Members have formed a California limited liability company under the laws of the State of California by filing the Articles with the California Secretary of State and entering into this Agreement. The rights and liabilities of the Members shall be determined pursuant to the Act and this Agreement. To the extent that the rights or obligations of any Member are different by reason of any provision of this Agreement than they would be in the absence of such provision, this Agreement shall, to the extent permitted by the Act, control. 1.2 NAME. The name of the Company shall be "CRYSTAL PARK HOTEL AND CASINO DEVELOPMENT COMPANY, LLC." The business of the Company may be conducted under that name or, upon compliance with applicable laws, any other name that the Manager deems appropriate or advisable. The Manager shall file any fictitious name certificates and similar filings, and any -2- amendments thereto, that the Manager considers appropriate or advisable. 1.3 TERM. The term of this Agreement shall be co-terminus with the period of duration of the Company provided in the Articles, unless extended or sooner terminated as hereinafter provided. 1.4 COMPANY PROPERTY. Pursuant to Section 2.1 hereof, the property of the Company (the "Company Property") shall consist of all of HPC's interest in the Card Club Site, including the Real Property Rights, the Card Club, the License Rights Option, HPC's rights under the Purchase Agreement, the Lease, and the DDA, and all other assets and properties, tangible and intangible, that are hereafter acquired or received by the Company. No Member, individually, shall have any ownership of the Company Property. 1.5 OFFICE AND AGENT. The Company shall continuously maintain an office and registered agent in the State of California as required by the Act. The principal office of the Company shall be as determined by the Manager. The Company also may have such offices, anywhere within and without the State of California, as the Manager from time to time may determine. The registered agent shall be as stated in the Articles or as otherwise determined by the Manager. 1.6 ADDRESSES OF THE MEMBERS. The respective names and addresses of the Members are set forth on Exhibit A. The Manager shall revise Exhibit A from time to time as changes in the information on that Exhibit occur. 1.7 PURPOSE OF COMPANY. The purpose of the Company is to engage in any lawful activity for which a limited liability company may be organized under the Act. Notwithstanding the foregoing, without the written consent of all of the Members, the Company shall not engage in any business other than the following: (a) The business of developing and owning the Card Club and, after such time as applicable law is amended to permit public companies to operate card clubs or HPI or HPC is otherwise legally permitted to operate the Card Club, to obtain all necessary licenses and approvals for, and to transfer the Company Assets to, Newco in accordance with the Purchase Agreement, with Newco thereafter to own and operate the Card Club and to own, lease or operate or to provide for the operation by others of the other Company Assets; (b) The business of remodeling, furnishing and operating or contracting for the operation of the Hotel; (c) The business of acquiring the Card Club Site or other property pursuant to the DDA and developing, constructing, -3- operating, contracting for the operation of and/or leasing other improvements at the Card Club Site or such other property as may be acquired and/or leased pursuant to the DDA; and (d) Such other activities directly related to the foregoing businesses as may be necessary, advisable or appropriate to further the foregoing business. In furtherance of this purpose, after such time as applicable law is amended to permit public companies to operate card clubs or HPI or HPC is otherwise legally permitted to operate the Card Club, each Member shall, and shall cause each person or entity that has a direct or indirect interest in such Member and who is required to apply for a license in order for the Company or Newco to acquire a license to operate the Card Club to, apply to the appropriate governmental authorities to obtain such licenses and approvals as are necessary for the Company or Newco to obtain a license to operate the Card Club. ARTICLE 2 CAPITAL CONTRIBUTIONS 2.1 INITIAL CAPITAL CONTRIBUTIONS. The Members shall make the following contributions to the Company ("Initial Capital Contributions"): Chu $ 1,000,000 HPC $22,000,000 DeBartolo $ 2,000,000 Chu and DeBartolo shall contribute their Initial Capital Contributions in cash on the effective date of this Agreement. HPC shall satisfy a portion of its Initial Capital Contribution by assigning to the Company all of its right, title and interest in and to the Card Club Site, including without limitation the Real Property Rights and HPC's rights under the Purchase Agreement, the Lease and the License Rights Option (together, the "Initial Card Club Assets"), upon approval of such assignment by the City and CEI. The Company shall assume all of HPC's obligations under or with respect to the Initial Card Club Assets, including without limitation obligations under the agreements set forth in Schedule 2.1, and shall indemnify HPC and HPI and hold each of them harmless from and against all losses, liabilities, costs and expenses with respect thereto (the "Card Club Liabilities"). The parties agree that the net fair market value of the non-cash assets contributed by HPC (i.e., the value of the Initial Card Club Assets minus the value of the Card Club Liabilities) is equal to the amount of HPC's Initial Expenses which, as of July 8, 1996, were approximately Nine Million Two Hundred Thousand Dollars ($9,200,000), as shown on Schedule 6.5. HPC shall contribute, as and when required by -4- the Company, cash of up to the difference between the Initial Expenses on the date that the Initial Card Club Assets are assigned to the Company and Twenty- Two Million Dollars ($22,000,000). 2.2 ADDITIONAL CAPITAL CONTRIBUTIONS. Except as may be explicitly agreed in writing by the Member and the Company, no Member shall be required to make any additional Capital Contributions. If the Manager notifies the Members, from time to time upon at least twenty (20) days' prior written notice, that additional Capital Contributions are necessary for (i) the acquisition, development and construction of the Card Club and the remodeling and furnishing of the Hotel and related activities in accordance with the Budget in effect from time to time or (ii) the acquisition and/or leasing of the Card Club Site or other property pursuant to the DDA or (iii) such improvements to the Card Club Site or other property acquired and/or leased pursuant to the DDA as are agreed upon by a Super Majority Interest or (iv) the payment of Card Club Liabilities or (v) such additional expenses as may be incurred after such time as applicable law is amended to permit public companies to operate card clubs or HPI or HPC is otherwise legally permitted to operate the Card Club, in connection with the formation of Newco and in connection with the operation by Newco of the Card Club or (vi) any other business purpose of the Company (collectively, "Additional Capital Contributions") each of the Members shall have the right, but not the obligation, to contribute as Additional Capital an amount equal to its respective Profit Percentage Interest of such Additional Capital Contribution. If any Member elects not to make such Additional Capital Contribution (the "Non-participating Member Contribution"), and HPC contributes its Profit Percentage Interest of such Additional Capital Contribution, then HPC shall be entitled to contribute as an Additional Capital Contribution an amount equal to the Non-participating Member Contribution. To the extent that the Members do not contribute their respective Profit Percentage Interests of Additional Capital Contributions, their Profit Percentage Interests shall be adjusted in accordance with Section 2.7. 2.3 CAPITAL ACCOUNTS. The Company shall establish an individual Capital Account for each Member. The Company shall determine and maintain each Capital Account in accordance with Regulations Section 1.704-1(b)(2)(iv). Upon the contributions by the Members under Section 2.1 and 2.2, each such Member will receive a credit to its Capital Account in the amount of cash or the fair market value of property so contributed. If a Member Transfers all or a part of such Member's Membership Interest in accordance with this Agreement, such Member's Capital Account attributable to the Transferred Membership Interest shall carry over to the new owner of such Membership Interest pursuant to Regulations Section 1.704-1(b)(2)(iv)(1). Each Capital Account shall consist of a Member's paid-in Capital Contribution(s) (whether in cash, property, services or otherwise, including a -5- Member's payment of claims against or liabilities of the Company to the extent that the payor has no right of indemnification or contribution) (a) increased by such Member's allocated share of Net Profits in accordance with Article 3 hereof, (b) decreased by such Member's allocated share of Net Losses and distributions in accordance with Article 3 hereof, and (c) adjusted as otherwise required in accordance with the Code, Regulations and generally accepted accounting principles (to the extent consistent with the Code and Regulations). If the book value of property is adjusted pursuant to Regulations 1.704-1(b)(2)(ix)(f), Capital Accounts shall be adjusted as provided in Regulations Section 1.704-1(b)(2)(iv)(g). 2.4 NO INTEREST ON OR WITHDRAWAL OF CAPITAL. No Member shall be entitled to receive any interest on such Member's Capital Contributions. Except as otherwise provided by law, no Member shall be entitled to withdraw or reduce its Capital Contribution or to demand or receive property other than cash in return for its Capital Contribution. No Member shall have any obligation, upon winding up of the Company, to restore any deficit balance in its Capital Account for the benefit of the other Members. 2.5 THIRD PARTY LOANS. The Company may seek debt financing from banks, savings and loan associations or other financial institutions from time to time if the Manager determines that the Initial Capital Contributions are insufficient for the conduct of its business or if the Manager otherwise determines in good faith that such financing is necessary or desirable ("Third Party Loans"), provided that no Member shall be required to guarantee any Third Party Loan unless such Member agrees to do so. Third Party Loans may be secured by liens on the Company Property and shall have such other terms and conditions as may be determined by a Super Majority Interest. 2.6 SHORT-TERM ADVANCES. Any Member may, but shall be under no obligation to, advance funds in excess of its obligation to make Initial Capital Contributions and Additional Capital Contributions ("Advances") in order to pay operational expenditures on a short-term basis in contemplation of income from operations or a disbursement of funds from Third Party Loans, if, in the judgment of the Manager, payment of expenditures cannot or should not be delayed until such funds are obtained by the Company. Amounts funded by a Member pursuant to this Section 2.6 shall bear interest at the Rate plus 200 basis points (but in no event greater than the maximum rate permitted under applicable law), and shall be repaid immediately upon receipt of funds contemplated to be received as provided above or from other Company assets as agreed by all of the Members. 2.7 DILUTION. In the event that HPC contributes its Profit Percentage Interest of an Additional Capital Contribution -6- and Chu and/or DeBartolo, as applicable, does not contribute its Profit Percentage Interest of such Additional Capital Contribution, the Profit Percentage Interests shall be recalculated such that (a) Chu's or DeBartolo's (as applicable) Profit Percentage Interest shall equal one-hundred (100) multiplied by a fraction, the numerator of which shall equal Chu's or DeBartolo's (as applicable) Capital Contributions and the denominator of which shall equal the total of all Capital Contributions by all Members; and (b) the Profit Percentage Interest of HPC shall be increased by the reduction in the Profit Percentage Interest of Chu or DeBartolo (as applicable) determined pursuant to clause (a) of this Section 2.7 from the Profit Percentage Interest of Chu or DeBartolo (as applicable) immediately prior to such determination. ARTICLE 3 ALLOCATIONS OF NET PROFITS AND NET LOSSES 3.1 ALLOCATIONS OF INCOME AND NET PROFITS. After giving effect to the special allocations set forth in Sections 3.3 and 3.4 hereof, Net Profits shall be allocated in accordance with the Members' Profit Percentage Interests, which shall initially be as follows: HPC 88% DeBartolo 8% Chu 4% The foregoing Profit Percentage Interests shall be subject to adjustment from time to time upon the admission of new Members or in accordance with Section 2.7. 3.2 ALLOCATIONS OF NET LOSSES. After giving effect to the special allocations set forth in Sections 3.3 and 3.4 hereof, Net Losses shall be allocated to the Members as follows: 3.2.1 POSITIVE CAPITAL ACCOUNTS. Net Losses shall first be allocated to the Members in proportion to and to the extent of their positive Capital Account balances. 3.2.2 PROFIT PERCENTAGE INTERESTS. Except as provided in Section 3.2.1, Net Losses shall be allocated to the Members in proportion to their Profit Percentage Interests. 3.3 SPECIAL ALLOCATIONS. 3.3.1 MEMBER NONRECOURSE DEDUCTIONS. Any Member Nonrecourse Deductions for any Fiscal Year and any other deductions or losses for any Fiscal Year referable to a liability owed by the Company to (or guaranteed or indemnified by) a Member for which no other Member bears the economic risk -7- of loss shall be specially allocated to the Member who bears the economic risk of loss with respect to the Member Nonrecourse Debt or other liability to which such Member Nonrecourse Deductions or other deductions are attributable in accordance with Regulations Section 1.704-2(i) and Regulations Section 1.704-1(b). 3.3.2 NONRECOURSE DEDUCTIONS REFERABLE TO LIABILITIES OWED TO NON-MEMBERS. Any Nonrecourse Deductions for any Fiscal Year and any other deductions or losses for any Fiscal Year referable to a liability owed by the Company to a Person other than a Member for which no Member bears the economic risk of loss shall be specially allocated to the Members in proportion to their Profit Percentage Interests. 3.3.3 MEMBER MINIMUM GAIN CHARGEBACK. Except as otherwise provided in Regulation Section 1.704-2(i)(4), notwithstanding any other provision of this Article 3, if there is a net decrease in Member Nonrecourse Debt Minimum Gain (as defined in Regulations Section 1.704-2(i)(2)) attributable to a Member Nonrecourse Debt during any Fiscal Year, each Member who has a share of the Member Nonrecourse Minimum Gain attributable to such Member Nonrecourse Debt (which share shall be determined in accordance with Regulations Section 1.704-2(i)(5)) shall be specially allocated items of Company income and gain for such Fiscal Year (and, if necessary, subsequent Fiscal Years) in an amount equal to that portion of such Member's share of the net decrease in Member Nonrecourse Debt Minimum Gain attributable to such Member Nonrecourse Debt, determined in accordance with Regulations Section 1.704-2(i)(4). Allocations pursuant to the previous sentence shall be made in proportion to the amounts required to be allocated to each Member pursuant thereto. The items to be so allocated shall be determined in accordance with Regulations Section 1.704-2(i)(4) and 1.704-2(j)(2). This Section 3.3.3 is intended to comply with the minimum gain chargeback requirement contained in Regulations Section 1.704-2(i)(4) and shall be interpreted consistently therewith. 3.3.4 MINIMUM GAIN CHARGEBACK. Except as otherwise provided in Regulations Section 1.704-2(f), notwithstanding any other provision of this Article 3, if there is a net decrease in Company Minimum Gain during any Fiscal Year, each Member shall be specially allocated items of Company income and gain for such Fiscal Year (and, if necessary, in subsequent Fiscal Years) in an amount equal to the portion of such Member's share of the net decrease in Company Minimum Gain which share of such net decrease shall be determined in accordance with Regulations Section 1.704-2(g)(2). Allocations pursuant to the previous sentence shall be made in proportion to the respective amounts required to be allocated to each Member pursuant thereto. The items to be so allocated shall be determined in accordance with Regulations Section 1.704-2(f)(6) and 1.704-2(j)(2). This Section 3.3.4 is intended to comply with the minimum gain chargeback requirement contained in -8- Regulations Section 1.704-2(f) and shall be interpreted consistently therewith. 3.3.5 QUALIFIED INCOME OFFSET. In the event a Member unexpectedly receives any adjustments, allocations, or distributions described in Regulations Section 1.704-1(b)(2)(ii)(d)(4), (5) or (6) or any other event creates an Adjusted Capital Account Deficit, items of Company income and gain shall be specially allocated to such Member in an amount and manner sufficient to eliminate such excess deficit balance as quickly as possible. 3.4 CURATIVE ALLOCATIONS. The allocations set forth in Section 3.3 hereof (the "Regulatory Allocations") are intended to comply with certain requirements of the Regulations. It is the intent of the Members that, to the extent possible, all Regulatory Allocations shall be offset either with other Regulatory Allocations or with special allocations of other items of Company income, gain, loss, or deduction pursuant to this Section 3.4. Therefore, notwithstanding any other provision of this Article 3 (other than the Regulatory Allocations), the Members shall make such offsetting special allocations of Company income, gain, loss, or deduction in whatever manner they determine appropriate so that, after such offsetting allocations are made, a Member's Capital Account balance is, to the extent possible, equal to the Capital Account balance such Member would have had if the Regulatory Allocations were not part of this Agreement and all Company items were allocated pursuant to Sections 3.1 and 3.2. 3.5 APPLICATION OF SECTION 704(C) PRINCIPLES. Notwithstanding the preceding sections of this Article 3: (a) Section 704(c) of the Code shall apply to the allocation of items of income, gain, deduction and loss related to contributed property having a tax basis at the time of contribution that differs from its fair market value; and (b) Regulations Section 1.704-1(b)(2)(iv)(f) shall apply to the items of income, gain, deduction and loss related to property the book value of which is adjusted pursuant to that Regulations Section. 3.6 ALLOCATION OF EXCESS NON-RECOURSE LIABILITIES. For purposes of Section 752 of the Code and Section 1.752-2(a)(3) of the Regulations, "excess non-recourse liabilities" shall be allocated among the Members in accordance with their Profit Percentage Interests. 3.7 INTENTION TO BE TAXED AS A PARTNERSHIP. The Company shall be treated as a partnership for tax purposes. 3.8 ALLOCATION OF NET PROFITS AND LOSSES IN RESPECT OF A TRANSFERRED INTEREST. - -------------------------------------------------------------------- If any Membership Interest is -9- Transferred, or is increased or decreased by reason of the admission of a new Member, Additional Capital Contributions or otherwise, during any Fiscal Year of the Company, each item of income, gain, loss, deduction or credit of the Company for such Fiscal Year shall be allocated among the Members by the Manager in accordance with any method permitted by Section 706(d) of the Code and the applicable Regulations in order to take into account the Members' varying Percentage Interests during the Year. 3.9 OBLIGATIONS OF MEMBERS TO REPORT ALLOCATIONS. The Members are aware of the income tax consequences of the allocations made by this Article 3 and hereby agree to be bound by the provisions of this Article 3 in reporting their shares of Company income and loss for income tax purposes. ARTICLE 4 DISTRIBUTIONS 4.1 DISTRIBUTION OF ASSETS BY THE COMPANY. Subject to applicable law and any limitations contained elsewhere in this Agreement, no distribution shall be made if, after giving effect to the distribution, (a) the Company would not be able to pay its debts as they become due in the usual course of business, or (b) the Company's total assets would be less than the sum of its total liabilities. 4.2 NET CASH FLOW. Subject to Section 4.1, Net Cash Flow, if any, shall be distributed within thirty (30) days after the end of each calendar quarter to the Members in accordance with the Members' respective Profit Percentage Interests on the date of the distribution. 4.3 PERSONS TO RECEIVE DISTRIBUTION. All distributions shall be made to the Persons who, according to the books and records of the Company, are the holders of record of the Economic Interests in respect of which such distributions are made on the actual date of distribution. Neither the Company nor any Company Person shall incur any liability for making distributions in accordance with this Section 4.3. 4.4 FORM OF DISTRIBUTION. A Member, regardless of the nature of the Member's Capital Contribution, has no right to demand and receive any distribution from the Company in any form other than money. No Member may be compelled to accept from the Company a distribution of any asset in kind in lieu of a proportionate distribution of money being made to other Members. 4.5 WITHHOLDING ON DISTRIBUTIONS. Each Member consents and agrees that the Company may deduct and withhold amounts for tax or other obligations of such Member on any amount -10- distributed or allocated by the Company to such Member, and to any assignee of a Member's Membership Interest (or the related Economic Interest), if the Company believes in good faith that it is required by law to do so. All amounts so withheld with respect to such Member, substitute Member, or Economic Interest Owner shall be treated as amounts distributed to such Person pursuant to Section 9.5 or 9.6 for all purposes under this Agreement. In addition, the affected Member, substitute Member or Economic Interest Owner shall reimburse the Company for any such amounts so withheld to the extent not deducted from a distribution. 4.6 RETURN OF DISTRIBUTIONS. Except for distributions made in violation of the Act or this Agreement, no Member or Economic Interest Owner shall be obligated to return any distribution to the Company or pay the amount of any distribution for the account of the Company or to any creditor of the Company. The amount of any distribution returned to the Company by a Member or Economic Interest Owner or paid by a Member or Economic Interest Owner for the account of the Company or to a creditor of the Company shall be added to the account or accounts from which it was subtracted when it was distributed to the Member or Economic Interest Owner. ARTICLE 5 MEMBERS 5.1 LIMITED LIABILITY. Except as required under the Act or as expressly set forth in this Agreement, no Member shall be personally liable for any debt, obligation or liability of the Company, whether that liability or obligation arises in contract, tort or otherwise. 5.2 ADMISSION OF ADDITIONAL MEMBERS. No additional Members shall be admitted unless approved by a Super Majority Interest. No additional Member shall become a Member until such additional Member has made any required Capital Contribution and has become a party to this Agreement by executing a signature page agreeing to the terms and provisions hereof, and substitute Members may only be admitted in accordance with Article 7. 5.3 TRANSACTIONS WITH THE COMPANY. A Company Person or any Affiliate may lend money to and transact other business with the Company only in accordance with this Agreement or with the prior approval of holders of a majority of the Profit Percentage Interests held by the disinterested Members after full disclosure of the Member's involvement. Subject to other applicable law, such Member has the same rights and obligations with respect thereto as a person who is not a Member. -11- 5.4 MEMBERS ARE NOT AGENTS. Pursuant to Article 6, the management of the Company is vested in the Manager. Unless expressly and duly authorized in writing to do so by the Manager, no Member, acting solely in the capacity of a Member, is an agent of the Company nor can any Member in such capacity bind or execute any instrument on behalf of the Company or render the Company liable for any purpose. 5.5 VOTING RIGHTS. 5.5.1 GENERAL RULE. Except as expressly provided in this Agreement, the Articles or the Act, Members shall have no voting, approval or consent rights. Except as otherwise expressly provided in this Agreement, in all instances in which a vote, approval, consent or agreement of the Members is required, a vote, approval or consent of a Super Majority Interest (or, in instances in which there are defaulting Members or an assignment of a Membership Interest, non- defaulting Members or Members who are not assignors of a Membership Interest, respectively, who hold eighty (80%) of the Profit Percentage Interests held by all such non-defaulting or non-assigning Members) shall be required. 5.5.2 MEETINGS OF MEMBERS. No annual or regular meetings of Members are required. A meeting of the Members may be called by any Manager or by Members with collective Profit Percentage Interests of at least ten percent (10%). Meetings of Members may be held at such date, time and place within or without the State of California as the Manager may fix from time to time. Notice of any meeting shall be given in accordance with Section 17104 of the Corporations Code. At any Members' meeting, the Manager shall preside at the meeting and shall designate an officer or representative of a Member to act as secretary of the meeting. The secretary of the meeting shall prepare minutes of the meeting, which shall be placed in the minute books of the Company. Any action that may be taken at a meeting of Members may be taken without a meeting, if a consent in writing setting forth the action so taken, is signed and delivered to the Company by Members having not less than the minimum number of votes that would be necessary to authorize or take that action at a meeting at which all Members entitled to vote on that action at a meeting were present and voted. All such consents shall be filed with the Company and shall be maintained in the Company records. Members may participate in any Members' meeting through the use of any means of conference telephones or similar communications equipment as long as all Members participating can hear one another. A Member so participating is deemed to be present in person at the meeting. 5.5.3 PROXIES. Every Member entitled to vote at a meeting may authorize another person or persons to act by proxy with respect to his, her or its Membership Interest. No proxy shall be valid after the expiration of 11 months from the date thereof unless otherwise provided in the proxy. Every -12- proxy continues in full force and effect until revoked by the Member executing it prior to the vote pursuant thereto, except as otherwise herein provided. Such revocation may be effected by a writing delivered to the Company stating that the proxy is revoked or by a subsequent proxy executed by the Member executing the prior proxy and presented to the meeting, or as to any meeting by attendance at such meeting and voting in person by the person executing the proxy. The dates contained on the forms of proxy presumptively determine the order of execution, regardless of the postmark dates on the envelopes in which they are mailed. A proxy is not revoked by the death or incapacity of the Member unless, before the vote is counted, written notice of such death or incapacity is received by the Company. The revocability of a proxy that states on its face that it is irrevocable shall be governed by the provisions of Sections 703(e) and 705(f) of the California General Corporation Law. 5.6 WITHDRAWAL, RESIGNATION AND RETIREMENT. Except as required by law, no Member may withdraw, resign or retire from the Company without the express consent of a Super Majority Interest. ARTICLE 6 MANAGEMENT AND CONTROL OF THE COMPANY 6.1 MANAGEMENT OF THE COMPANY BY THE MANAGER. 6.1.1 EXCLUSIVE MANAGEMENT BY THE MANAGER. Subject to the provisions of the Articles and this Agreement, the business, property and affairs of the Company shall be managed, and all powers of the Company shall be exercised, by or under the direction of the Manager. The Manager shall have, without limitation the authority to exercise all rights and fulfill all obligations with respect to the Initial Card Club Assets, including without limitation rights and obligations under the agreements set forth in Schedule 2.1. 6.1.2 AGENCY AUTHORITY OF THE MANAGER. Subject to the rights of the Members as set forth in Section 6.3, the Manager shall have signing authority with respect to all matters on behalf of the Company, including without limitation the authority to endorse checks, drafts and other evidences of indebtedness made payable to the order of the Company or to sign checks, drafts and other instruments obligating the Company to pay money, or sign agreements or other documents. Subject to the provisions of the Articles and this Agreement, the Manager may delegate any of its powers hereunder. -13- 6.2 MANAGER. 6.2.1 INITIAL MANAGER. HPC shall be the initial Manager. --------------- 6.2.2 TERM OF OFFICE; SUCCESSOR MANAGER. The Manager shall hold --------------------------------- office for a term commencing on the date of appointment (or in the case of the initial Manager, commencing on the date hereof) and expiring upon the earlier of (i) the date on which such Manager resigns, (ii) the date on which the Manager becomes an Excluded Member pursuant to Section 9.2 hereof or (iii) the date on which the Manager ceases to be a Member owning at least a 20% interest in the capital and profits of the Company. Upon the expiration of the term of office of a Manager, a successor Manager shall be elected by a Super Majority Interest, including HPC in its capacity as a Member (unless HPC's term as the Manager expired by reason of clause (ii) above), provided that such successor Manager must be a Member owning at least a 20% interest in the capital and profits of the Company unless agreed upon in writing by all of the Members. 6.2.3 RESIGNATION. The Manager may resign at any time by giving written notice to the Members without prejudice to the rights, if any, of the Company under any contract to which the Manager is a party. The resignation of any Manager shall take effect upon receipt of that notice or at such later time as shall be specified in the notice; and, unless otherwise specified in the notice, acceptance of the resignation shall not be necessary to make it effective. A Manager who has an incapacity shall be deemed to have resigned. For purposes of this Section 6.2.3, "incapacity" shall mean, as to any Manager, as applicable, (i) the death or adjudication or incompetence or insanity in the case of a natural person, (ii) the inability of a Manager to fulfill his obligations under this Agreement because of injury or physical or mental illness and such incapacity shall exist for ninety (90) working days in the aggregate during any consecutive twelve (12) month period, (iii) the termination of a trust in the case of a trustee of a trust, the dissolution and commencement of winding up of a partnership in the case of a partnership, the filing of a certificate of dissolution or its equivalent in the case of a corporation or a limited liability company and the distribution by a fiduciary of an estate's entire interest in the Company, or (iv) the Bankruptcy of such Manager. The resignation of a Manager shall not affect the Manager's rights as a Member and shall not by itself constitute a withdrawal of a Member. 6.3 LIMITATIONS ON MANAGER'S AUTHORITY. Notwithstanding the foregoing, the Manager shall not, without the written consent of all of the Members, which consent shall not be unreasonably delayed or withheld: -14- (a) do any act in contravention of this Agreement in its present form or as amended; (b) confess a judgment against the Company; (c) cause the Company to enter into any arrangement with itself or any of its affiliates or other related entities as principal on terms less favorable to the Company as would be obtained from an unaffiliated third party; (d) dissolve the Company except in accordance with Article 9 hereof; (e) change the nature of the business of the Company (provided, however, that to the extent agreed to by a Super Majority Interest the Company may determine to undertake additional businesses at the Card Club Site or other property leased or acquired by the Company pursuant to the DDA in addition to the Card Club and the Hotel). 6.4 CARD CLUB OPERATOR; HOTEL OPERATOR; OTHER OFFICERS. 6.4.1 CARD CLUB OPERATOR; HOTEL OPERATOR. Pursuant to the Lease, CEI will act as the operator of the Card Club (the "Card Club Operator") until such time as the Company may be licensed to act as the Card Club Operator, at which time the Company and CEI shall form Newco to operate the Card Club, the Hotel and related businesses, in accordance with the Purchase Agreement. When the Company and CEI form Newco, subject to the terms of the Purchase Agreement, the Manager shall select the chief operating officer and manager of the Card Club (and may enter into employment agreements with such persons as it deems appropriate). Such chief operating officer and manager, under the supervision of the Manager, shall be responsible for the day-to-day management of the operations of the Card Club and shall make all the decisions required to be made regarding the day-to-day administration, supervision, management and control of the operations of the Card Club. The chief operating officer (and all other employees of the Company) shall report directly to and shall be supervised by the Manager. The Hotel operator shall be selected by the Manager. 6.4.2 OTHER OFFICERS. The Manager may appoint such other officers as may be deemed necessary or advisable from time to time by the Manager. All officers, including the chief operating officer, shall serve at the pleasure of the Manager, subject to all rights, if any, of an officer under any contract of employment. Any individual may hold any number of offices with such duties and powers as designated by the Manager. 6.5 REMUNERATION AND REIMBURSEMENT OF MEMBERS. Except as otherwise authorized in, or pursuant to, this Agreement, no Member is entitled to remuneration for acting on behalf of the Company or in connection with the Company's business. HPC shall -15- receive a credit against its Initial Capital Contribution for all Initial Expenses paid for by HPC or HPI. A schedule setting forth the Initial Expenses paid for by HPC or HPI as of July 8, 1996, is attached hereto as Schedule 6.5. The Manager shall be entitled to full reimbursement of its actual costs incurred in connection with the Company's ownership and/or operation of the Card Club, including salaries and other compensation of all employees hired for or assigned to Card Club operations but excluding any allocation for general and administrative overhead costs. The Members shall be entitled to reimbursement of reasonable out-of-pocket expenses incurred or services provided for the purposes of the Company at the request of the Manager. 6.6 BUDGETS. The Manager shall prepare an initial capital budget and annual capital and operating budgets and operating plans for the Company for each fiscal year, which annual budgets and plans shall be delivered to the Members for informational purposes. 6.7 BANK ACCOUNTS. All funds of every kind and nature received by the Company, including capital contributions, loan proceeds, and operating receipts shall be deposited in such bank accounts in the name of the Company as shall be determined from time to time by the Manager. Company funds shall not be commingled with funds of any Member or others. 6.8 INSURANCE. The Company shall procure and maintain in full force and effect insurance on the Card Club and other Company Property, including liability, fire, extended property and business interruption insurance, naming the Company and the Manager as insureds thereunder (the terms and coverage amounts of which shall be that customary in the industry). The Company shall procure and maintain any additional insurance coverage required by applicable City ordinances or written order. ARTICLE 7 TRANSFER AND ASSIGNMENT OF INTERESTS 7.1 RESTRICTIONS ON TRANSFER; TRANSFERS OF ECONOMIC INTERESTS. No Member may Transfer its Membership Interest or Economic Interest in the Company, in whole or in part, without the prior written consent of the Manager (or, in the case of HPC if HPC is then the Manager, holders of a majority of the Profit Percentage Interests excluding those held by HPC), which consent may be given or withheld, conditioned or delayed by the Manager or such holders, as applicable, in its or their sole discretion; provided that any Member may Transfer its Economic Interest to another Member or to an Affiliate without consent. The Transfer of an Economic Interest to an Affiliate or another Member shall not effect a Transfer of the Membership Interest of the transferring Member and the transferee shall in no event be -16- deemed substituted as a Member of the Company, except to the extent of the Economic Interest so Transferred unless otherwise agreed by all of the Members. No Transfer of an Economic Interest permitted by this Agreement shall effect a novation or release any of the transferor Member's obligations hereunder, and the Transferring Member shall continue to be obligated under each and every provision of this Agreement. No Economic Interest Owner of the Company shall have any right to participate in the management of the business and affairs of the Company or to become a Member thereof. 7.2 RIGHTS OF FIRST REFUSAL. If a Member has received the prior written consent of the Manager (or, in the case of HPC if HPC is then the Manager, holders of a majority of the Profit Percentage Interests excluding those held by HPC), to a proposed Transfer in accordance with Section 7.1, prior to seeking to sell all or any portion of its Membership Interest (the "Transferable Interest"), (i) each Member other than HPC shall first offer HPC and, as long as HPC is the Manager, the other Members and (ii), HPC subject to the requirements of the Purchase Agreement regarding the rights of CEI in connection with Transfers by HPC, shall offer to the other Members (in each case, collectively with HPC, the "Offerees") the right to purchase the Transferable Interest (or in the case of HPC, if CEI had the right pursuant to the Purchase Agreement to exercise a right of first refusal and did so, the remainder, if any, of the Transferable Interest following such exercise) on the same terms and conditions as the selling Member intends to sell such interest, or on the same terms and conditions as the offer received from a prospective purchaser, as the case may be (herein, the "First Opportunity Offer"). The First Opportunity Offer, once made, shall constitute an irrevocable binding offer by the selling Member to sell the Transferable Interest to the Offerees, who shall have thirty (30) days after receipt of the First Opportunity Offer within which to accept same in writing. If any of the Offerees timely accepts the First Opportunity Offer, the selling Member shall sell the Transferable Interest to such accepting Offerees on a pro rata basis in accordance with their Profit Percentage Interests (or if only one Offeree accepts in a timely manner, such Offeree may purchase the entire Transferable Interest), on the same terms and conditions as the First Opportunity Offer; provided, however, that such sale shall be consummated within ninety (90) days of the Offerees' acceptance of the First Opportunity Offer. If the Offerees fail to timely accept the First Opportunity Offer or do not agree to purchase all of the Transferable Interest, the selling Member (other then HPC, if it has previously made such offer to CEI) shall offer the still available portion of the Transferable Interest to CEI in accordance with the terms and conditions of the Purchase Agreement. If CEI agrees to purchase (x) all of the still available portion of the Transferable Interest of DeBartelo or Chu, as applicable, or (y) all or any portion of the Transferable Interest of HPC, the sale of the Transferable Interest to CEI and the accepting Offerees, if any, shall be -17- consummated in accordance with the Purchase Agreement. If the accepting Offerees, if any, and CEI together do not agree to purchase the entire Transferable Interest, then the selling Member shall be free to sell the Transferable Interest to any third party, subject to the terms of this Agreement and of the Purchase Agreement. Each of the Members acknowledges receipt of a copy of the Purchase Agreement and hereby agrees to be bound by all the provisions thereof, including without limitation (i) the grant to CEI by each of them of a right of first refusal with respect to Transfers of their respective Membership Interests herein, and (ii) the provisions regarding the price below which Membership Interests may not be sold, all as set forth in Section 10.2 of the Purchase Agreement. 7.3 TRANSFERS SUBJECT TO LICENSES AND APPROVALS. Notwithstanding any other provision of this Agreement, at such time as a public company is permitted under applicable law to own and operate a card club, or HPI or HPC is otherwise legally permitted to operate the Card Club, no Transfer of a Membership Interest or an Economic Interest in the Company may be made unless and until the transferee has obtained all licenses and approvals necessary for the ownership and operation of the Card Club from the City and any other necessary or applicable licensing authorities and has executed an agreement to be bound by all provisions of this Agreement. 7.4 EFFECT OF NON-COMPLIANCE. Any purported Transfer not permitted by this Agreement shall be void ab initio and of no effect against the Company, any other Member or any creditor of or claimant against the Company. 7.5 EFFECT OF TRANSFER. A transferee of a Membership Interest shall have the right to become a substitute Member only if (a) the requirements of Sections 7.1 and 7.2, and as applicable, Sections 7.3 and 7.8, are met, (b) such person executes an instrument satisfactory to all of the Members accepting and adopting the terms and provisions of this Agreement, and (c) such person pays any reasonable expenses in connection with its admission as a new Member. The admission of a substitute Member shall not result in the release of the Member who assigned the Membership Interest from any liability that such Member may have to the Company or to any Member. 7.6 RIGHTS OF LEGAL REPRESENTATIVES. Subject to the provisions of Section 9.2, if a Member who is an individual dies or is adjudged by a court of competent jurisdiction to be incompetent to manage the Member's person or property, the Member's executor, administrator, guardian, conservator, or other legal representative shall have all the rights of a holder of an Economic Interest, but shall have no right to become a substitute Member without the consent otherwise required pursuant to this Agreement. If a Member is a corporation, trust, or other entity and is dissolved or terminated, the -18- powers described in the preceding sentence may be exercised by such Member's legal representative or successor. 7.7 OBLIGATION TO COMPLY WITH APPLICABLE LAW. At such time as a public company is permitted under applicable law to own and operate a card club, or HPI or HPC is otherwise legally permitted to operate the Card Club, the Company shall promptly apply to obtain licensing and the necessary approvals to permit Newco to acquire the Company Assets and to operate the Card Club, the Hotel and related businesses and all Members hereby agree to obtain (and to cause each of their directors, officers, equity owners and other Affiliates, as applicable, to obtain) all required licenses and approvals as promptly as possible. If any Member or any director, officer, equity owner or other Affiliate of any Member (collectively a "Noncomplying Person") is unable, at any time, to obtain or maintain such licensing or otherwise comply with applicable law, such Member shall take such action, including without limitation, a corporate restructuring or the severing of its relationship with the Noncomplying Person, in order to comply with applicable law within thirty (30) days of the date on which the Noncomplying Person was unable or ceased to comply with such law. If a Member is unable to satisfy the requirements of the preceding sentence, then the Company (or, if the Company is unable to do so, the other Members) shall purchase such Member's Membership Interest (on a pro rata basis in accordance with their respective Profit Percentage Interests, if the purchasers are the other Members). The purchase price of the sale required by the previous sentence shall equal the Fair Value of such Member's Membership Interest determined in accordance with the procedures for determining the Fair Value of Chu's and DeBartolo's Membership Interests as set forth in Section 7.9.3 and shall be payable in equal quarterly installments over five (5) years with interest at the Rate. A Member that is removed from the Company pursuant to this Section shall have no further right to participate, in any way, in the business of the Company (specifically including the right to receive distributions from, or to share in the Net Profits, Net Losses or similar items of, the Company or to approve Company actions). 7.8 CHANGES OF CONTROL -- DEBARTOLO AND CHU. During the term of this Agreement, each of Chu and DeBartolo shall prohibit each of its equity owners from effecting any Transfer of their ownership interests that would result in a Change of Control, respectively, of Chu or DeBartolo. Chu represents and warrants to HPC and DeBartolo that attached hereto as Schedule 7.8A is a true and complete list setting forth each of the equity owners of Chu, showing the percentage interest owned. DeBartolo represents and warrants to HPC and Chu that attached hereto as Schedule 7.8B is a true and complete list setting forth each of the equity owners of DeBartolo, showing the percentage interest owned. Each of Chu and DeBartolo hereby agrees to provide the Manager (or HPC, if HPC is no longer the Manager) with prompt notice of any proposed sale by an equity owner of his, her or -19- its ownership interest. Concurrently with the execution of this Agreement, each of Chu and DeBartolo shall cause any certificates representing such ownership interests to bear a legend substantially as follows: "THE OWNERSHIP INTERESTS REPRESENTED BY THIS CERTIFICATE ARE SUBJECT TO CERTAIN TRANSFER RESTRICTIONS CONTAINED IN THE OPERATING AGREEMENT OF CRYSTAL PARK HOTEL AND CASINO DEVELOPMENT COMPANY, LLC, A COPY OF WHICH AGREEMENT IS ON FILE AT THE PRINCIPAL OFFICE OF THE ISSUER. ANY TRANSFER OF SHARES IN VIOLATION OF SUCH PROVISIONS SHALL BE NULL AND VOID AB INITIO." -------- The Members hereby agree that any Change of Control, merger, sale of assets, recapitalization or other corporate restructuring of HPI shall not constitute a Transfer or Change of Control of HPC for purposes of this Agreement. 7.9 PUT/CALL. 7.9.1 CHU/HPC. Within one-hundred twenty (120) days following each of the following events, subject to CEI's rights pursuant to the Purchase Agreement, Chu shall have the right to notify HPC of its election to cause HPC to purchase its Membership Interest, and HPC shall have the right to notify Chu of its election to purchase Chu's Membership Interest, for a price equal to the Fair Value of Chu's Membership Interest, which price shall be payable in accordance with Section 7.9.4. This right and obligation shall be personal to Chu and may not be assigned or transferred, even if there is a permitted Transfer of Chu's Membership Interest. The events giving rise to rights of each of HPC and Chu under this Section 7.9.1 are as follows: (a) An HPI Change; (b) The death of Leo Chu; (c) The death of Ivy Chu; or (d) The date that is five (5) years after the date hereof. 7.9.2 DEBARTOLO/HPC. Within one-hundred twenty (120) days following each of the following events, subject to CEI's rights pursuant to the Purchase Agreement, DeBartolo shall have the right to notify HPC of its election to cause HPC to purchase its Membership Interest in the Company, and HPC shall have the right to notify DeBartolo of its election to purchase DeBartolo's Membership Interest, for a price equal to the Fair Value of DeBartolo's Membership Interest, which price shall be payable in accordance with Section 7.9.4. This right and obligation shall be personal to DeBartolo and may not be -20- assigned or transferred, even if there is a permitted Transfer of DeBartolo's Membership Interest. The events giving rise to the rights of each of DeBartolo and HPC under this Section 7.9.2 are as follows: (a) An HPI Change; or (b) The date that is five (5) years after the date hereof. 7.9.3 DETERMINATION OF FAIR VALUE. The Fair Value of the Membership Interest of Chu or DeBartolo for purposes hereof shall be determined as follows. (a) During the first eighteen (18) months after the date hereof, the Fair Value shall be determined by multiplying the Profit Percentage Interest of Chu or DeBartolo as applicable by the total Capital Contributions to the Company of all of the Members from its inception to the date of the purchase of such interest. (b) From and after the date that is eighteen (18) months after the date hereof, the Fair Value shall mean the price that an unaffiliated third party would be willing to pay for the Membership Interest of Chu or DeBartolo, as applicable (the "Acquired Interest"), considering the value of the Company's business and assets at the time and its liabilities (with no minority discount applied). HPC and DeBartolo or Chu, as applicable, shall attempt to agree on the Fair Value during the sixty (60) day period after the notification by HPC, on the one hand, or Chu or DeBartolo, on the other, of its election to purchase or sell the Acquired Interest pursuant to Section 7.9.1 or 7.9.2. If HPC and DeBartolo or Chu, as applicable, cannot agree on the Fair Value during such sixty (60) day period, then the Fair Value of the Acquired Interest shall be determined by an appraisal. Either HPC, on the one hand, or DeBartolo or Chu, on the other hand, may initiate an appraisal by notifying the other in writing of its designation of a nationally recognized investment banking firm to determine the Fair Value of the Acquired Interest. Within ten (10) days following receipt of such designation, the other shall either notify HPC or DeBartolo or Chu, as the case may be, of its designated appraiser, which shall also be a nationally recognized investment banking firm, or, in the absence of notice, shall be deemed to have accepted the investment banking firm designated by the other. The investment banking firm (or firms) so appointed shall make a determination of the Fair Value within thirty (30) days after the deemed acceptance of the first designated investment banking firm or, if applicable, the appointment of the second investment banking firm, and shall concurrently exchange and/or deliver such determinations to HPC or DeBartolo or Chu. If only one investment banking firm has been appointed, the determination by such firm of the Fair Value shall be final and binding. If two -21- firms have been appointed, and the determinations of the two firms are within ten percent (10%) of each other, the average of the two determinations shall be the Fair Value. If the two determinations are not within ten percent (10%) of each other, then the two investment banking firms shall select a third investment banking firm within fifteen (15) days after the determinations have been exchanged; and if the two investment banking firms are unable to agree within that period on a third firm, such appointment will be made by the American Arbitration Association. If a third investment banking firm is appointed, the third investment banking firm shall make the determination of the Fair Value, which shall be within the range of the determinations made by the first two firms, within fifteen (15) days after the appointment of the third firm. Each of HPC on the one hand and Chu or DeBartolo on the other shall pay one-half ( 1/2) of the cost of the investment banking firm, if only one is appointed; if two firms are appointed, HPC on the one hand, and Chu or DeBartolo, on the other hand, shall each pay the fees and costs of the investment banking firm appointed by such Person; and the fees and costs of a third investment banking firm shall be divided equally between them. 7.9.4 HPC OPTION. HPC shall have the option to pay for the Acquired Interest either by the issuance of HPI Common Stock (or common stock of any successor to HPI) in an amount equal to the Fair Value or by payment of the Fair Value in cash by wire transfer; provided, that HPC may elect to pay for the Acquired Interest by issuing common stock only if HPI or its successor is a public company at the time. HPC shall make such election by notice to Chu or DeBartolo as applicable within thirty (30) days after the determination of the Fair Value of the Acquired Interest. If HPC elects to pay for the Acquired Interest by the issuance of HPI Common Stock, Chu or DeBartolo, as applicable, shall be entitled to exercise piggyback registration rights and demand registration rights on one occasion each with respect to such common stock, on the terms and conditions contained in Article 11 hereof. For purposes hereof, the value of HPI's stock shall be determined by reference to the closing price on the principal stock exchange on which such shares are then listed or, if such shares are not then listed on a stock exchange, by reference to the closing price (if approved for quotation on the Nasdaq National Market) or the mean between the bid and asked price (if other over-the-counter issue) of a share as supplied by the National Association of Securities Dealers, Inc. through Nasdaq (or its successor in function), in each case as reported by The Wall Street Journal, for the business day immediately following the date of the election made by HPC, DeBartolo or Chu pursuant to Section 7.9.1 or 7.9.2 (or, if for any reason no such price is available, in such other manner as the Board of Directors of HPI may deem appropriate to reflect the then fair market value thereof). If HPC is no longer the Manager at the time HPC, Chu or DeBartolo exercises its right hereunder, the parties acknowledge that Chu or DeBartolo must first offer its -22- Membership Interest to CEI in accordance with the terms of the Purchase Agreement. 7.9.5 CLOSING. The closing (the "Closing") of any sale pursuant hereto shall be held at a mutually acceptable place, on a date (the "Closing Date") not more than the later of (i) one-hundred twenty (120) days after the election made by HPC, DeBartolo or Chu pursuant to Section 7.9.1 or 7.9.2, or (ii) thirty (30) days after determination of the Fair Value of the Membership Interest of Chu or DeBartolo as applicable, which date shall be established by HPC upon not less than ten (10) business days' prior written notice to Chu or DeBartolo, as applicable. Conveyance shall be made by an appropriate assignment, duly and validly executed by Chu or DeBartolo, as applicable, conveying the Acquired Interest, free and clear of all liens, claims, encumbrances and rights of others and containing customary representations and warranties to HPC, including without limitation, representations and warranties that (i) there are no outstanding options, warrants or other rights to purchase such Membership Interest; and (ii) Chu or DeBartolo, as applicable, has full power and authority to sell its Membership Interest and such sale is not prohibited by and will not conflict with the terms of any other understanding, agreement or arrangement to which Chu or DeBartolo, as applicable, is a party or by which it is bound. 7.10 TAG-ALONG RIGHTS. 7.10.1 RIGHT TO PARTICIPATE IN SALE. Following compliance with all applicable requirements of this Agreement governing the Transfer of Membership Interests, including the requirements of the Purchase Agreement regarding offering the Membership Interest to CEI, if any Member ("Selling Member") enters into an agreement to transfer, sell or otherwise dispose of any portion of its Membership Interest (other than a Transfer of an Economic Interest to an Affiliate or another Member as permitted by Section 7.1) (such transfer, sale or other disposition being referred to as a "Tag-Along Sale"), then each other Member ("Tag-Along Member") shall have the right, but not the obligation, to participate in such Tag-Along Sale. The portion of its Membership Interest that each Tag-Along Member will be entitled to include in such Tag-Along Sale (the "Member's Allotment") shall be determined by multiplying (i) the Profit Percentage Interest represented by the Membership Interest proposed to be sold, transferred or otherwise disposed of pursuant to the Tag-Along Sale, by (ii) such Tag-Along Member's Profit Percentage Interest on the day immediately preceding the Tag-Along Notice Date (as defined below). Any sales of any portion of its Membership Interest by a Tag-Along Member as a result of the foregoing "Tag-Along Rights" shall be on the same terms and conditions as the proposed Tag-Along Sale by the Selling Member. The "Tag-Along Notice Date" shall be the date that the Tag-Along Sale Notice (as defined below) is delivered to Members. -23- 7.10.2 SALE NOTICE. The Selling Member shall provide the other Members with written notice (the "Tag-Along Sale Notice") not more than sixty (60) nor less than thirty (30) days prior to the proposed date of the Tag-Along Sale (the "Tag-Along Sale Date"). Each Tag-Along Sale Notice shall set forth: (i) the name and address of each proposed transferee or purchaser of a Membership Interest in the Tag-Along Sale; (ii) the Profit Percentage Interest represented by the Membership Interest proposed to be transferred or sold by the Selling Member; (iii) the proposed amount and form of consideration to be paid for such Membership Interest and the terms and conditions of payment offered by each proposed transferee or purchaser; (iv) confirmation that the proposed purchaser or transferee has been informed of the "Tag-Along Rights" provided for herein and has agreed to purchase the Membership Interest in accordance with the terms hereof; and (v) the Tag-Along Sale Date. 7.10.3 TAG-ALONG NOTICE. If a Member wishes to participate in the Tag-Along Sale, such Member shall provide written notice (the "Tag-Along Notice") to the Selling Member no less than ten (10) business days prior to the Tag-Along Sale Date. If a Tag-Along Notice is not received by the Selling Member from a Member prior to the ten (10) day period specified above, the Selling Member shall have the right to sell or otherwise transfer the Membership Interest specified in the Tag-Along Sale Notice to the proposed purchaser or transferee without any participation by such Member. The Tag-Along Notice shall set forth the Profit Percentage Interest represented by the Membership Interest that such Member elects to include in the Tag-Along Sale, which shall not exceed the Member's Allotment. The Tag-Along Notice shall also specify the aggregate Profit Percentage Interest represented by such Member's Membership Interest as of the close of business on the day immediately preceding the Tag-Along Notice Date, which such Member desires also to include in the sale ("Additional Membership Interests") in the event there is any under-subscription for the entire amount of all Members' Allotments. In the event there is an under- subscription in the aggregate of such Members' Allotments, the Selling Member shall apportion the unsubscribed Members' Allotments to such holders whose Tag- Along Notices specified an amount of Additional Membership Interests, which apportionment shall be on a pro rata basis among such Members in accordance with the number of Additional Membership Interests specified by all such Members in their Tag-Along Notices. The Tag-Along Notice given by the Member shall constitute such Member's binding agreement to sell such Membership Interest on the terms and conditions applicable to the Tag-Along Sale, subject to the provisions of this Section 7.10. 7.10.4 VOID TRANSFERS. If the Selling Member fails to sell or otherwise Transfer its Membership Interest or any portion thereof on terms and conditions which are no more -24- favorable in any material respect to the Selling Member than as stated in the Tag-Along Sale Notice on or prior to the Tag-Along Sale Date, such sale or Transfer shall be null and void, and any subsequent sale or Transfer of such Membership Interest must comply with all of the requirements of this Agreement. 7.10.5 EXEMPT TRANSFERS. The provisions of this Section 7.10 shall not apply to any Transfer, sale or other disposition by any Member to one of its Affiliates (provided that prior to any such disposition the Member complies with the requirements of this Agreement regarding Transfers). ARTICLE 8 ACCOUNTING, RECORDS, REPORTING BY MEMBERS 8.1 FISCAL YEAR. The fiscal year of the Company shall be the calendar year. The decision to engage outside accountants for the Company and the selection of such outside accountants, if any, shall be made by the Manager. 8.2 BOOKS AND RECORDS. Each Member and each Economic Interest Owner, and their duly authorized representatives shall at all times, during regular business hours, have reasonable access to and may inspect and copy at its own expense any of the books and records of the Company set forth in this Section, for purposes reasonably related to such person's interest in the Company. Each Member shall be entitled at any time to have the Company's books and records examined or audited at such Member's expense, and HPC shall cooperate fully with the party or parties making such examination or audit on behalf of such Member. The books of account of the Company shall be maintained and prepared in accordance with generally accepted accounting principles, consistently applied. The Company shall maintain at its principal office in California all of the following: (a) A current list of the full name and last known business or residence address of each Member and Economic Interest Owner set forth in alphabetical order, together with the Capital Contributions, Capital Account and Profit Percentage Interest of each Member and Economic Interest Owner; (b) A current list of the full name and business or residence address of the Manager and each officer; (c) A copy of the Articles and any and all amendments thereto together with executed copies of any powers of attorney pursuant to which the Articles or any amendments thereto have been executed; -25- (d) Copies of the Company's federal, state and local income tax or information returns and reports, if any, for the six (6) most recent taxable years; (e) A copy of this Agreement and any and all amendments thereto together with executed copies of any powers of attorney pursuant to which this Agreement or any amendments thereto have been executed; (f) Copies of the financial statements of the Company, if any, for the six (6) most recent Fiscal Years; (g) The Company's books and records as they relate to the internal affairs of the Company for at least the current and past four (4) Fiscal Years; (h) Originals or copies of all minutes, actions by written consent, consents to action and waivers of notice to Members and Member votes, actions and consent, if any; and (i) Any other information required to be maintained by the Company pursuant to the Act. 8.3 STATEMENTS. 8.3.1 ANNUAL REPORT. Within one-hundred twenty (120) days after the end of each calendar year, the Manager shall deliver to each of the other Members audited financial statements of the Company, certified by Arthur Anderson & Co., Inc. or such other "Big Six" accounting firm selected by the Manager. 8.3.2 TAX INFORMATION. The Manager shall cause to be prepared at least annually, at Company expense, information necessary for the preparation of the Members' and Economic Interest Owners' federal and state income tax returns. The Manager shall send or cause to be sent to each Member or Economic Interest Owner within ninety (90) days after the end of each taxable year such information as is necessary to complete federal and state income tax or information returns and a copy of the Company's federal, state, and local income tax or information returns for that year. 8.3.3 ANNUAL STATE REPORT. The Manager shall cause to be filed at least annually with the California Secretary of State the statement required under California Corporations Code (S)17060. 8.3.4 MONTHLY REPORTS. As soon as practicable following the end of each month, the Manager shall deliver to each of the other Members a copy of such monthly financial reports of income and expense of the Company as are prepared by the Manager with respect to the Company. -26- 8.4 FILINGS. The Manager, at Company expense, shall cause the income tax returns for the Company to be prepared and timely filed with the appropriate authorities. The Manager, at Company expense, shall cause to be prepared and timely filed, with appropriate federal and state regulatory and administrative bodies, amendments to, or restatements of, the Articles and all reports required to be filed by the Company with those entities under the Act or other then current applicable laws, rules, and regulations. If the Manager or any officer required by the Act to execute or file any document fails, after demand, to do so within a reasonable period of time or refuses to do so, any other officer or Member may prepare, execute and file that document with the California Secretary of State. 8.5 BANK ACCOUNTS. The Manager shall maintain the funds of the Company in one or more separate bank accounts in the name of the Company, and shall not permit the funds of the Company to be commingled in any fashion with the funds of any other Person. 8.6 TAX MATTERS FOR THE COMPANY HANDLED BY THE MANAGER AND TAX MATTERS - ---------------------------------------------------------------------- PARTNER. The Manager shall from time to time cause the Company to make such tax elections as the Manager deems to be in the best interests of the Company and the Members. The Tax Matters Partner, as defined in Code Section 6231, shall represent the Company (at the Company's expense) in connection with all examinations of the Company's affairs by tax authorities, including resulting judicial and administrative proceedings, and shall expend the Company funds for professional services and costs associated therewith. The Tax Matters Partner shall oversee the Company tax affairs in the overall best interests of the Company. If for any reason the Tax Matters Partner resigns or can no longer serve in that capacity, a Super Majority Interest may designate another Member to be Tax Matters Partner. ARTICLE 9 DISSOLUTION AND WINDING UP 9.1 EVENTS OF DISSOLUTION. The Company shall be dissolved, its assets shall be disposed of, and its affairs wound up on the first to occur of the following: 9.1.1 The happening of any event of dissolution specified in the Articles; 9.1.2 The entry of a decree of judicial dissolution pursuant to Section 17351 of the Corporations Code; 9.1.3 The vote of a Super Majority Interest; -27- 9.1.4 The occurrence of a Dissolution Event unless there are at least two Remaining Members in addition to the Excluded Member (it being agreed that, if there are not at that time at least two Remaining Members in addition to the Excluded Member, the sole Remaining Member shall in its sole and absolute discretion have the right to admit another Member to the Company) and a Majority Interest consent within ninety (90) days of the Dissolution Event to the continuation of the business of the Company; or 9.1.5 The expiration of the period fixed for the duration of the Company as stated in the Articles. 9.2 EFFECT OF A DISSOLUTION EVENT (OTHER THAN DISSOLUTION). If following a Dissolution Event, the Remaining Members vote to continue the business of the Company, such Remaining Member(s) shall purchase the Excluded Member's interest in the Company, on a pro rata basis in accordance with their respective Profit Percentage Interests, for an aggregate purchase price equal to the amount that the Excluded Member would be entitled to receive for the Fair Value of the Excluded Member's Membership Interest as determined in accordance with the procedures for determining the Fair Value of Chu's and DeBartolo's Membership Interests set forth in Section 7.9.3, payable in equal quarterly installments over five (5) years with interest at the Rate. Following such purchase, the Remaining Members shall continue the operation of the Company independently of the Excluded Member. Upon such vote by the Remaining Members to continue the business of the Company, the Excluded Member shall have no further right to participate, in any way, in the business of the Company (specifically including the right to receive distributions from, or to share in the Net Profits, Net Losses or similar items of, the Company or to approve Company actions). Election of the Remaining Member(s) to continue the business of the Company under this Section 9.2 shall not preclude such Remaining Member(s) from pursuing any and all other remedies available to it or them under this Agreement, at law or in equity. 9.3 CERTIFICATE OF DISSOLUTION. As soon as possible after the occurrence of any of the events specified in Section 9.1 above, any Member shall execute a Certificate of Dissolution in such form as shall be prescribed by the California Secretary of State and file the Certificate as required by the Act. 9.4 WINDING UP. Upon the occurrence of any event specified in Section 9.1 above, the Company shall continue solely for the purpose of winding up its affairs in an orderly manner, liquidating its assets, and satisfying the claims of its creditors. The Manager shall be responsible for overseeing the winding up and liquidation of Company, shall take full account of the liabilities of Company and assets, shall either cause its assets to be sold or distributed, and if sold as promptly as is -28- consistent with obtaining the fair market value thereof, shall cause the proceeds therefrom, to the extent sufficient therefor, to be applied and distributed as provided in Section 9.6. The Manager shall give written notice of the commencement of winding up by mail to all known creditors and claimants whose addresses appear on the records of the Company. The Manager shall be entitled to reasonable compensation for its services in winding up the Company's affairs. 9.5 DISTRIBUTIONS IN KIND. Any non-cash asset distributed to one or more Members shall first be valued at its fair market value to determine the Net Profit or Net Loss that would have resulted if such asset were sold for such value, such Net Profit or Net Loss shall then be allocated pursuant to Article 3, and the Members' Capital Accounts shall be adjusted to reflect such allocations. The amount distributed and charged to the Capital Account of each Member receiving an interest in such distributed asset shall be the fair market value of such interest (which shall mean the price that an independent third party would pay for such asset, net of any liability secured by such asset that such Member assumes or takes subject to). The fair market value of such asset shall be determined by the Manager or if there is an objection by any Member, the fair market value shall be determined by an independent appraiser (which must be recognized as an expert in valuing the type of asset involved) selected by the Manager or liquidating trustee and approved by a Super Majority Interest. 9.6 ORDER OF PAYMENT UPON DISSOLUTION. After determining that all known debts and liabilities of the Company in the process of winding-up, including, without limitation, debts and liabilities to Members who are creditors of the Company, have been paid or adequately provided for, the remaining assets shall be distributed to the Members in accordance with their positive Capital Account balances, after taking into account income and loss allocations for the Company's taxable year during which liquidation occurs. Such liquidating distributions shall be made by the end of the Company's taxable year in which the Company is liquidated, or, if later, within ninety (90) days after the date of such liquidation. 9.7 COMPLIANCE WITH REGULATIONS. All payments to the Members upon the winding up and dissolution of the Company shall be strictly in accordance with the positive capital account balance limitation and other requirements of Regulations Section 1.704-1(b)(2)(ii)(d). 9.8 LIMITATIONS ON PAYMENTS MADE IN DISSOLUTION. Except as otherwise specifically provided in this Agreement, each Member shall be entitled to look solely at the assets of the Company for the return of its positive Capital Account balance and shall have no recourse for such Member's Capital -29- Contribution and/or share of Net Profits (upon dissolution or otherwise) against the Manager, officers, or any other Member. 9.9 CERTIFICATE OF CANCELLATION. The Persons who filed the Certificate of Dissolution shall cause to be filed in the office of, and on a form prescribed by, the California Secretary of State, a certificate of cancellation of the Articles upon the completion of the winding up of the affairs of the Company. 9.10 NO ACTION FOR DISSOLUTION. No Member or Economic Interest Owner has any interest in specific property of the Company. Without limiting the foregoing, each Member and Economic Interest Owner irrevocably waives during the term of the Company any right that he or it may have to maintain any action for partition with respect to the property of the Company. Except as expressly permitted in this Agreement, a Member or Economic Interest Owner shall not take any voluntary action that directly causes a Dissolution Event. The Members acknowledge that irreparable damage would be done to the goodwill and reputation of the Company if any Member should bring an action in court to dissolve the Company under circumstances where dissolution is not required by Section 9.1. This Agreement has been drawn carefully to provide fair treatment of all parties and equitable payment in liquidation of the Economic Interests. Accordingly, except where the Members have failed to liquidate the Company as required by this Article 9, each Member hereby waives and renounces such Member's right to initiate legal action to seek the appointment of a receiver or trustee to liquidate the Company or to seek a decree of judicial dissolution of the Company on the ground that (a) it is not reasonably practicable to carry on the business of the Company in conformity with the Articles or this Agreement, or (b) dissolution is reasonably necessary for the protection of the rights or interests of the complaining Member. Damages for breach of this Section 9.10 shall be monetary damages only (and not specific performance), and the damages may be offset against distributions by the Company to which such Member would otherwise be entitled. ARTICLE 10 INDEMNIFICATION AND INSURANCE 10.1 INDEMNIFICATION OF COMPANY PERSONS. The Company shall indemnify any Company Person who was or is a party or is threatened to be made a party to, or otherwise becomes involved in, any Proceeding (including a Proceeding by or in the right of the Company) by reason of the fact that such Company Person is or was an agent of the Company against all Expenses, amounts paid in settlement, judgments, fines, penalties and ERISA excise taxes actually and reasonably incurred by or levied against such Company Person in connection with such Proceeding -30- if such Company Person acted in good faith and in a manner such Company Person reasonably believed to be in or not opposed to the best interests of the Company and, with respect to any criminal Proceeding, had no reasonable cause to believe such Company Person's conduct was unlawful. The termination of any Proceeding, whether by judgment, order, settlement or conviction, or upon a plea of nolo contendere or its equivalent, shall not, of itself, create a presumption that a Company Person did not act in good faith and in a manner which he reasonably believed to be in or not opposed to the best interests of the Company or, with respect to any criminal Proceeding, that a Company Person had reasonable cause to believe that such Company Person's conduct was unlawful. To the fullest extent permitted by applicable law, a Company Person shall be conclusively presumed to have met the relevant standards of conduct, as defined by the laws of the State of California or other applicable jurisdictions, for indemnification pursuant to this Section 101, unless and until a court of competent jurisdiction, after all appeals, finally determines to the contrary, and the Company shall bear the burden of proof of establishing by clear and convincing evidence that such Company Person failed to meet such standards of conduct. In any event, the Company Person shall be entitled to indemnification from the Company to the fullest extent permitted by applicable law, including, without limitation, any amendments thereto subsequent to the date of this Agreement that increase the protection of Company Persons allowable under such laws. 10.2 SUCCESSFUL DEFENSE. Notwithstanding any other provision of this Agreement, to the extent that a Company Person has been successful on the merits or otherwise in defense of any Proceeding referred to in Section 10.1, or in defense of any claim, issue or matter therein, such Company Person shall be indemnified against Expenses actually and reasonably incurred in connection therewith to the fullest extent permitted by the laws of California or other applicable jurisdictions, including, without limitation, any amendments thereto subsequent to the date of this Agreement that increase the protection of Company Persons allowable under such laws. 10.3 INDEMNIFICATION OF OTHER AGENTS. The Company may, but shall not be obligated to, indemnify any Person (other than a Company Person) who was or is a party or is threatened to be made a party to, or otherwise becomes involved in, any Proceeding (including any Proceeding by or in the right of the Company) by reason of the fact that such Person is or was an agent of the Company, against all Expenses, amounts paid in settlement, judgments, fines, penalties and ERISA excise taxes actually and reasonably incurred by such Person in connection with such Proceeding under the same circumstances and to the same extent as is provided for or permitted in this Article 10 with respect to a Company Person, or with respect to such circumstances and on such terms as the Manager may determine. -31- 10.4 RIGHT TO INDEMNIFICATION UPON APPLICATION. 10.4.1 TIMING. Any indemnification or advance under Section 10.1 or 10.3 shall be made promptly, and in no event later than sixty (60) days, after the Company's receipt of the written request of a Company Person therefor, unless, in the case of an indemnification, a determination shall have been made as provided in Section 10.1 that such Company Person has not met the relevant standard for indemnification set forth in that Section. 10.4.2 ENFORCEMENT. The right of a Person to indemnification or an advance of Expenses as provided by this Article 10 shall be enforceable in any court of competent jurisdiction. The burden of proving by clear and convincing evidence that indemnification or advances are not appropriate shall be on the Company. Neither the failure by the Manager or Members of the Company or its independent legal counsel to have made a determination that indemnification or an advance is proper in the circumstances, nor any actual determination by the Manager or Members of the Company or its independent legal counsel that indemnification or an advance is not proper, shall be a defense to the action or create a presumption that the relevant standard of conduct has not been met. In any such action, the Person seeking indemnification or advancement of Expenses shall be entitled to recover from the Company any and all expenses of the types described in the definition of Expenses actually and reasonably incurred by such Person in such action, but only if such Person prevails therein. A Person's Expenses incurred in connection with any Proceeding concerning such Person's right to indemnification or advances in whole or in part pursuant to this Agreement shall also be indemnified by the Company regardless of the outcome of such a Proceeding, unless a court of competent jurisdiction finally determines that each of the material assertions made by such Person in the Proceeding was not made in good faith or was frivolous. 10.5 PAYMENT OF EXPENSES IN ADVANCE. Expenses incurred by a Company Person in connection with a Proceeding shall be paid by the Company in advance of the final disposition of such Proceeding upon receipt of a written undertaking by or on behalf of such Company Person to repay such amount if it shall ultimately be determined that such Company Person is not entitled to be indemnified by the Company as authorized in this Article 10. 10.6 LIMITATIONS ON INDEMNIFICATION. No payments pursuant to this Agreement shall be made by the Company: (a) To indemnify or advance funds to any Person with respect to a Proceeding initiated or brought voluntarily by such Person and not by way of defense, except as provided in Section 10.42 with respect to a Proceeding brought to establish or enforce a right to indemnification under this Agreement, -32- otherwise than as required under California law, but indemnification or advancement of Expenses may be provided by the Company in specific cases if a determination is made that such indemnification or advancement is appropriate. The determination as to whether any such indemnification or advancement of Expenses is appropriate shall be made (i) by the Manager or, if there is more than one Manager (provided the Manager is not a party to such Proceeding) Managers by a majority vote of a quorum consisting of Managers who were not parties to such Proceeding, or (ii) if such quorum is not obtainable or, even if obtainable, a quorum of such disinterested Managers so directs, by independent legal counsel in a written opinion, or (iii) by the Members by a vote of Members holding a Super Majority Interest, whether or not constituting a quorum, who were not parties to such Proceeding; (b) To indemnify or advance funds to any Person for any Expenses, judgments, amounts paid in settlement, fines, penalties or ERISA excise taxes resulting from the such Person's conduct which is finally adjudged to have been willful misconduct, knowingly fraudulent or deliberately dishonest; or (c) If a court of competent jurisdiction finally determines that any indemnification or advance of Expenses hereunder is unlawful. 10.7 OTHER TERMS OF INDEMNIFICATION. 10.7.1 PARTIAL INDEMNIFICATION. If a Person is entitled under any provision of this Article 10 to indemnification by the Company for a portion of Expenses, amounts paid in settlement, judgments, fines, penalties or ERISA excise taxes incurred by such Person in any Proceeding but not, however, for the total amount thereof, the Company shall nevertheless indemnify such Person for the portion of such Expenses, amounts paid in settlement, judgments, fines, penalties or ERISA excise taxes to which such Person is entitled, except that no indemnification shall be given for Expenses in connection with a Proceeding brought by the Company if the Person is found liable on any portion of the claims in such Proceeding. 10.7.2 INDEMNITY NOT EXCLUSIVE. The indemnification and advancement of Expenses provided by, or granted pursuant to, the provisions of this Article 10, shall not be deemed exclusive of any rights to which any Person seeking indemnification or advancement of Expenses may be entitled under any agreement, vote of Members, determination of the Board, or otherwise, both as to action in such Person's capacity as an agent of the Company and as to action in another capacity while serving as an agent. 10.7.3 INSURANCE. The Company shall have the power to purchase and maintain insurance or other financial arrangement on behalf of any Person who is or was an agent of -33- the Company against any liability asserted against such Person and incurred by such Person in any such capacity, or arising out of such Person's status as an agent, whether or not the Company would have the power to indemnify such Person against such liability under the provisions of this Article 10 or of Section 17155 of the Act. In the event a Person shall receive payment from any insurance carrier or from the Plaintiff in any action against such Person with respect to indemnified amounts after payment on account of all or part of such indemnified amounts having been made by the Company pursuant to this Article 10, such Person shall reimburse the Company for the amount, if any, by which the sum of such payment by such insurance carrier or such plaintiff and payments by the Company to such Person exceeds such indemnified amounts; provided, however, that such portions, if any, of such insurance proceeds that are required to be reimbursed to the insurance carrier under the terms of its insurance policy shall not be deemed to be payments to such Person hereunder. In addition, upon payment of indemnified amounts under the terms and conditions of this Agreement, the Company shall be subrogated to such Person's rights against any insurance carrier with respect to such indemnified amounts (to the extent permitted under such insurance policies). Such right of subrogation shall be terminated upon receipt by the Company of the amount to be reimbursed by such Person pursuant to the second sentence of this Section 10.7.3. 10.7.4 HEIRS, EXECUTORS AND ADMINISTRATORS. The indemnification and advancement of Expenses provided by, or granted pursuant to, this Article 10 shall, unless otherwise provided when authorized or ratified, continue as to a Person who has ceased to be an agent of the Company and shall inure to the benefit of such Person's heirs, executors and administrators. ARTICLE 11 REGISTRATION RIGHTS In the event that, following the exercise of a right to cause a Membership Interest to be purchased or sold pursuant to Section 7.9, HPC exercises its right pursuant to Section 7.9.4 to pay for the Acquired Interest with HPI Common Stock, then the provisions of this Article 11 shall apply. The rights set forth in this Article 11 shall be personal to Chu and DeBartolo and may not be assigned or transferred. 11.1 INCIDENTAL REGISTRATION. Each time HPI proposes to file a Registration Statement, if Chu or DeBartolo, as applicable, has not theretofore exercised its rights pursuant to Section 11.1A hereof, HPI shall take the following steps: -34- TAX INFORMATION ANNUAL STATE REPORT MONTHLY REPORTS FILINGS 11.1.1 NOTICE. Mail a written notice of the offering and the name of the managing underwriter (if any) to each Holder at the address shown on the books and records of HPI at least thirty (BANK ACCOUNTS 30) days prior to the filing of any such Registration Statement; and 11.1.2 INCLUSION OF SHARES. Include in such Registration Statement any and all Registrable Securities specified in a notice by the Holder which is received by the Company not less than fifteen (15) days following the mailing of the notice specified in Section 11.1.1 above. In connection with any registration, the Selling Holder must: (i) sell such Registrable Securities in the manner and on the terms adopted by or through the underwriter(s) acting on behalf of HPI in connection with such registration, if such underwriter(s) so requests; and (ii) accept a reduction (including a total elimination) in the number of shares to be included in such registration on a pro rata basis (based on the number of shares held by each) with any other selling shareholders holding contractual registration rights (except that HPI and any shareholder who has exercised demand registration rights with respect to such Registration Statement shall not be affected by such reduction) if the underwriter(s) reasonably deem that without such reduction (or elimination) HPI might be substantially hindered in the terms or number of securities which it could sell in such registration. Nothing in this Section 11.1.2 shall limit the ability of HPI to withdraw a Registration Statement it has filed either before or after effectiveness thereof. In the case of an underwritten offering, a Selling Holder may withdraw his, her or its included shares after the filing of the Registration Statement only (i) with the consent of the underwriter; (ii) if the final price is less than the range of prices given in the preliminary prospectus; (iii) if HPI breaches its obligations; or (iv) as provided in Section 11.2.2. 11.1A DEMAND REGISTRATION. ------------------- 11.1A.1 NOTICE OF DEMAND. At any time after Chu or DeBartolo ---------------- receives Registrable Securities, each of Chu or DeBartolo shall have the right to request by written notice to HPI that HPI register the Registrable Securities under the 1933 Act. Each of Chu and DeBartolo shall have the right to make one such demand (except that if such demand is withdrawn pursuant to Section 11.1A.3, such demand shall not be deemed to have been made for purposes of this limitation); and each such demand must include all Registrable Securities held by Chu or DeBartolo, as applicable. Each notice shall set forth (i) the number of shares to be included; (ii) the names of the Selling Holder; and (iii) the proposed manner of sale. Within ten (10) days after receipt of such notice, the Company shall notify the other Holder (if any) and offer to such Holder the opportunity to include its shares in such registration. -35- 11.1A.2 HOLDER AND REGISTRATION. Promptly after receipt of any notice pursuant to Section 11.1A.1, HPI shall prepare and file with the SEC, a Registration Statement on any applicable form, with respect to all the Registrable Securities held by such Selling Holder. 11.1A.3 HOLDBACK. In the event that registration is demanded pursuant to Section 11.1A.1, and HPI determines that the shares for which registration is requested cannot be sold without serious injury to HPI or its existing shareholders, HPI shall have the option to require the Selling Holders to withdraw such registration demand and not make any other demand for a period of up to one- hundred eighty (180) days (which may be extended if such facts continue to be in effect). 11.2 REGISTRATION PROCEDURES. Whenever HPI shall register any securities pursuant to this Article 11, the parties agree as follows: 11.2.1 SELLING HOLDER INFORMATION. Each Selling Holder shall provide HPI with such information about such Holder and his, her or its intended manner of distributing the Registrable Securities, and shall otherwise cooperate with HPI and the underwriter(s) as may be needed or helpful in the reasonable opinion of HPI to complete any obligation of HPI hereunder. Failure to comply with this requirement shall excuse HPI from any further obligation to a Selling Holder to include his, her or its shares in that Registration Statement; 11.2.2 CONSULTATION. HPI shall supply copies of any Registration Statement, any amendment thereto and any communications of the SEC related thereto to each Selling Holder and Seller's Underwriter and shall provide each Selling Holder and Seller's Underwriter with a reasonable opportunity, prior to filing such document with the SEC, to provide comments with respect to any matters in such documents that describe such Selling Holder, the Seller's Underwriter or the distribution of securities held by such Selling Holder ("Selling Holder Matters"). HPI will immediately amend such Registration Statement to include such reasonable changes relating to Selling Holder Matters as the Selling Holders and the Seller's Underwriter reasonably agree should be included therein. Any Selling Holder requesting a change refused by HPI may withdraw his, her or its shares from the Registration Statement; 11.2.3 PROVISION OF PROSPECTUSES. HPI shall furnish each Selling Holder such number of copies of preliminary and final prospectuses, each in conformity with the requirements of the 1933 Act, and such other documents as such Selling Holder may reasonably request in order to facilitate the public sale or other disposition of such securities; 11.2.4 BLUE SKY COMPLIANCE. HPI shall use its reasonable efforts to register or qualify the securities covered -36- by such Registration Statement under the securities or "blue sky" laws of such jurisdictions as each Selling Holder shall reasonably request (provided, however, that HPI shall not be required (i) to consent to, or take any action which would subject it to, general service of process for all purposes or (ii) to qualify to do business in any jurisdiction where it is not then subject or qualified); 11.2.5 AMENDMENTS. HPI shall use its reasonable efforts to prepare and file promptly with the SEC such amendments and supplements to such Registration Statement and the prospectus used in connection therewith, as may be necessary to keep such Registration Statement continuously effective and in compliance with the 1933 Act for up to four (4) months, or until all Registrable Securities registered in that Registration Statement are sold, whichever is earlier; 11.2.6 PROSPECTUS DELIVERY. At any time when a sale or other public disposition pursuant to a Registration Statement is subject to a prospectus delivery requirement, HPI shall immediately notify each Selling Holder and Sellers' Underwriter of the occurrence of any event as a result of which the prospectus included in such Registration Statement, as then in effect, includes an untrue statement of a material fact or omits to state a material fact required to be stated therein or necessary to make the statements therein not misleading in the light of the circumstances then existing. Upon receipt of such a notice, each Selling Holder shall immediately discontinue sales or other dispositions of Registrable Securities pursuant to the Registration Statement. The Selling Holders may resume sales only upon receipt of amended prospectuses or after such Selling Holders have been advised by HPI that the use of the previous prospectus may be legally resumed; 11.2.7 STOP-ORDERS. HPI agrees to immediately notify each Selling Holder (i) of the issuance by the SEC of any stop order or order suspending the effectiveness of any Registration Statement or the initiation of any proceedings for that purpose, or (ii) of the receipt by HPI of any notification with respect to the suspension of the qualification of the Registrable Securities for sale in any jurisdiction, or the initiation of any proceedings for such purpose. HPI, with the reasonable cooperation of the Selling Holders, shall make every reasonable effort to contest any such proceedings and to obtain the withdrawal of any such order at the earliest possible moment; 11.2.8 UNDERWRITING AGREEMENT. At the request of HPI or any underwriter of the offering, each Selling Holder shall enter into an underwriting agreement in a form reasonably agreed upon by HPI and such underwriter(s); and 11.2.9 COMPLIANCE WITH LAWS. In all actions taken under this Agreement, each Selling Holder agrees to use -37- his, her or its best efforts to comply with all provisions of the 1933 Act as well as any other applicable law. 11.3 REGISTRATION NOT REQUIRED. HPI shall have no obligation to any Holder under this Article 11 with respect to whom HPI has obtained an opinion of counsel, in form reasonably satisfactory to such Holder, to the effect that the Registrable Securities involved may be immediately sold to the public without registration thereof, whether pursuant to Rule 144 or otherwise. 11.4 DELAY OF REGISTRATION. No Holder shall have any right to take any action to restrain, enjoin or otherwise delay the filing or effectiveness of any Registration Statement on the basis of any controversy which might arise with respect to the interpretation or implementation of this Article 11. 11.5 INDEMNITY. 11.5.1 HPI'S INDEMNITY. HPI will indemnify each Selling Holder and any Sellers' Underwriter (and any of their officers and directors and persons who control such Holder or Underwriter within the meaning of Section 15 of the 1933 Act or Section 20 of the 1934 Act) against all claims, losses, damages, liabilities and expenses resulting from any untrue statement or alleged untrue statement of a material fact contained in any Registration Statement or from any omission or alleged omission to state therein a material fact required to be stated therein or necessary to make the statements therein not misleading, except insofar as the same is based on (i) information furnished in writing to the Company by such Holder, an underwriter, or any Selling Holder expressly for use therein, or (ii) the circumstances set forth in Section 11.5.2(y) hereof. 11.5.2 THE HOLDER'S INDEMNITY. Each Selling Holder will indemnify (i) HPI, any underwriter, and any other person selling under a Registration Statement (and any of their officers and directors and persons who control HPI, such underwriter or such other persons within the meaning of Section 15 of the 1933 Act or Section 20 of the 1934 Act) against all claims, losses, damages, liabilities and expenses resulting from (x) any untrue statement or alleged untrue statement of a material fact contained in that Registration Statement or from any omission or alleged omission to state a material fact required to be stated or necessary to make the statements therein not misleading, but only to the extent based upon information furnished in writing to the Company by such Holder expressly for inclusion in that Registration Statement or other document or (y) any untrue statement or alleged untrue statement of a material fact contained in, or any omission or alleged omission of a material fact from, a prospectus if (i) a later prospectus corrected the untrue statement or alleged untrue statement, or omission or alleged omission, (ii) at such time the Company had advised the Holder of the availability of -38- the revised prospectus, and (iii) there would have been no such liability had such later prospectus actually been delivered to the purchaser at or prior to confirmation of sale. 11.6 EXPENSES OF REGISTRATION. The Selling Holder shall bear all expenses incurred in any Registration undertaken pursuant to Section 11.1A, including, without limitation, all registration and filing fees (including all expenses incident to filing with the National Association of Securities Dealers, Inc.), legal fees, brokerage or underwriting fees, expenses or commissions, fees and expenses of complying with securities and blue sky laws and regulations, printing expenses and fees and disbursements of the independent certified public accountants and of HPI's counsel. With respect to any Registration undertaken pursuant to Section 11.1, HPI shall bear all expenses other than Selling Holder Expenses (defined below). Each Selling Holder shall bear his, her or its equitable share of any Selling Holder Expenses. "Selling Holder Expenses" shall consist of (i) Selling Holder's legal costs, (ii) any proportionate share of brokerage or underwriting fees, expenses or commissions, (iii) any fees and expenses of complying with blue sky laws to the extent registration in the applicable state is requested by a Selling Holder pursuant to Section 11.24 hereof, and (iv) any other costs required to be paid by Selling Holders in order to comply with state securities laws and regulations. 11.7 TERMINATION. Each Holder shall have no further rights under this Article at any time (i) after such time as no further Registrable Securities of such Holder remain outstanding or (ii) such Holder has exercised his, her or its registration rights under Section 11.1A on one occasion, whichever comes first. Further, each Holder shall have the right to participate in any Registration undertaken pursuant to Section 11.1 only once. ARTICLE 12 MISCELLANEOUS 12.1 OTHER VENTURES; COMPETITION. (a) Nothing contained in this Agreement or in law shall be construed to limit or restrict in any way the freedom of any Member, or any shareholders or affiliates of a Member, to conduct any other business venture or activity whatsoever, including the ownership, development, leasing, sale, financing, operation and management of other card clubs or casinos nor to require any accountability to the Company or to any other Member, whether or not such other business ventures are in direct or indirect competition with the business of the Company. -39- (b) No Member need afford the Company or any other Member or any affiliate of a Member the opportunity to acquire or invest in any other property, project or enterprise, regardless of whether such property, project or enterprise would, but for this sentence, be deemed an opportunity of the Company. 12.2 COUNSEL TO THE COMPANY. Counsel to the Company may also be counsel to any Member or any Affiliate of a Member. The officers of the Company may execute on behalf of the Company and the Members any consent to the representation of the Company that counsel may request pursuant to the California Rules of Professional Conduct or similar rules in any other jurisdiction. 12.3 GENERAL PROVISIONS. 12.3.1 COMPLETE AGREEMENT. This Agreement and any documents referred to herein or executed contemporaneously herewith constitute the parties' entire agreement with respect to the subject matter hereof and supersede all prior or contemporaneous agreements, representations, warranties, statements, promises and understandings, whether oral or written, with respect to the subject matter hereof. 12.3.2 DISPUTES. 12.3.2.1 GOVERNING LAW; JURISDICTION. This Agreement has been negotiated and entered into in the State of California, concerns a California business and all questions with respect to the Agreement and the rights and liabilities of the parties will be governed by the laws of that state, regardless of the choice of law provisions of California or any other jurisdiction. Any and all disputes between the parties which may arise pursuant to this Agreement not covered by arbitration will be heard and determined before an appropriate federal or state court located in Los Angeles, California. The parties hereto acknowledge that such court has the jurisdiction to interpret and enforce the provisions of this Agreement and the parties waive any and all objections that they may have as to personal jurisdiction or venue in any of the above courts. 12.3.2.2 ARBITRATION AS EXCLUSIVE REMEDY. Except for actions seeking injunctive relief and for actions pursuant to Sections 10.1 and 10.4.2, which may be brought before any court having jurisdiction, any claim arising out of or relating to (i) this Agreement, including without limitation its validity, interpretation, enforceability or breach, or (ii) the relationship between the parties (including without limitation its commencement and termination) whether based on breach of covenant, breach of an implied covenant or intentional infliction of emotional distress or other tort or contract theories, which are not settled by agreement between the parties, shall be settled by arbitration in Los Angeles County, California, before a sole arbitrator who shall be a retired -40- judge of the Los Angeles Superior Court or retired justice of the California Court of Appeal or Supreme Court. The sole arbitrator shall be selected by mutual agreement of the parties within fifteen (15) days after service of a notice of intent to arbitrate by any party. If the parties are unable to select a mutually agreeable arbitrator, then a retired judge or justice of the California state courts shall be selected by order of the court pursuant to the provisions of Code of Civil Procedure (S)1281.6. The parties hereby (i) consent to the in personam jurisdiction of the Superior Court of the State of California for purposes of the enforcement of this arbitration provision and confirming any such award and entering judgment thereof; (ii) agree to use their best efforts to keep all matters relating to any arbitration hereunder confidential; and (iii) agree that the arbitrators may not assess any remedy other than the awarding of actual out-of-pocket damages suffered and/or punitive damages when appropriate. In any arbitration proceedings hereunder (a) all testimony of witnesses shall be taken under oath; (b) discovery will be allowed under the provisions of Section 1283.05 of the Code of Civil Procedure, as presently in force, which are incorporated herein; (c) production of documents will be allowed as provided for by Section 2031 of the Code of Civil Procedure; and (d) upon conclusion of any arbitration, the arbitrator shall render findings of fact and conclusions of law in a written opinion setting forth the basis and reasons for any decision reached and deliver such documents to each party to this Agreement along with a signed copy of the award in accordance with Section 1283.6 of the California Code of Civil Procedure. Each party agrees that, except as expressly provided above, the arbitration provisions of this Agreement are its exclusive remedy and expressly waives any right to seek redress in another forum. Each party shall share equally the fees of the arbitrator during the arbitration, but the fees of the arbitrator shall be borne by the losing party. Any arbitration shall be commenced within forty-five (45) days, and completed within ninety (90) days, of the appointment of the arbitrator. 12.3.3 ADDITIONAL DOCUMENTS. Each party hereto agrees to execute any and all further documents and writings and to perform such other actions which may be or become necessary or expedient to effectuate and carry out this Agreement. 12.3.4 NOTICES. Unless otherwise specifically permitted by this Agreement, all notices under this Agreement shall be in writing and shall be delivered by personal service, telecopy, federal express or comparable overnight service or certified mail (if such service is not available, then by first class mail), postage prepaid, to such address as may be designated from time to time by the relevant party, and which shall initially be as set forth on Exhibit A. All other notices shall be deemed given when received. No objection may be made to the manner of delivery of any notice actually received in writing by an authorized agent of a party. -41- 12.3.5 PARTIES. 12.3.5.1 NO THIRD-PARTY BENEFITS. None of the provisions of this Agreement shall be for the benefit of, or enforceable by, any third party. 12.3.5.2 SUCCESSORS AND ASSIGNS. Except as provided herein to the contrary, this Agreement shall be binding upon and inure to the benefit of the parties, their respective successors and permitted assigns. 12.3.6 GOVERNING LAW; JURISDICTION. This Agreement has been negotiated and entered into in the State of California, concerns a California business and all questions with respect to the Agreement and the rights and liabilities of the parties will be governed by the laws of that state, regardless of the choice of law provisions of California or any other jurisdiction. 12.3.7 WAIVER OF JURY. WITH RESPECT TO ANY DISPUTE ARISING UNDER OR IN CONNECTION WITH THIS AGREEMENT OR ANY RELATED AGREEMENT, AS TO WHICH NO MEMBER INVOKES THE RIGHT TO ARBITRATION HEREINABOVE PROVIDED, OR AS TO WHICH LEGAL ACTION NEVERTHELESS OCCURS, EACH MEMBER HEREBY IRREVOCABLY WAIVES ALL RIGHTS IT MAY HAVE TO DEMAND A JURY TRIAL, INCLUDING ITS CONSTITUTIONAL RIGHTS. THIS WAIVER IS KNOWINGLY, INTENTIONALLY, AND VOLUNTARILY MADE BY THE MEMBERS AND EACH MEMBER ACKNOWLEDGES THAT NONE OF THE OTHER MEMBERS NOR ANY PERSON ACTING ON BEHALF OF THE OTHER PARTIES HAS MADE ANY REPRESENTATION OF FACT TO INDUCE THIS WAIVER OF TRIAL BY JURY OR IN ANY WAY TO MODIFY OR NULLIFY ITS EFFECT. THE MEMBERS EACH FURTHER ACKNOWLEDGE THAT IT HAS BEEN REPRESENTED (OR HAS HAD THE OPPORTUNITY TO BE REPRESENTED) IN THE SIGNING OF THIS AGREEMENT AND IN THE MAKING OF THIS WAIVER BY INDEPENDENT LEGAL COUNSEL, SELECTED OF ITS OWN FREE WILL, AND THAT IT HAS HAD THE OPPORTUNITY TO DISCUSS THIS WAIVER WITH COUNSEL. THE MEMBERS EACH FURTHER ACKNOWLEDGES THAT IT HAS READ AND UNDERSTAND THE MEANING AND RAMIFICATIONS OF THIS WAIVER PROVISION. 12.3.8 WAIVERS STRICTLY CONSTRUED. With regard to any power, remedy or right provided herein or otherwise available to any party hereunder (i) no waiver or extension of time shall be effective unless expressly contained in a writing signed by the waiving party; and (ii) no alteration, modification or impairment shall be implied by reason of any previous waiver, extension of time, delay or omission in exercise, or by any other indulgence. 12.3.9 RULES OF CONSTRUCTION. 12.3.9.1 HEADINGS. The Article and Section headings in this Agreement are inserted only as a matter of convenience, and in no way define, limit, or interpret the scope of this Agreement or of any particular Article or Section. -42- 12.3.9.2 TENSE AND CASE. Throughout this Agreement, as the context may require, references to any word used in one tense or case shall include all other appropriate tenses or cases. 12.3.9.3 SEVERABILITY. The validity, legality or enforceability of the remainder of this Agreement will not be affected even if one or more of the provisions of this Agreement will be held to be invalid, illegal or unenforceable in any respect. 12.3.9.4 AGREEMENT NEGOTIATED. The parties hereto are sophisticated and have been represented by lawyers throughout this transaction who have carefully negotiated the provisions hereof. As a consequence, the parties do not believe that the presumptions of Civil Code Section 1654 and similar laws or rules relating to the interpretation of contracts against the drafter of any particular clause should be applied in this case and therefore waive their effects. Only the final executed version of this Agreement may be admitted into evidence or used for any purpose, and drafts of this Agreement shall be disregarded for all purposes. 12.3.10 COUNTERPARTS. This Agreement may be executed simultaneously in two or more counterparts, each of which shall be deemed an original, but all of which together shall constitute one and the same instrument. 12.4 AMENDMENTS. Except as set forth in the next sentence, all amendments to this Agreement shall be in writing and approved by all of the Members. The Manager may amend Exhibit A hereto at any time and from time to time to reflect the admission or withdrawal of any Member, or the change in any Member's Capital Contributions, Profit Percentage Interests, or any changes in the Member's addresses, all as contemplated by this Agreement. 12.5 RELIANCE ON AUTHORITY OF PERSON SIGNING AGREEMENT. If a Member is not a natural person, neither the Company nor any Member will be required to determine the authority of the individual signing this Agreement to make any commitment or undertaking on behalf of such entity or to determine any fact or circumstance bearing upon the existence of the authority of such individual. 12.6 INVESTMENT REPRESENTATION. Each Member hereby represents and warrants to, and agrees with, the other Members and the Company that he or it is acquiring the Membership Interest for investment purposes for his or its own account only and not with a view to or for sale in connection with any distribution of all or any part of the Membership Interest. No other person will have any direct or indirect beneficial interest in or right to the Membership Interest. -43- 12.7 LLC AS CARD CLUB OPERATOR. At such time as HPI or HPC may be licensed as an owner and operator of a card club under applicable California law and the City ordinance, if applicable law then prohibits a card club operator from being organized as a limited liability company or the Company as a limited liability company from being the manager or the managing general partner of Newco, the Company shall be reorganized as a California limited partnership, with HPC as the managing general partner, and the Members shall enter into a Limited Partnership Agreement containing substantially the same terms and provisions hereof, modified as necessary to reflect the fact that the entity is a California limited partnership. -44- IN WITNESS WHEREOF, this Agreement is executed as of the day and year set forth above. HP/COMPTON, INC. By: /s/ G. Michael Finnigan --------------------------- G. Michael Finnigan Its: Vice President REDWOOD GAMING LLC DEMUR, INC. By: /s/ Mark Rivers --------------------------- Mark Rivers Its: Vice President FIRST PARK INVESTMENTS, LLC By: /s/ Leo Chu --------------------------- Leo Chu Its: -------------------------- -45- SCHEDULE I ---------- DEFINITIONS When used in this Agreement, the following terms shall have the meanings set forth below (all terms used in this Agreement that are not defined in this Schedule I shall have the meanings set forth elsewhere in this Agreement): "1933 ACT" shall mean the Securities Act of 1933, as amended, or any future comparable law. "1934 ACT" shall mean the Securities Exchange Act of 1934, as amended, or any future comparable law. "ACQUIRED INTEREST" is defined in Section 7.9.3. "ACT" means the Beverly-Killea Limited Liability Company Act, codified in the California Corporations Code, Section 17000 et seq., as the same may be amended from time to time. "ADDITIONAL CAPITAL CONTRIBUTIONS" has the meaning set forth in Section 2.2. "ADJUSTED CAPITAL ACCOUNT DEFICIT" means, with respect to any Member, the deficit balance, if any, in such Member's Capital Account as of the end of the relevant Fiscal Year, after giving effect to the following adjustments: (a) Credit to such Capital Account any amounts that such Member is obligated to restore pursuant to any provision of this Agreement or is deemed to be obligated to restore pursuant to the penultimate sentences of Regulations Sections 1.704-2(g)(1) and 1.704-2(i)(5); (b) Credit to such Capital Account the amount of the deductions and losses referable to any outstanding recourse liabilities owed by the Company to such Member for which no other Member bears any economic risk of loss and the amount of the deductions and losses referable to such Member's share (determined in accordance with the Member's Profit Percentage Interest) of outstanding recourse liabilities owed by the Company to non-Members for which no Member bears any economic risk of loss; and (c) Debit to such Capital Account the items described in Regulations Sections 1.704-1(b)(2)(ii)(d)(4), 1.704-1(b)(2)(ii)(d)(5), and 1.704-1(b)(2)(ii)(d)(6). The foregoing definition of Adjusted Capital Account Deficit is intended to comply with the provisions of Regulations Section 1.704-1(b)(2)(ii)(d) and shall be interpreted consistently therewith. -46- "ADVANCES" has the meaning set forth in Section 2.6. "AFFILIATE" means any individual, partnership, corporation, trust or other entity or association, directly or indirectly, through one or more intermediaries, controlling, controlled by, or under common control with, a Member. The term "control," as used in the immediately preceding sentence, means, with respect to a corporation or limited liability company, the right to exercise, directly or indirectly, fifty percent (50%) of the voting rights attributable to the controlled corporation or limited liability company and, with respect to any individual, partnership, trust, other entity or association, the possession, directly or indirectly, of the power to direct or cause the direction of the management or policies of the controlled entity. "AGREEMENT" means this Operating Agreement, as originally executed and as amended and/or restated from time to time. "ARTICLES" means the Articles of Organization for the Company originally filed with the California Secretary of State, as amended and/or restated from time to time. "BANKRUPTCY" means: (i) being adjudicated bankrupt or insolvent in proceedings filed against a Person or its ultimate "parent" entity under any section or chapter of the United States Bankruptcy Code, as amended from time to time, or any similar law or statute of any state thereof (collectively "Bankruptcy Laws"); (ii) any petition for reorganization or arrangement under any Bankruptcy Laws; (iii) proceedings under any Bankruptcy Laws to have a Person adjudicated a bankrupt or insolvent, which proceedings are not dismissed within ninety (90) days of commencement; (iv) the general assignment by any Person for the benefit of creditors; (v) the appointment of a receiver for all or substantially all of the assets of any Person and the failure to have such receiver discharged within ninety (90) days after appointment; (vi) the suffering by any Member of any assignment by operation of law, or any attachment, sequestration, garnishment or lien against, or the occurrence of a levy on, such Person's interest in the Company, or any portion thereof, with the same not being discharged of record by bonding or otherwise within ninety (90) days after notice to such Member of such event. "CAPITAL ACCOUNT" means with respect to any Member the capital account that the Company establishes and maintains for such Member pursuant to Section 2.3. "CAPITAL CONTRIBUTION" means the total value of cash and the fair market value (as determined by the Managers or as agreed upon by the Members under this Agreement) of property (including promissory notes or other obligations to contribute cash or property) or services contributed by Members. -47- "CAPITAL INTERESTS" means the ratio of each Member's Capital Account to the total of all Member's Capital Accounts at any time. "CARD CLUB" has the meaning set forth in Recital A of this Agreement. "CARD CLUB OPERATOR" has the meaning set forth in Section 6.4.1. "CARD CLUB SITE" has the meaning set forth in Recital A of this AGREEMENT. "CHANGE OF CONTROL" means that, with respect to a Person, more than 50% of the beneficial ownership (within the meaning of Rule 13d-3 under the Securities Exchange Act of 1934, as amended, whether or not such provision is applicable to such Person) of its securities, as of the date of this Agreement, is Transferred to another Person or group of Persons that is not an Affiliate of the current owners. In the case of Chu, a Change of Control shall occur if Leo and Ivy Chu together do not own more than 50% of the beneficial ownership of Chu; and in the case of DeBartolo, a Change of Control shall occur if Edward J. DeBartolo or Cynthia R. DeBartolo do not own more than 50% of the beneficial ownership of DeBartolo. "CHU" means FIRST PARK INVESTMENTS, LLC, a California limited liability --- company. "CITY" has the meaning set forth in Recital A of this Agreement. ---- "CODE" means the Internal Revenue Code of 1986, as amended from time to ---- time, the provisions of succeeding law and to the extent applicable, the Regulations. "COMPANY" MEANS CRYSTAL PARK HOTEL AND CASINO DEVELOPMENT COMPANY, LLC, A California limited liability company. "COMPANY MINIMUM GAIN" has the meaning ascribed to the term "Partnership Minimum Gain" in the Regulations Section 1.704-2(d). "COMPANY PERSON" means a Member, Manager or officer of the Company. "COMPANY PROPERTY" has the meaning set forth in Section 14. "CORPORATIONS CODE" means the California Corporations Code, as amended from time to time, and the provisions of succeeding law. -48- "DDA" has the meaning set forth in Recital B of this Agreement. "DEBARTOLO" means REDWOOD GAMING LLC, a California limited liability company. "DEFAULTING MEMBER" means any Member that has committed a material breach of this Agreement, including without limitation a breach pursuant to Section 2.7 hereof. "DISSOLUTION EVENT" means (i) the death, insanity, expulsion, Bankruptcy or dissolution of any Member or the commission by a Member of a material default under this Agreement which is incapable of cure or (ii) the withdrawal, resignation or retirement of a Member without the prior consent of all of the other Members. "ECONOMIC INTEREST" means a Member's or Economic Interest Owner's share of one or more of the Company's Net Profits, Net Losses and distributions of the Company's assets pursuant to this Agreement and the Act, but shall not include any other rights of a Member including, without limitation, the right to vote or participate in the management or, except as provided in Section 17106 of the Corporations Code, any right to information concerning the business and affairs of Company. "ECONOMIC INTEREST OWNER" means the owner of an Economic Interest who is not a Member. "EXCLUDED MEMBER" means a Member that caused a Dissolution Event. "EXPENSES" shall include, without limitation, attorneys' fees, disbursements and retainers, court costs, transcript costs, fees of accountants, experts and witnesses, travel expenses, duplicating costs, printing and binding costs, telephone charges, postage, delivery service fees, and all other expenses of the types customarily incurred in connection with prosecuting, defending, preparing to prosecute or defend, investigating, or being or preparing to be a witness or other participant in a Proceeding. "FAIR VALUE" shall be determined in accordance with Section 7.9.3. "FIRST OPPORTUNITY OFFER" has the meaning set forth in Section 7.2. "FISCAL YEAR" means (i) the period commencing upon the formation of the Company and ending on December 31, 1996, (ii) any subsequent twelve (12) month period commencing on January 1 and ending on December 31, or (iii) any portion of the period described in Clause (ii) of this sentence for which the Company is required to allocate Profits, Losses, and other items -49- of Company income, gain, loss, or deduction pursuant to Article 3 hereof. "HOLDER" means either Chu or DeBartolo, who at that time, is the holder of any Registrable Securities based on the records of HPI. "HOTEL" is defined in Recital C. "HPC" means HP/Compton, Inc., a California corporation. --- "HPI" means Hollywood Park, Inc., a Delaware corporation. --- "HPI CHANGE" means that either R. D. Hubbard or G. Michael Finnigan ("Finnigan") no longer serves in either (i) his current capacity or (ii) a capacity that is senior to his current capacity with HPI or a successor (as long as, in the case of Finnigan, the individual at HPI or its successor who is primarily responsible for the Company reports directly or indirectly to Finnigan). "INITIAL CAPITAL CONTRIBUTIONS" has the meaning set forth in Section 2.1. "INITIAL CARD CLUB ASSETS" has the meaning set forth in Section 2.1. "INITIAL EXPENSES" means all monies expended or committed by HPC or HPI with respect to the Card Club, the Hotel and related businesses prior to the assignment of the Initial Card Club Assets to the Company, including without limitation the costs of acquiring the Card Club Site. "LEASE" has the meaning set forth in Recital D of this Agreement. "LICENSE RIGHTS OPTION" has the meaning set forth in Recital B of this AGREEMENT. "MAJORITY INTEREST" means Members holding in the aggregate over fifty percent (50%) of the aggregate of all Profit Percentage Interests; provided, however, that for purposes of Section 9.1, "Majority Interest" means more than fifty percent (50%) of both the capital and profit interests in the Company (within the meaning of such terms in Revenue Procedure 94-46, 1994-28 IRB 1) held by the Remaining Members. "MANAGER" shall mean the manager who is designated from time to time as provided in Section 6.2. "MEMBER" means each Person who (a) is an Original Member, has been admitted to the Company as a Member in accordance with the Articles and this Agreement or is an assignee who has become a Member in accordance with Article 7 and (b) has not resigned, -50- withdrawn, been expelled or, if other than an individual, dissolved. "MEMBER-MANAGER" means a Manager who is a Member. "MEMBER NONRECOURSE DEBT" has the meaning ascribed to the term "Partner Nonrecourse Debt" in Regulations Section 1.704-2(b)(4). "MEMBER NONRECOURSE DEDUCTIONS" means items of Company loss, deduction or Code Section 705(a)(2)(B) expenditures that are attributable to Member Nonrecourse Debt or to other loans by a Member to the Company for which no other Member bears the economic risk of loss. "MEMBERSHIP INTEREST" means a Member's entire interest in the Company or any portion thereof, including without limitation the Member's Economic Interest, the right to vote on or participate in the management and the right to receive information concerning the business and affairs of the Company. "NET CASH FLOW" means the sum of Net Cash From Operations and Net Cash From Sales or Refinancings, where: (a) "NET CASH FROM OPERATIONS" means the gross cash proceeds from Company operations (including sales and dispositions of property in the ordinary course of business) less the portion thereof used to pay or establish reserves for all Company expenses, debt payments, capital improvements, replacements, and contingencies, all as determined by the Manager, subject to the reasonable approval of all of the Members. Net Cash From Operations shall not be reduced by depreciation, amortization, cost recovery deductions, or similar allowances, but shall be increased by any reductions of reserves previously established pursuant to the first sentence of this clause (a) and pursuant to the definition below of Net Cash From Sales or Refinancings. (b) "NET CASH FROM SALES OR REFINANCINGS" means the net cash proceeds from all sales and other dispositions (other than in the ordinary course of business) and all refinancings of property, less any portion thereof used to establish reserves, all as determined by the Manager, subject to the reasonable approval of all of the Members. Net Cash From Sales or Refinancings shall include all principal and interest payments with respect to any note or other obligation received by the Company in connection with sales and other dispositions (other than in the ordinary course of business) of property. "NET PROFITS" and "NET LOSSES" means the income, gain, loss, deductions and credits of the Company in the aggregate or separately stated, as appropriate, determined in accordance with the method of accounting used on the Company's information tax return filed for federal income tax purposes. Notwithstanding -51- the foregoing, any items of income, gain, loss or deduction that are specially allocated pursuant to Section 3.3 or 3.4 shall not be taken into account in computing Net Profits or Net Losses. "NEWCO" means the limited liability company, general partnership or other entity formed by the Company and CEI to which the Company Assets will be transferred in accordance with the Purchase Agreement after such time as applicable law is amended to permit public companies to operate card clubs or HPI or HPC is otherwise legally permitted to operate the Card Club. "NONCOMPLYING PERSON" has the meaning set forth in Section 7.7. "NONRECOURSE LIABILITY" has the meaning set forth in Regulations Section 1.752-1(a)(2). "OFFEREES" has the meaning set forth in Section 7.2. "ORIGINAL MEMBERS" means HPC, DeBartolo and Chu. "PERSON" means an individual, general partnership, limited partnership, limited liability company, corporation, trust, estate, real estate investment trust association or any other entity. "PROCEEDING" means any action, suit, arbitration, alternative dispute resolution mechanism, investigation, administrative hearing or other proceeding, whether civil, criminal, administrative or investigative in nature. "PROFIT PERCENTAGE INTEREST" means the percentage interest of a Member in Net Profits, as set forth in Section 31 and as adjusted from time to time in accordance with Section 2.7. "PURCHASE AGREEMENT" has the meaning set forth in Recital B of this Agreement. "RATE" means interest at an annual rate equal to the Bank of America's prime interest rate in effect from time to time (but in no event greater than the maximum rate permitted under applicable law). "REAL PROPERTY RIGHTS" has the meaning set forth in Recital B of this Agreement. "REGISTRABLE SECURITIES" means those shares of HPI Common Stock received or receivable by either Chu or DeBartolo under Section 7.9 of this Agreement (including shares received from HPI with respect to or in replacement of such shares by reason of splits, dividends and recapitalizations) but excluding any shares which may be then sold to the public without registration -52- pursuant to Rule 144 or other comparable provision under the 1933 Act ("Rule 144"). "REGISTRATION STATEMENT" means any registration statement or comparable document under the 1933 Act through which a public sale or disposition of HPI's Common Stock may be registered or exempted from registration (except a form exclusively for the sale or distribution of securities by HPI or to employees of HPI or its subsidiaries or for use exclusively in connection with a business combination). "REGULATIONS" means, unless the context clearly indicates otherwise, the regulations currently in force from time to time as final or temporary that have been issued by the U.S. Department of Treasury pursuant to its authority under the Code. "REMAINING MEMBERS" means the Members other than the Excluded Member. "SEC" means the Securities and Exchange Commission. "SELLING HOLDER" means with respect to any Registration Statement, any Holder whose securities are included therein. "SELLERS' UNDERWRITER" means with respect to any Registration Statement and only to the extent that HPI has not retained an underwriter for such offering, the underwriter designated in writing by the Selling Holders, subject to the prior approval of HPI, which may be withheld for any reason. "SUPER MAJORITY INTEREST" means Members holding in the aggregate at least eighty percent (80%) of all Profit Percentage Interests. "TAX MATTERS PARTNER" shall be HPC or its successor as designated pursuant to Section 8.6. "THIRD PARTY LOANS" has the meaning set forth in Section 25. "TRANSFER" means any sale, transfer, assignment, hypothecation or other voluntary disposition, whether by gift, bequest or otherwise. In the case of a hypothecation, the Transfer shall be deemed to occur both at the time of the initial pledge and at any pledgee's sale or a sale by any secured creditor. "TRANSFERABLE INTEREST" has the meaning set forth in Section 7.2. -53- SCHEDULE 2.1 ------------ INITIAL CARD CLUB ASSETS ------------------------ A. AGREEMENTS WITH COMPTON ENTERTAINMENT, INC. ("CEI") 1. Agreement In Principle, dated April 29, 1994, by and among Hollywood Park, Inc., a Delaware corporation ("HPI") and CEI. 2. Amended and Restated Agreement Respecting Pyramid Casino, dated July 14, 1995, by and among HPI as Buyer, CEI as Seller and Shareholder, together with (i) Exhibit A: Form of Lease, by and among HP/Compton as Landlord and CEI as Tenant; (ii) Exhibit B-1: Form of Partnership Agreement Of Pyramid Casino Partners, a California general partnership, by and among HPI and CEI; and Exhibit B-2: Form of Limited Liability Company Operating Agreement Of Pyramid Casino Company, LLC, by and among HPI and CEI. 3. Lease, dated August 3, 1995, by and among HPC as Landlord and CEI as Tenant, as amended by that certain First Amendment to Lease. 4. Assignment, Acceptance and Assumption and Consent, dated August 2, 1995, to transfer and assign to HPC, all of its right, title and interest in that certain Amended and Restated Agreement Respecting Pyramid Casino, dated as of July 14, 1995, by and between HPI and CEI and Shareholder. 5. License Rights Option Agreement, dated August 3, 1995, by and among CEI as Optionor and HPC as Optionee. B. AGREEMENTS WITH THE COMMUNITY REDEVELOPMENT AGENCY OF THE CITY OF COMPTON ("the Agency") 1. Amended and Restated Disposition and Development Agreement, Agreement of Purchase and Sale, and Lease with Option to Purchase, dated April 4, 1995 (the "DDA"), by and among the Agency and CEI. 2. Assignment, Assumption & Consent Agreement, dated July 31, 1995, by and among CEI as Assignor, HPC as Assignee, HPI as Guarantor and the Agency. 3. Guaranty, dated July 31, 1995, by HPI as Guarantor, in favor of the Agency. -54- 4. Memorandum of Lease and Option to Purchase, dated July 31, 1995, by and among the Agency as Landlord and HPC as Tenant, recorded August 3, 1995, as Instrument No. 95-1265412, in the Official Records, Los Angeles County, California. 5. Deed of Trust, Assignment of Rents, Security Agreement and Fixture Filing, dated July 31, 1995, by HPC as Trustor, Chicago Title Company, a California corporation, as Trustee and the Agency as Beneficiary, recorded August 3, 1995, as Instrument No. 95-1265414, in the Official Records, Los Angeles County, California. 6. UCC-1 Financing Statement dated July 31, 1995, executed by HPC as Debtor, in favor of the Agency as Secured Creditor, recorded August 3, 1995, as Instrument No. 95-1265415, in the Official Records of Los Angeles County, California. 7. UCC-1 Financing Statement, dated July 31, 1995, executed by HPC as Debtor, in favor of the Agency as Secured Creditor, filed with the Secretary of State- California. 8. Offset Agreement, dated as of July 31, 1995, by and among the Agency, the City of Compton, HPC and CEI. 9. Representations and Warranties Agreement, dated August 2, 1995, by and among CEI, HPC and the Agency. 10. Slope Maintenance Agreement, dated August 2, 1995, by HPC in favor of the City of Compton, recorded August 3, 1995, as Instrument No. 95-1265419, in the Official Records of Los Angeles County, California. -55- SCHEDULE 6.5 ------------ -56- SCHEDULE 7.8A -------------- INTERESTS IN FIRST PARK INVESTMENTS, LLC Member Profit Percentage Interest - ------ -------------------------- Leo Chu 50% Ivy Chu 50% -57- SCHEDULE 7.8B ------------- INTERESTS IN REDWOOD GAMING LLC Member Profit Percentage Interest - ------ -------------------------- Cynthia R. DeBartolo 90% Christine Catherine Muranski 10% -58- EXHIBIT A --------- - ------------------ -------------------------- ------------ -------------- Initial Profit Initial Percentage Capital Member's Name Member's Address Interests Contributions - ------------------ -------------------------- ------------ -------------- HPC 1050 South Prairie Avenue 88% $22,000,000 Inglewood, CA 90301 DeBartolo Attn: G. Michael Finnigan 8% $ 2,000,000 999 Baker Way, Suite 420 San Mateo, CA 94404 Chu Attn: Mark Rivers 4% $ 1,000,000 515 North Camden Drive Beverly Hills, CA 90210 Attn: Leo Chu EX-10.36 7 dex1036.txt AMEND. NO. 3 TO REDUCING REVOLVING LOAN AGRMNT. Exhibit 10.36 AMENDMENT NO. 3 TO AMENDED AND RESTATED REDUCING REVOLVING LOAN AGREEMENT This Amendment No. 3 to Amended and Restated Reducing Revolving Loan Agreement (this "Amendment") is entered into with reference to the Amended Reducing Revolving Loan Agreement dated as of October 14, 1998 among Pinnacle Entertainment, Inc (acting under its former name, Hollywood Park, Inc. and referred to herein as "Borrower"), the Banks party thereto, Societe Generale and Bank of Scotland, as Managing Agents, First National Bank of Commerce, as Co- Agent, and Bank of America, N.A. (under its former name, Bank of America National Trust and Savings Association), as Administrative Agent (the "Loan Agreement"). Capitalized terms used but not defined herein are used with the meanings set forth for those terms in the Loan Agreement. Borrower and the Administrative Agent, acting with the consent of the Requisite Banks pursuant to Section 11.2 of the Loan Agreement, agree as follows: 1. Section 6.14(d). Section 6.14(d) of the Loan Agreement is amended to --------------- ------- read in full as follows: "(d) Capital Expenditures (excluding capitalized interest, pre- --------- opening expenses and funds disbursed pursuant to community development agreements) for the acquisition of land for and construction of the Indiana Project not in excess of $183,000,000; provided that Borrower -------- may not make any such Capital Expenditure which, when added to all such Capital Expenditures previously made for the acquisition of land for and construction of the Indiana Project, would exceed $25,000,000 unless at least 20 Banking Days prior thereto, (i) Borrower furnishes ------ to the Administrative Agent a detailed construction budget and timetable therefor, together with projected financial statements by Fiscal Quarter of Borrower and the Restricted Subsidiaries for the period extending one year beyond the scheduled completion date, (ii) Borrower engages Bank of America Construction Services Group (or a comparable firm reasonably acceptable to the Administrative Agent), at the expense of Borrower, to monitor construction of the Indiana Project and (iii) Borrower furnishes the Administrative Agent with a letter from Bank of America Construction Services Group (or such comparable firm) stating that it believes the construction budget and construction timetable are reasonable and feasible." 2. Representations and Warranties. Borrower represents and warrants that ------------------------------ (a), as of the date hereof and giving effect to this Amendment, no Default or Event of Default exists, (c) Switzerland County Development Corp., formerly a Subsidiary of Borrower, has been dissolved, and (c) Boomtown Hoosier, Inc., a Nevada corporation which was formerly a Subsidiary of Borrower, has been merged with and into Borrower, with Borrower the survivor. 3. Conditions Precedent. The effectiveness of this Amendment is -------------------- conditioned upon the receipt by the Administrative Agent of the following documents, each properly executed by a Responsible Official of each party thereto and dated as of the date hereof: a. Counterparts of this Amendment executed by all parties hereto; -1- b. Written consent of the Requisite Banks as required under Section 11.2 of the Loan Agreement in the form of Exhibit A to this Amendment; and c. Written consent of the Subsidiary Guarantors in the form of Exhibit B to this Amendment. 4. Confirmation. In all respects, the terms of the Loan Agreement (as ------------ amended hereby) are hereby confirmed. IN WITNESS WHEREOF, Borrower and the Administrative Agent have executed this Amendment as of September 15, 2000 by their duly authorized representatives. PINNACLE ENTERTAINMENT, INC. By: /s/ Bruce C. Hinckley ---------------------------------- Bruce C. Hinckley Chief Financial Officer BANK OF AMERICA, N.A., as Administrative Agent By: /s/ Janice Hammond ---------------------------------- Vice President - Agency Specialist ---------------------------------- [Printed Name and Title] -2- EX-10.37 8 dex1037.txt AMEND. NO. 4 TO REDUCING REVOLVING LOAN AGRMNT. Exhibit 10.37 AMENDMENT NO. 4 TO AMENDED AND RESTATED REDUCING REVOLVING LOAN AGREEMENT AND WAIVER This Amendment No. 4 to Amended and Restated Reducing Revolving Loan Agreement and Waiver (this "Amendment") is entered into with reference to the Amended and Reducing Revolving Loan Agreement dated as of October 14, 1998 among Pinnacle Entertainment, Inc. (acting under its former name, Hollywood Park, Inc. and referred to herein as "Borrower"), the Banks party thereto, Societe Generale and Bank of Scotland, as Managing Agents, First National Bank of Commerce, as Co-Agent, and Bank of America, N.A. (under its former name, Bank of America National Trust and Savings Association), as Administrative Agent (the "Loan Agreement"). Capitalized terms used but not defined herein are used with the meanings set forth for those terms and in the Loan Agreement. Borrower and the Administrative Agent, acting with the consent of the Requisite Banks pursuant to Section 11.2 of the Loan Agreement, agree as ---- follows: 1. Section 6.14(d). Section 6.14(d) of the Loan Agreement is amended to --------------- --------------- read in full as follows: "(d) Capital Expenditures (excluding capitalized interest, pre-opening --------- expenses and funds disbursed pursuant to community development agreements) for the acquisition of land for and construction of the Indiana Project not in excess of $205,000,000; provided that Borrower may not make any such -------- Capital Expenditures which, when added to all such Capital Expenditures previously made for the acquisition of land for and construction of the Indiana Project, would exceed $25,000,000 unless at least 20 Banking Days ------ prior thereto, (i) Borrower furnishes to the Administrative Agent a detailed construction budget and timetable therefor, together with projected financial statements by Fiscal Quarter of Borrower and the Restricted Subsidiaries for the period extending one year beyond the scheduled completion date, (ii) Borrower engages Bank of America Construction Services Group (or a comparable firm reasonably acceptable to the Administrative Agent), at the expense of Borrower, to monitor construction of the Indiana Project and (iii) Borrower furnishes the Administrative Agent with a letter from Bank of America Construction Services Group (or such comparable firm) stating that it believes the construction budget and construction timetable are reasonable and feasible." -1- 2. Compliance with Section 6.11 of the Loan Agreement is hereby waived in respect of the Borrower complying with the Interest Coverage Ratio as of the last day of the Fiscal Quarter ending on December 31, 2000 and for the period during which such Fiscal Quarter ends; provided, however, Borrower shall not -------- ------- permit the Interest Coverage Ratio as of the last day of the Fiscal Quarter ending on December 31, 2000 or for the period during which such Fiscal Quarter ends to be less than the ratio of 1.50 to 1.00. 3. Compliance with Section 7.1(e) of the Loan Agreement is hereby waived in respect of the Borrower delivering within 45 days after the commencement of the Fiscal Year beginning January 1, 2001 a budget and projection of the Borrower's statement of operations by Fiscal Quarter for the Fiscal Year 2001. 4. Representations and Warranties. Borrower represents and warrants that ------------------------------ as of the date hereof and giving effect to this Amendment, no Default or Event of Default exists. 5. No Other Waivers. The waivers contained in Section 2 and Section 3 of ---------------- this Amendment are expressly limited to the facts and circumstances referred to therein and shall not operate as a waiver of or a consent to non-compliance with any other section of the Loan Agreement or any of the other Loan Documents. The waivers contained in Section 2 and Section 3 are only effective for the specific instances, for the specific purposes and for the specific period for which given. 6. Conditions Precedent. The effectiveness of this Amendment is -------------------- conditioned upon the receipt by the Administrative Agent of the following documents, each properly executed by a Responsible Official of each party thereto and dated as of the date hereof: (a) Counterparts of this Amendment executed by all parties hereto; (b) Written consent of the Requisite Banks as required under Section 11.2 of the Loan Agreement in the form of Exhibit A to this Amendment; and - ---- (c) Written consent of the Subsidiary Guarantors in the form of Exhibit B to this Amendment. -2- 7. Confirmation. In all respects, the terms of the Loan Agreement (as ------------ amended hereby) are hereby confirmed. IN WITNESS WHEREOF, Borrower and the Administrative Agent have executed this Amendment as of March 16, 2001 by their duly authorized representatives. PINNACLE ENTERTAINMENT, INC. By /s/ Bruce C. Hinckley ------------------------------------- Bruce C. Hinckley Chief Financial Officer BANK OF AMERICA, N.A., as Administrative Agent By /s/ Janice Hammond ------------------------------------- Title Vice President - Agency Specialist ------------------------------------- -3- EX-10.54 9 dex1054.txt EMPLOYMENT AGREEMENT DATED 9/1/01 Exhibit 10.54 EMPLOYMENT AGREEMENT THIS EMPLOYMENT AGREEMENT (the "Agreement") is made on September 1, 2001 by and between PINNACLE ENTERTAINMENT, INC., a Delaware corporation (the "Company"), and WADE HUNDLEY, an individual ("Executive"), with respect to the following facts and circumstances: RECITALS Company desires to retain Executive as Executive Vice President and Chief Operating Officer of the Company. Executive desires to be retained by Company in that capacity, on the terms and conditions and for the consideration set forth below. NOW, THEREFORE, in consideration of the mutual promises, covenants and agreements set forth herein, the parties hereto agree as follows: ARTICLE 1 EMPLOYMENT AND TERM 1.1 Employment. Company agrees to engage Executive in the capacity of Executive Vice President and Chief Operating Officer of Company on the Effective Date (as hereinafter defined) and Executive hereby accepts such engagement by Company upon the terms and conditions specified below. 1.2 Term. The term of this Agreement (the "Term") shall commence on September 1, 2001 (such date being referred to as the "Effective Date") and shall continue in force until December 31, 2002, unless earlier terminated under Article 6 below. Each 12-month period commencing as of the Effective Date is sometimes called a year of the "Term", and the date which is 365 days from and after the Effective Date shall be referred to as the "Anniversary Date". At least ninety (90) days prior to the expiration of the Term (as the same may be extended from time to time), either party shall advise the other whether it intends not to renew the term of this Agreement; if neither party so advises the other, then this Agreement shall be deemed renewed on its existing terms for a period of one (1) year from its then scheduled expiration. ARTICLE 2 DUTIES OF EXECUTIVE 2.1 Duties. Executive shall perform all the duties and obligations of Executive Vice President and Chief Operating Officer of Company subject to the control and supervision of the Chief Executive Officer of Company and such other executive duties consistent with the foregoing as may be assigned to him from time to time by the Chief Executive Officer of the Company. Executive shall report to the Chief Executive 1 Officer of Company. In his capacity as Chief Operating Officer of Company, Executive shall coordinate with the Marketing, Human Resources and IT Department heads of Company, as well as other similar operating departments that may be created in the future. All Property General Managers shall report directly to Executive (it being understood that they may have dotted line reporting obligations to other corporate officers as well). Executive shall perform the services contemplated herein faithfully, diligently, to the best of his ability and in the best interests of Company. Executive shall devote all his business time and efforts to the rendition of such services. Executive shall, at all times, perform such services in compliance with, and to the extent of his authority, shall to the best of his ability cause Company to be in compliance with, any and all laws, rules and regulations applicable to Company of which Executive is aware. Executive may rely on Company's inside counsel and outside lawyers in connection with such matters. Executive shall, at all times during the Term, in all material respects, adhere to and obey any and all written internal rules and regulations governing the conduct of Company's employees, as established or modified from time to time; provided, however, in the event of any conflict between the provisions of this Agreement and any such rules or regulations, the provisions of this Agreement shall control. 2.2 Location of Service. Notwithstanding the fact that the Company's headquarters are located in Glendale, California area, it is understood and agreed that Executive shall continue to reside in the Dallas/Ft. Worth metropolitan area and that Executive shall spend the majority of his time at the Company's various properties in the ongoing effort to improve the operating performance of such properties. 2.3 Exclusive Service. Except as otherwise expressly provided herein, Executive shall devote his business time, attention, energies, skills, learning and best efforts to the business of the Company. Executive may participate in social, civic, charitable, religious, business, education or professional associations, so long as such participation does not materially interfere with the duties and obligations of Executive hereunder. This Section 2.3, however, shall not be construed to prevent Executive from making passive outside investments so long as such investments do not require material time of Executive or otherwise interfere with the performance of Executives duties and obligations hereunder. Executive shall not make any investment in an enterprise that competes with Company without the prior written approval of Company after full disclosure of the facts and circumstances; provided, however, that so long as Executive does not utilize material, non-public information this sentence shall not preclude Executive from owning up to one percent (1%) of the securities of a publicly traded entity. During the Term, Executive shall not directly or indirectly work for or provide services to or own an equity interest in any person, firm or entity engaged in the casino gaming, card club or horse racing business. In this regard, Executive acknowledges that the gaming industry is national in scope and that accordingly, this covenant shall apply throughout the United States. 2 ARTICLE 3 COMPENSATION 3.1 Signing Bonus. Upon the execution of this Agreement, Company shall pay to Executive a one-time signing bonus in the amount of Fifteen Thousand Dollars ($15,000). 3.2 Salary. In consideration for Executive's services hereunder, Company shall pay Executive an annual salary at the rate of Four Hundred Thousand ($400,000) per year during each of the years of the Term; payable in accordance with Company's regular payroll schedule from time to time (less any deductions required for Social Security, state, federal and local withholding taxes, and any other authorized or mandated withholdings). 3.3 Annual Bonus. Executive shall be entitled to earn a bonus with respect to each year of the Term during which Executive is employed under this Agreement of up to $200,000 per full year, $100,000 of which shall be based upon Company meeting its EBITDA budget (as established by the Board) for the year in question and not exceeding its capital budget for the year and the balance at the discretion of the Board of Directors. For the partial year from the Effective Date through December 31, 2001, Executive shall be paid a bonus of up to $70,000 payable December 31, 2001 provided that Executive is then employed by the Company. For the purposes of determining whether Company has met its EBITDA budget, income and expenses relating to acquisitions and new projects made during the year shall be disregarded unless such acquisition or projects were included in the budget for the year and the budget shall be equitability adjusted for divestitures made during the year not contemplated by the budget. No bonus based on meeting its EBITDA budget will be earned or payable if Company's results are less than those established as target results under its budget. Any such bonus earned by Executive (other than the fixed bonus for 2001) shall be paid annually within ninety (90) days after the conclusion of Company's fiscal year. The amount of and criteria for earning bonuses may be adjusted by mutual agreement of Executive and Company. 3.4 Stock Options. As an additional element of compensation to Executive, in consideration of the services to be rendered hereunder, Company shall grant to Executive options to purchase 200,000 shares of Company's common stock, 100,000 of which shall have an exercise price equal to the closing price of such stock on August 31, 2001, 50,000 of which shall have an exercise price equal to 120% of the closing price of such stock on August 31, 2001, and 50,000 of which shall have an exercise price equal to 140% of the closing price of such stock on August 31, 2001. Such stock options shall vest over a three (3) year period in three equal installments of 66,666.67 shares beginning on the First Anniversary of the Effective Date, as follows: 3
Percentage # of Shares at # of Shares at # of Shares at Cumulative Initially 8/31/01 Closing 120% of 8/31/01 140% of 8/31/01 Percentage Date Exercisable Price Closing Price Closing Price Exercisable First Anniversary 33.33% 33,334 16,666 16,666 33.33% Second Anniversary 33.33% 33,333 16,666 16,667 66.67% Third Anniversary 33.33% 33,333 16,667 16,666 100%
The terms and conditions of such options shall be governed by a Stock Option Agreement between Company and Executive, in the form attached hereto as Exhibit "A". - ----------- ARTICLE 4 EXECUTIVE BENEFITS 4.1 Vacation. Executive shall be entitled to four weeks vacation each calendar year, without reduction in compensation. 4.2 Company Employee Benefits. Executive shall receive all group insurance and pension plan benefits and any other benefits on the same basis as they are available generally to other senior executives of Company under Company personnel policies in effect from time to time. 4.3 Benefits. Executives shall receive all other such fringe benefits as Company may offer generally to other senior executives of Company under Company's personnel policies in effect from time to time, such as health and disability insurance coverage and paid sick leave. 4.4 Indemnification. Executive shall have the benefit of indemnifications as provided under applicable law and bylaws of Company, which indemnification shall continue after the termination of this Agreement for such period as may be necessary to continue to indemnify Executive for his acts during the Term hereof. Company shall cause Executive to be covered by the current policies of directors and officers liability insurance covering directors and officers of Company, copies of which have been provided to Executive, in accordance with their terms, to the maximum extent of the coverage available for any director or officer of Company to be maintained throughout the term of Executive's employment with Company and for such period thereafter as may be necessary to continue to cover acts of Executive during the Term of his employment (provided that Company may substitute therefore, or allow to be substituted therefore, 4 policies of at least the same coverage and amounts containing terms and conditions which are, in the aggregate, no less advantageous to the insured in any material respect). ARTICLE 5 REIMBURSEMENT FOR EXPENSES Executive shall be reimbursed by the Company for all ordinary and necessary expenses incurred by Executive in the performance of his duties or otherwise in furtherance of the business of Company in accordance with the policies of Company in effect from time to time. Executive shall keep accurate and complete records of all such expenses, including, but not limited to, proof of payment and purpose. Executive shall account fully for all such expenses to Company. ARTICLE 6 TERMINATION 6.1 Termination for Cause. Without limiting the generality of Section 6.2, Company shall have the right to terminate Executive's employment, without further obligation or liability to Executive, upon the occurrence of any one or more of the following events, which events shall be deemed terminated for cause. 6.1.1 Failure to Perform Duties. If Executive neglects or otherwise fails to perform the duties of his employment under this Agreement in a professional and businesslike manner after having received written notice specifying such failure to perform and a reasonable opportunity, not to exceed ten days, to perform or if such performance cannot be completed within such time period, commenced within such time period and diligently pursued to completion as soon as practicable thereafter. 6.1.2 Willful Breach. If Executive willfully commits a material breach of this Agreement or a material willful breach of his fiduciary duty to Company. 6.1.3 Wrongful Acts. If Executive is indicted or convicted of a felony or any other serious crime, commits a serious wrongful act or engages in other misconduct involving acts of moral turpitude that would make the continuance of his employment by Company materially detrimental to Company, which determination shall be made in the reasonable exercise of Company's judgment. 6.1.4 Disability. If Executive is physically or mentally disabled from the performance of a major portion of his duties for a continuous period of 120 days or greater, which determination shall be made in the reasonable exercise of Company's judgment, provided, however, if Executive's disability is the result of a serious health condition as defined by the federal Family and Medical Leave Act (or its California equivalent) ("FMLA"), Executive's employment shall not be terminated due to such disability at any time during or after any period of FMLA-qualified leave except as permitted by FMLA. If there should be a dispute between Company and Executive as to Executive's physical or mental disability for purposes of this Agreement, the question 5 shall be settled by the opinion of an impartial reputable physician or psychiatrist agreed upon by the parties or their representatives, or if the parties cannot agree within ten (10) days after a request for designation of such party, then a physician or psychiatrist designated by the Los Angeles County Medical Association. The certification of such physician or psychiatrist as to the questioned dispute shall be final and binding upon the parties herein. 6.2 Termination Without Cause. Notwithstanding anything to the contrary herein, Company shall have the right to terminate Executive's employment under this Agreement at any time without cause by giving notice of such termination to Executive. 6.3 Termination by Executive for Good Reason. Executive may terminate his employment under this Agreement on thirty (30) days prior written notice to Company for good reason. For purposes of this Agreement, "good reason" shall mean and be limited to a material breach of this Agreement by Company (including, without limitation, any material reduction in the authority or duties of Executive or any relocation from his current principal residence) and the failure of Company to remedy such breach within thirty (30) days after written notice (or as soon thereafter as practicable so long as it commences effectuation of such remedy within such time period and diligently pursues such remedy to completion as soon as practicable). 6.4 Termination by Virtue of a Change of Control. Notwithstanding anything to the contrary herein, Company and Executive each shall have the right to terminate Executive's employment under this Agreement upon the occurrence of a Change of Control. A "Change of Control" shall be defined as: a. The acquisition by any individual, entity or group within the meaning of Section 13(d)(3) or 14(d)(2) of the Securities Exchange Act of 1934, as amended (the "34 Act") (a "Person") of beneficial ownership (within the meaning of Rule 13d-3 under the 34 Act) of 50% or more of either (i) Company's then outstanding common stock ("Outstanding Stock") or (ii) the combined voting power of Company's then outstanding voting securities entitled to vote generally in the election of directors ("Outstanding Voting Securities") other than any acquisition (i) by any employee benefit plan (or related trust) sponsored or maintained by the Company or any entity controlled by it or (ii) by any entity pursuant to transaction which complies with clauses (i), (ii) and (iii) of subsection (c) of this definition; or b. Individuals who as of the date hereof constitute the Board (the "Incumbent Board") cease for any reason to constitute at least a majority thereof; provided, however, that any individual becoming a director subsequent to the date hereof whose election or nomination was approved by a vote of at least a majority of the directors then comprising the Incumbent Board shall be considered 6 as a member of the Incumbent Board unless his initial assumption of office occurs as a result of an actual or threatened contest with respect to the election or removal of directors or other actual or threatened solicitation of proxies by or on behalf of a Person other than the Board; or c. Consummation of a reorganization, merger of consolidation, share exchange or sale or other disposition of all or substantially all of the Company's assets (a "Combination") unless immediately thereafter (i) all or substantially all of the beneficial owners of the Outstanding Stock and Outstanding Voting Securities immediately prior to such Combination beneficially own, directly or indirectly, more than 50% of, respectively, the then outstanding shares of common stock and the combined voting power of the then outstanding voting securities entitled to vote generally in the election of directors, as the case may be, of the entity resulting from such Combination (including, without limitation, any entity which as a result of such transaction owns the Company or all or substantially all of its assets either directly or through one or more subsidiaries) in substantially the same proportions as their ownership immediately prior to such Combination of the Outstanding Stock and Outstanding Voting Securities, as the case may be, (ii) no Person (excluding any entity resulting from such Combination or any employee benefit plan (or related trust) of the Company or such resulting entity) beneficially owns, directly or indirectly, 20% or more of, respectively, the then outstanding shares of common stock of the resulting entity or the combined voting power of the then outstanding voting securities of entity except to the extent that such ownership existed prior to the Combination and (iii) at least a majority of the members of the board of directors of the resulting entity were members of the Incumbent Board at the time of the execution of the initial agreement or the action of the Board providing for such Combination; or d. Approval by the shareholders of the Company's complete liquidation or dissolution. 6.5 Effectiveness on Notice. Any termination under this Section 6 shall be effective upon receipt of notice by Executive or Company, as the case may be, of such termination or upon such other later date as may be provided herein or specified by Company or Executive in the notice (the "Termination Date"). 7 6.6 Effect of Termination. 6.6.1 Payment of Salary and Expenses Upon Termination. If the Term of this agreement is terminated, all benefits provided to Executive by Company hereunder shall thereupon cease and Company shall pay or cause to be paid to Executive all accrued but unpaid salary and vacation benefits. In addition, promptly upon submission by Executive of his unpaid expenses incurred prior to the Termination Date and owing to Executive pursuant to Article 5, reimbursement for such expenses shall be made. 6.6.2 Termination for Disability. In the event of a termination under Section 6.1.4 (for disability), Executive may be eligible for benefits under the California State Disability Insurance program for his first six months of disability. In addition, Executive shall be eligible for the benefits provided under any long-term disability insurance policy which Company may have as in effect from time to time. Eligibility and benefits with regard to either insurance program shall be governed by the provisions of the insurance program or policy and shall not be the responsibility of Company. 6.6.3 Termination Without Cause or Termination by Executive for Good Reason. If Company terminates Executive without cause or Executive terminates for good reason under Section 6.3 only, the following shall apply: a. So long as Executive does not compete with Company, or its subsidiaries in the gaming business prior to the end of the Term, Executive shall be entitled to receive an amount equal to $400,000 per year through the end of the Term (e.g. if there were three (3) months left in the Term, Executive would be entitled to $100,000), payable in accordance with Company's regular salary payment schedule from time to time, plus any amounts payable under Section 6.5.1 above, plus a continuation of health and disability insurance coverage for a period of six (6) months after termination, at Company's expense. Should Executive compete with Company or its subsidiaries prior to the end of the Term, Executive shall not be entitled to receive any additional payments from Company with respect to periods after commencement of such competitive activities under this Section 6.6.3 and all such obligations shall be extinguished. b. In addition to those already vested, all unvested stock options that would have vested on future Anniversary Dates of this Agreement shall be deemed immediately and fully vested and exercisable by Executive; and 8 c. The "Covenant Not to Compete" set forth in Section 7.4 below shall not apply in any respect to Executive (except as the same may affect his entitlement to payments under Section 6.6.3(a) hereof) and the term of the "No Hire Away Policy" in Section 7.6 shall be limited to six months from the date of termination. 6.6.4 Termination by Virtue of a Change of Control. If Company or Executive terminates this Agreement in connection with a Change of Control under Section 6.4 hereof, the foregoing shall apply: a. Executive shall be entitled to receive an amount equal to the greater of (i) one full year's salary plus the maximum bonus payable to Executive pursuant to Section 3.3 hereof, or (ii) all salary plus the maximum bonus payable to Executive under this Agreement through the remainder of the Term. b. In addition to those already vested, all unvested stock options shall be deemed immediately and fully vested and exercisable by Executive; c. "The Covenant Not to Compete" set forth in Section 7.4 shall not apply in any respect to Executive and the terms of the "No Hire Away Policy" in Section 7.6 shall be limited to six months from the date of termination; and d. Executive shall be entitled to a continuation of health, life and disability insurance coverage for a period of one (1) year after termination, at Company's expense. In the event the Company has executed a definitive agreement with respect to a contemplated Change of Control but such Change of Control has not been consummated prior to the termination of this Agreement, then Executive shall be entitled to receive the benefits contemplated in Sections 6.6.4(a), (b) and (d) if, and at such time as, the Change of Control is consummated. 6.7 Suspension. In lieu of terminating Executive's employment hereunder for cause under Section 6.1, Company shall have the right, at its sole election, to suspend the operation of this Agreement during the continuance of events or circumstances under Section 6.1 for an aggregate of not more than thirty (30) days during the Term (the "Default Period") by giving Executive written notice of Company's election to do so at any time during the Default Period. Company shall have the right to extend the Term beyond its normal expiration date by the period(s) of any suspension(s). Company's exercise of its right to suspend the operation of this Agreement shall not preclude Company from subsequently terminating Executive's employment hereunder. Executive 9 shall not render services to any other person, firm or corporation in the casino business during any period of suspension. Executive shall be entitled to continue compensation pursuant to the provisions hereof during the Default Period. 6.8 DEFRA Limitation. The payments that Executive shall be entitled to receive hereunder and upon the exercise of his stock options shall in all events be limited by the provisions of Section 280G of the Internal Revenue Code ("Code") and the regulations thereunder (or their then equivalents) and no payment shall be made that would have the result of limiting the deductibility of such payments by Company or that would result in the imposition of an excise tax under Section 4999 of the Code. 6.9 Exercisability of Options. As provided in the Option Agreement, all options terminate no later than ninety (90) days after the termination, regardless of the cause of such termination. ARTICLE 7 CONFIDENTIALITY 7.1. Nondisclosure of Confidential Material. In the performance of his duties, Executive may have access to confidential records, including, but not limited to, development, marketing, organizational, financial, managerial, administrative and sales information, data, specifications and processes presently owned or at any time hereafter developed or used by Company or its agents or consultants that is not otherwise part of the public domain (collectively, the "Confidential Material"). All such Confidential Material is considered secret and is disclosed to Executive in confidence. Executive acknowledges that the Confidential Material constitutes proprietary information of Company which draws independent economic value, actual or potential, from not being generally known to the public or to other persons who could obtain economic value from its disclosure or use, and that Company has taken efforts reasonable under the circumstances, of which this Section 7.1 is an example, to maintain its secrecy. Except in the performance of his duties to Company or as required by a court order, Executive shall not, directly or indirectly for any reason whatsoever, disclose, divulge, communicate, use or otherwise disclose any such Confidential Material, unless such Confidential Material ceases to be confidential because it has become part of the public domain (not due to a breach by Executive of his obligations hereunder). Executive shall also take all reasonable actions appropriate to maintain the secrecy of all Confidential Information. All records, lists, memoranda, correspondence, reports, manuals, files, drawings, documents, equipment, and other tangible items (including computer software), wherever located, incorporating the Confidential Material, which Executive shall prepare, use or encounter, shall be and remain Company's sole and exclusive property and shall be included in the Confidential Material. Upon termination of this Agreement, or whenever requested by Company, Executive shall promptly deliver to Company any and all of the Confidential Material, not previously delivered to Company, that is in the possession or under the control of Executive. 7.2 Assignment of Intellectual Property Rights. Any ideas, processes, know-how, copyrightable works, maskworks, trade or service marks, trade secrets, 10 inventions, developments, discoveries, improvements and other matters that may be protected by intellectual property rights, that relate to Company's business and are the results of Executive's efforts during the Term (collectively, the "Executive Work Product"), whether conceived or developed alone or with others, and whether or not conceived during the regular working hours of Company, shall be deemed works made for hire and are the property of Company. In the event that for whatever reason such Executive Work Product shall not be deemed a work made for hire, Executive agrees that such Executive Work Product shall become the sole and exclusive property of Company, and Executive hereby assigns to Company his entire right, title and interest in and to each and every patent, copyright, trade or service mark (including any attendant goodwill), trade secret or other intellectual property right embodied in Executive Work Product. Company shall also have the right, in its sole discretion to keep any and all of the Executive Work Product as Company's Confidential Material. The foregoing work made for hire and assignment provisions are and shall be in consideration of this agreement of employment by Company, and no further consideration is or shall be provided to Executive by Company with respect to these provisions. Executive agrees to execute any assignment documents Company may require confirming Company's ownership of any of the Executive Work Product. Executive also waives any and all moral rights with respect to any such works, including without limitation any and all rights of identification of authorship and/or rights of approval, restriction or limitation on use or subsequent modifications. Executive promptly will disclose to Company any Executive Work Product. 7.3 No Unfair Competition After Termination of Agreement. Executive hereby acknowledges that the sale or unauthorized use or disclosure of any of Company's Confidential Material obtained by Executive by any means whatsoever, at any time before, during or after the Term shall constitute unfair competition. Executive shall not engage in any unfair competition with Company either during the Term or at any time thereafter. 7.4 Covenant Not to Compete. In the event this Agreement is terminated by Company for cause under Section 6.1 above, or by Executive, for a reason other than one specified in either Section 6.3 or 6.4 above, then for a period of one year after the effective date of such termination, Executive shall not, directly or indirectly, work for or provide services to or own an equity interest in any person, firm or entity engaged in the casino gaming, card club or horseracing business which competes against Company in any "market" in which Company owns or operates a casino, card club or horseracing facility. For purposes of this Agreement, "market" shall be defined as the area within a 100 mile radius of any casino, card club or horseracing facility owned or operated by Company. 7.5 No Hire Away Policy. In the event this Agreement is terminated prior to the normal expiration of the Term, either by Company for cause under 6.1 above, or by Executive, for a reason other than one specified in either Section 6.3 or 6.4 above, then for a period of one year after the effective date of such termination, Executive shall not, directly or indirectly, hire any person known to Executive to be an employee of Company or any of its subsidiaries (or any person known to Executive to have been such an 11 employee within six months prior to such occurrence). In the case of a termination under Sections 6.2 and 6.3, the period of the No Hire Away Policy shall be six months from the date of such termination. 7.6 No Solicitation. During the Term and for a period of one year thereafter, or for a period of one year after earlier termination of this Agreement prior to expiration of the Term, and regardless of the reason for such termination (whether by Company or Executive), Executive shall not directly or indirectly solicit any employee of Company or any of its subsidiaries (or any person who was such an employee within six months prior to such occurrence) or encourage any such employee to leave the employment of Company or any of its subsidiaries. 7.7 Non-Solicitation of Customers. During the Term and for a period of two years thereafter, or for a period of two years after the earlier termination of this Agreement prior to the expiration of the Term, and regardless of the reason for such termination (whether by Company or Executive), Executive shall not directly or indirectly use customer lists or confidential information to solicit any customers of Company or its subsidiaries or any of their respective casinos or card clubs, or knowingly encourage any such customers to leave Company's casinos or card clubs or knowingly encourage any such customers to use the facilities or services of any competitor of Company or its subsidiaries. 7.8 Irreparable Injury. The promised service of Executive under this Agreement and the other promises of this Article 7 are of special, unique, unusual, extraordinary, or intellectual character, which gives them peculiar value, the loss of which cannot be reasonably or adequately compensated in damages in an action at law. 7.9 Remedies for Breach. Executive agrees that money damages will not be a sufficient remedy for any breach of the obligations under this Article 7 and Article 2 hereof and that Company shall be entitled to injunctive relief (which shall include, but not be limited to, restraining Executive from directly or indirectly working for or having an ownership interest in any person engaged in the casino, gaming or horseracing businesses in any market in which Company or its affiliates owns or operates any such business, using or disclosing the Confidential Material) and to specific performance as remedies for any such breach. Executive agrees that Company shall be entitled to such relief, including temporary restraining orders, preliminary injunctions and permanent injunctions, without the necessity of proving actual damages and without the necessity of posting a bond or making any undertaking in connection therewith. Any such requirement of a bond or undertaking is hereby waived by Executive and Executive acknowledges that in the absence of such a waiver, a bond or undertaking might otherwise be required by the court. Such remedies shall not be deemed to be the exclusive remedies for any breach of the obligations in this Article 7, but shall be in addition to all other remedies available at law or in equity. ARTICLE 8 ARBITRATION 12 In the event there is any dispute between Executive and Company which the parties are unable to resolve themselves, including any dispute with regard to the application, interpretation or validity of this Agreement or any dispute with regard to any aspect of Executive's employment or the termination of Executive's employment, both Executive and Company agree by entering into this Agreement that the exclusive remedy for determining any such dispute, regardless of its nature, will be by arbitration in accordance with the then applicable rules of the American Arbitration Association; provided, however, the breach of the obligation to provide services under this Agreement or of the obligations of Article 7 may be enforced by an action for injunctive relief and damages in a court of competent jurisdiction. In the event of any conflict between this Agreement and the rules of the American Arbitration Association, the provisions of this Agreement shall be determinative. In the event the parties are unable to agree upon an arbitrator, the parties shall select a single arbitrator from a list designated by the Los Angeles Office of the American Arbitration Association of seven arbitrators all of whom shall be retired judges of the Superior of appellate courts resident in Los Angeles who are members of the "Independent List" of retired judges. If the parties are unable to select an arbitrator from the list provided by the American Arbitration Association, then the parties shall each strike names alternatively from the list, with the first to strike being determined by lot. After each party has used three strikes, the remaining name on the list shall be the arbitrator. This agreement to resolve any disputes by binding arbitration shall extend to claims against any shareholder or partner of Company, any brother-sister company, parent, subsidiary or affiliate of Company, any officer, director, employee, or agent of Company, or of any of the above, and shall apply as well to claims arising out of state and federal statutes and local ordinances as well as to claims arising under the common law. Unless mutually agreed by the parties otherwise, any arbitration shall take place in Los Angeles County, California. In the event the parties are unable to agree upon a location for the arbitration, the location within Los Angeles County shall be determined by the arbitrator. The prevailing party in such arbitration proceeding, as determined by the arbitrator, and in any enforcement or other court proceedings, shall be entitled to the extent permitted by law, to reimbursement from the other party for all of the prevailing party's costs (including but not limited to the arbitrator's compensation), expenses and attorneys' fees. ARTICLE 9 LOANS TO EXECUTIVE 9.1 Purchase of Company Stock. Executive agrees to acquire, on or before the Effective Date, at least 50,000 shares of the Company's common stock on the open market. In order to assist Executive in acquiring such common stock, Company agrees to lend to Executive, up to $300,000 on the following terms: a. The loan maturity date shall be December 31, 2002; b. The loan shall bear interest at the prime rate as set forth in the "Money Rates" section of the Wall Street Journal; 13 c. The loan shall be evidenced by a Promissory Note executed by Executive in favor of Company in the form of that attached hereto as Exhibit "B"; and ---------- d. The loan shall be secured by a pledge of the Company stock purchased by Executive by the Security Pledge Agreement in the form of that attached hereto as Exhibit "C". ---------- 9.2 Tax Loans. In the event, during the Term (i) Executive exercises any of the options specified in Section 3.4 hereof, (ii) such exercise triggers a federal or state tax liability, and (iii) Executive does not concurrently with such option exercise sell the stock received by exercising the option, then, upon the request of Executive, the Company will lend Executive the monies to pay such tax liability on terms and conditions mutually agreeable to Executive and Company, but similar to those set forth in Section 9.1 above. ARTICLE 10 MISCELLANEOUS 10.1 Amendments. The provisions of this Agreement may not be waived, altered, amended or repealed in whole or in part except by the signed written consent of the parties sought to be bound by such waiver, alteration, amendment or repeal. 10.2 Entire Agreement. This Agreement and the nonqualified Option Amendment of even date herewith constitutes the total and complete agreement of the parties and supersedes all prior and contemporaneous understandings and agreements heretofore made, and there are no other representations, understandings or agreements. 10.3 Counterparts. This Agreement may be executed in one of more counterparts, each of which shall be deemed and original, but all of which shall together constitute one and the same instrument. 10.4 Severability. Each term, covenant, condition or provision of this Agreement shall be viewed as separate and distinct, and in the event that any such term, covenant, condition or provision shall be deemed by an arbitrator or a court of competent jurisdiction to be invalid or unenforceable, the court or arbitrator finding such invalidity or unenforceability shall modify or reform this Agreement to give as much effect as possible to the terms and provisions of this Agreement. Any term or provision which cannot be so modified or reformed shall be deleted and the remaining terms and provisions shall continue in full force and effect. 10.5 Waiver or Delay. The failure or delay on the part of Company, or Executive to exercise any right or remedy, power or privilege hereunder shall not operate as a waiver thereof. A waiver, to be effective, must be in writing and signed by the party making the waiver. A written waiver of default shall not operate as a waiver of any other default or of the same type of default on a future occasion. 14 10.6 Successors and Assigns. This Agreement shall be binding on and shall inure to the benefit of the parties to it and their respective heirs, legal representatives, successors and assigns, except as otherwise provided herein. 10.7 No Assignment or Transfer by Executive. Neither this Agreement nor any of the rights, benefits, obligations or duties hereunder may be assigned or transferred by Executive. Any purported assignment or transfer by Executive shall be void. 10.8 Necessary Acts. Each party to this Agreement shall perform any further acts and execute and deliver any additional agreements, assignments or documents that may be reasonably necessary to carry out the provisions or to effectuate the purpose of this Agreement. 10.9 Governing Law. This Agreement and all subsequent agreements between the parties shall be governed by and interpreted, construed and enforced in accordance with the laws of the State of California. 10.10 Notices. All notices, requests, demands and other communications to be given under this Agreement shall be in writing and shall be deemed to have been duly given on the date of service, if personally served on the party to whom notice is to be given, or 48 hours after mailing, if mailed to the party to whom notice is to be given by certified or registered mail, return receipt requested, postage prepaid, and properly addressed to the party at his address set forth as follows or any other address that any party may designate by written notice to the other parties: To Executive: Wade Hundley 1604 Noble Way Flower Mound, TX 75022 To Company: Pinnacle Entertainment, Inc. 330 N. Brand Boulevard, Suite 1100 Glendale, CA 91203-2309 Attn : Loren Ostrow with copy to: Irell & Manella 1800 Avenue of the Stars, Suite 900 Los Angeles, Ca 90067-4276 Attn: Al Segel 10.11 Headings and Captions. The headings and captions used herein are solely for the purpose of reference only and are not to be considered as construing or interpreting the provisions of this Agreement. 10.12 Construction. All terms and definitions contained herein shall be construed in such a manner that shall give effect to the fullest extent possible to the express or implied intent of the parties hereby. 15 10.13 Counsel. Executive has been advised by Company that he should consider seeking the advice of counsel in connection with the execution of this Agreement and Executive has had an opportunity to do so. Executive has read and understands this Agreement, and has sought the advice of counsel to the extent he has determined appropriate. 10.14 Withholding of Compensation. Executive hereby agrees that Company may deduct and withhold from the compensation or other amounts payable to Executive hereunder or otherwise in connection with Executive's employment any amounts required to be deducted and withheld by Company under the provisions of any applicable Federal, state and local statute, law, regulation, ordinance or order. IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be duly executed and delivered as of the date first written above. EXECUTIVE COMPANY /s/ Wade Hundley PINNACLE ENTERTAINMENT, INC. - -------------------------------- a Delaware corporation WADE HUNDLEY Social Security No: ###-##-#### By: /s/ Paul Alanis ------------------------- Its: Chief Executive Officer ------------------------- 16 EXHIBIT "A" NONQUALIFIED STOCK OPTION AGREEMENT This NONQUALIFIED STOCK OPTION AGREEMENT is made as of the ____ day of ________, 2001, between PINNACLE ENTERTAINMENT, INC., and WADE HUNDLEY ("Optionee"). All capitalized terms not specifically defined herein shall have the meanings set forth in the Company's 1996 Stock Option Plan (the "Plan"). R E C I T A L S --------------- A. Pursuant to the Plan, the Compensation Committee of the Board of Directors (the "Committee") has determined that it is to the advantage and in the best interests of the Company and its stockholders to grant a nonqualified stock option to Optionee covering 200,000 shares of the Company's Common Stock, in order to more closely align the Optionee's interests with those of other stockholders of the Company, and has approved the execution of this Nonqualified Stock Option Agreement between the Company and Optionee. B. The option granted hereby is not intended to qualify as an "incentive stock option" under Section 422 of the Internal Revenue Code of 1986, as amended (the "Code"). NOW, THEREFORE, the parties hereto agree as follows: ARTICLE 1 Grant of Option. The Company grants to Optionee the right and --------------- option ("Option") to purchase on the terms and conditions hereinafter set forth, all or any part of an aggregate of two hundred thousand (200,000) shares of Common Stock, 100,000 at the closing price of such stock as of August 31, 2001, 50,000 of which at 120% of the closing price of such stock as of August 31, 2001 and 50,000 at 140% of the closing price of such stock as of August 31, 2001. The Option shall be exercisable from time to time in accordance with the provisions of this Agreement during a period expiring on the tenth anniversary of the date of this Agreement (the "Expiration Date") or earlier in accordance with Section 5 hereof. ARTICLE 2 Vesting. No portion of this Option shall vest prior to the dates ------- indicated below. Subject to Section 5 hereof, on or after the date of grant and the following anniversary dates of this Agreement this Option may be exercised up to the indicated percentage of shares covered by this Option: 1
Percentage # of Shares at # of Shares at # of Shares at Cumulative Initially 8/31/01 Closing 120% of 8/31/01 140% of 8/31/01 Percentage Date Exercisable Price Closing Price Closing Price Exercisable First Anniversary 33.33% 33,334 16,666 16,666 33.33% Second Anniversary 33.33% 33,333 16,666 16,667 66.67% Third Anniversary 33.33% 33,333 16,667 16,666 100%
Subject to earlier termination under Section 5 hereof, at any time after the third anniversary date of this Agreement, but no later than the Expiration Date, Optionee may purchase all or any part of the shares subject to this Option which Optionee theretofore failed to purchase. In each case the number of shares which may be purchased shall be calculated to the nearest full share. ARTICLE 3 DEFRA Limitation. The payments that Optionee shall be entitled ---------------- to receive upon the exercise of the options covered hereby and under his employment agreement, if any, shall in all events be limited by the provisions of Section 280G of the Code and the regulations thereunder (or their then equivalents) and no payment shall be made (and no option vesting accelerated) that would have the result of limiting the deductibility of such payments by the Company or that would result in the imposition of an excise tax under Section 4999 of the Code on the Optionee. ARTICLE 4 Manner of Exercise. Each exercise of this Option shall be by ------------------ means of a written notice of exercise delivered to the Company, specifying the number of shares to be purchased and accompanied by payment to the Company (x) of the full purchase price of the shares to be purchased (i) in cash or by certified, cashier's or (as funds clear) personal check payable to the order of the Company, or (ii) by delivery of shares of Common Stock of the Company which have been owned by the Optionee for over six months and which are in the possession of the Optionee, or a combination thereof, and (y) of any required withholding taxes (as contemplated by Section 7 hereof) in cash or by certified, cashier's or (as funds clear) personal check payable to the order of the Company. This Option may not be exercised for a fraction of a share and no partial exercise of this Option may be for less than (i) one hundred (100) shares or (ii) the total number of shares then eligible for exercise, if less than one hundred (100) shares. This Option may be exercised (i) during the lifetime of the Optionee only by the Optionee; (ii) to the extent permitted by the Committee or by the terms of this 2 Agreement, Optionee's spouse if such spouse obtained the Option pursuant to a qualified domestic relations order as defined by the Code or Title I of ERISA, or the rules thereunder ("Qualified Domestic Relations Order"); and (iii) after the Optionee's death by his or her transferees by will or the laws of descent or distribution, and not otherwise, regardless of any community property interest therein of the spouse of the Optionee, or such spouse's successors in interest. If the spouse of the Optionee shall have acquired a community property interest in this Option, the Optionee, or the Optionee's permitted successors in interest, may exercise the Option on behalf of the spouse of the Optionee or such spouse's successors in interest. ARTICLE 5 Cessation of Services, Death or Permanent Disability. If the ---------------------------------------------------- Optionee ceases to be employed by or provide services to the Company or one of its subsidiaries for any reason other than the Optionee's death, "permanent disability" (within the meaning of Section 22(e)(3) of the Code) or termination for "Cause" (as defined below), the Option shall be exercisable until the earlier of (i) the Expiration Date or (ii) a date one (1) month after the Optionee ceases to be employed by or provide services to the Company or one of its subsidiaries, but only to the extent the Option was exercisable on the date of the cessation of employment or services, and shall thereafter expire and be void and of no further force or effect. The employment or other relationship of the Optionee to the Company or any subsidiary shall be deemed to continue during any leave of absence which has been authorized in writing by the Committee. If the Optionee dies or becomes "permanently disabled" while the Optionee is employed by or providing services to the Company or any of its subsidiaries, the Option shall be exercisable until the earlier of (i) the Expiration Date or (ii) a date six (6) months after the date of such death or "permanent disability", but only to the extent the Option was exercisable on the date of death or "permanent disability", and shall thereafter expire and be void and of no further force or effect. During such period after death, any vested, unexercised portion of the Option may be exercised by the person or persons to whom the Optionee's rights under the Option shall pass by reason of the death of the Optionee, whether by will or by the applicable laws of descent and distribution. If the Optionee is terminated for Cause, either as an employee of or as a provider of services to the Company or one of its subsidiaries, then the Option shall terminate immediately and be void and of no further force or effect and may not be exercised for any reason. For purposes of this Agreement, the Optionee shall be deemed to have been terminated for "Cause" if such termination was as a result of any one or more of the following, as determined in good faith by the Board of Directors, President or Executive Vice President of the Company: The Optionee's (a) gross neglect or gross misconduct in performing his or her duties, (b) willful refusal to follow directions given by his or her supervisor(s) from time to time, provided that such directions are within the scope of the Optionee's duties, (c) misuse of alcoholic drinks or narcotics, (d) inexcusable repeated or prolonged absence from work, (e) being charged with the commission of a felony or other serious crime, (f) dishonesty or commission of a theft or defalcation against the Company or one of its subsidiaries, or (g) commission of a wrongful act that would make the continuance of the Optionee's employment or services detrimental to the Company or one of its subsidiaries. 3 If the Optionee is terminated for Cause, the Company shall have the option, exercisable within ninety (90) days of termination, to repurchase any shares of Common Stock acquired by the Optionee through the exercise of this Option during the twelve-month period immediately preceding such termination and which are still held by the Optionee. The repurchase price per share payable by the Company shall be the exercise price paid by the Optionee as specified in Section 1 hereof, plus interest at the rate of ten percent (10%) per annum from the date of payment of the exercise price by the Optionee. Certificates representing the shares of Common Stock acquired by the Optionee pursuant to the exercise of this Option may bear a legend regarding the Company's repurchase option. Any unvested portion of the Option at the date of cessation of employment or of provision of services, whether or not for Cause, or of death or permanent disability, as the case may be, shall immediately be cancelled and shall not be exercisable. ARTICLE 6 Shares to be Issued in Compliance with Federal Securities and ------------------------------------------------------------- Other Applicable Laws and Exchange Rules. By accepting the Option, Optionee - ---------------------------------------- represents and agrees, for Optionee and his or her legal successors (by will or the laws of descent and distribution or through a Qualified Domestic Relations Order), that none of the shares purchased upon exercise of the option will be acquired with a view to any sale, transfer or distribution of said shares in violation of the Securities Act of 1933, as amended (the "Securities Act"), and the rules and regulations promulgated thereunder, any applicable state "blue sky" laws or any applicable foreign laws. If required by the Committee at the time the Option is exercised, Optionee or any other person entitled to exercise the Option shall furnish evidence satisfactory to the Company (including a written and signed representation) to such effect in form and substance satisfactory to the Company, including an indemnification of the Company in the event of any violation of the Securities Act, state blue sky laws or any applicable foreign laws by such person. No shares shall be issued and delivered upon the exercise of any option unless and until there shall have been full compliance with all applicable requirements of the Securities Act (whether by registration or satisfaction of exemption conditions), all applicable listing requirements of any principal securities exchange on which shares of the same class are then listed and any other requirements of law (including without limitation state blue sky laws) or of any regulatory bodies having jurisdiction over such issuance and delivery. ARTICLE 7 Withholding of Taxes. Upon the exercise of this Option, the -------------------- Company shall have the right to require Optionee or Optionee's legal successor to pay the Company the amount of any taxes which the Company may be required to withhold with respect to such shares. 4 ARTICLE 8 No Assignment. This Option and all other rights and privileges ------------- granted hereby shall not be transferred, assigned, pledged or hypothecated, either voluntarily or by operation of law otherwise than by will or the laws of descent and distribution or pursuant to a Qualified Domestic Relations Order. Upon any attempt to so transfer, assign, pledge, hypothecate or otherwise dispose of this Option or any other right or privileges granted hereby contrary to the provisions hereof, this Option and all rights and privileges contained herein shall immediately become null and void and of no further force or effect. ARTICLE 9 Adjustment for Reorganizations, Stock Splits, etc. If the ------------------------------------------------- outstanding shares of Common Stock of the Company (or any other class of shares or securities which shall have become issuable upon the exercise of this Option pursuant to this sentence) are increased or decreased or changed into or exchanged for a different number or kind of shares or securities of the Company through reorganization, recapitalization, reclassification, stock dividend, stock split, reverse stock split or other similar transaction, an appropriate and proportionate adjustment shall be made in the maximum number and kind of shares or securities receivable upon the exercise of this Option, without change in the aggregate purchase price applicable to the unexercised portion of this Option, but with a corresponding adjustment in the price for each share or other unit of any security covered by this Option. Upon (i) the dissolution or liquidation of the Company, or upon a reorganization, merger or consolidation of the Company with one or more corporations as a result of which the Company is not the surviving corporation, (ii) a sale of substantially all the property or more than eighty percent (80%) of the then outstanding stock of the Company to another corporation, or (iii) if the majority of any class of directors be comprised of individuals who were not either nominated by the then existing Board of Directors or had not been appointed by the then existing Board of Directors (any of the foregoing, a "Corporate Transaction"), subject to the following sentence, the Plan and this Option shall terminate and be of no further force and effect. Notwithstanding the foregoing, the Committee shall provide in writing in connection with any such transaction for any or all of the following alternatives: (i) for this Option to become immediately exercisable in full notwithstanding the provisions of Sections 2 and 4 hereof; (ii) for the assumption by the successor corporation of this Option or the substitution by such corporation for this Option of new options covering the stock of the successor corporation, or a parent or subsidiary thereof, with appropriate adjustments as to the number and kind of shares and prices; or (iii) for the payment in cash or stock at the option of the Committee in lieu of and in complete satisfaction of this Option. The Optionee may exercise the Option subject to the consummation of a Corporate Transaction. Adjustments under this Section 9 shall be made by the Committee, whose determination as to what adjustments shall be made, and the extent thereof, shall be final, binding and conclusive. No fractional shares of stock shall be issued under this Option on any such adjustment. 5 ARTICLE 10 Participation by Optionee in Other Company Plans. Nothing herein ------------------------------------------------ contained shall affect the right of Optionee to participate in and receive benefits under and in accordance with the then current provisions of any pension, insurance, profit sharing or other employee welfare plan or program of the Company or of any subsidiary of the Company. ARTICLE 11 No Rights as a Stockholder Until Issuance of Stock Certificate. -------------------------------------------------------------- Neither Optionee nor any other person legally entitled to exercise this Option shall be entitled to any of the rights or privileges of a stockholder of the Company in respect of any shares issuable upon any exercise of this Option unless and until a certificate or certificates representing such shares shall have been actually issued and delivered to Optionee. ARTICLE 12 Not an Employment or Service Contract. Nothing herein contained ------------------------------------- shall be construed as an agreement by the Company or any of its subsidiaries, express or implied, to employ Optionee or contract for Optionee's services, to restrict the Company's or such subsidiary's right to discharge Optionee or cease contracting for Optionee's services or to modify, extend or otherwise affect in any manner whatsoever, the terms of any employment agreement or contract for services which may exist between Optionee and the Company or any of its subsidiaries. ARTICLE 13 Agreement Subject to Stock Option Plan. The Option hereby granted is -------------------------------------- subject to, and the Company and Optionee agree to be bound by, all of the terms and conditions of the Plan, as the same shall be amended from time to time in accordance with the terms thereof, but no such amendment shall adversely affect Optionee's rights under this Option without the prior written consent of Optionee. ARTICLE 14 Governing Law. The interpretation, performance and enforcement of ------------- this Agreement shall be governed by the internal substantive laws of the State of Delaware, without regard to the conflict of laws provisions of that or any other State. PINNACLE ENTERTAINMENT, INC. By: --------------------------------- Its: Senior Vice President & CFO OPTIONEE ------------------------------------ WADE HUNDLEY 6 SPOUSAL CONSENT By his or her signature below, the spouse of the Optionee agrees to be bound by all of the terms and conditions of the foregoing Option Agreement. OPTIONEE'S SPOUSE ______________________________ Signature ______________________________ Print Name 7 EXHIBIT "B" PROMISSORY NOTE ____________, 2001 $300,000 Los Angeles, California FOR VALUE RECEIVED, the receipt and sufficiency of which are hereby acknowledged, WADE HUNDLEY, an individual and MARGO HUNDLEY, an individual (collectively "Maker"), hereby promises to pay PINNACLE ENTERTAINMENT, INC. ("Holder") or order, the principal amount of THREE HUNDRED THOUSAND ($300,000) or the lesser amount advanced pursuant hereto as evidenced by entries of such advances on the "Schedule of Advances" attached hereto, with interest on the -------------------- unpaid principal balance outstanding from time to time, computed at the prime rate of interest as set forth in the "Money Rates" section of the Wall Street Journal. All advances pursuant to this Note shall be evidenced by entries thereof on the Schedule of Advances attached hereto. Maker agrees that Holder shall not be obligated to make further advances pursuant to this Note, and that all further advances pursuant hereto shall be at the sole discretion of Holder. 1. Payment of Principal and Interest. The original principal amount --------------------------------- of this Note, together with all accrued and unpaid interest thereon shall become due and payable on the earlier of (i) December 31, 2002, or (ii) the date as of which the collateral pledged as security for repayment of this Note is disposed of in any manner whatsoever to repay this Note. The foregoing notwithstanding, all amounts owing under this Note shall become immediately due and payable upon the filing of any petition by or against Maker under bankruptcy laws. 2. Manner of Payment. All amounts payable hereunder shall be payable ----------------- in lawful money of the United States of America to Holder at 330 N. Brand Boulevard, Suite 1100, Glendale, CA 91203-2308, or such other place as may be designated by Holder, without any deduction or setoff. 3. Related Agreements. This Note is the "Note" referred to in that ------------------ certain Employment Agreement of even date herewith, between Maker and Holder, which Employment Agreement provides for certain pledges as collateral security for Maker's obligations under this Note. 4. Events of Default. If Maker fails to pay any amounts under this ----------------- Note as and when due, then Holder may, in its sole discretion, declare all principal, interest and 1 other indebtedness evidenced by this Note to be immediately due and payable without any presentment, demand, protest or notice of any kind to Maker (which presentment, demand, protest or notice are hereby expressly waived by Maker), and Holder shall be entitled to exercise any and all remedies available to it at law, in equity or otherwise. Should suit be commenced to collect any amounts due under this Note, Holder shall be entitled to recover all attorney's fees and costs it incurs in collecting such amount. 5. Governing Law. This Note shall be governed by and construed in ------------- accordance with the internal laws of the State of California. "MAKER" ______________________________________ WADE HUNDLEY ______________________________________ MARGO HUNDLEY 2 SCHEDULE OF ADVANCES AND PAYMENTS OF PRINCIPAL AND INTEREST
Date Amount of Amount of Amount of Interest Unpaid Principal Advance Principal Paid or Paid Balance of Prepaid Advances - --------------------------------------------------------------------------------------------------------------- - --------------------------------------------------------------------------------------------------------------- - --------------------------------------------------------------------------------------------------------------- - --------------------------------------------------------------------------------------------------------------- - --------------------------------------------------------------------------------------------------------------- - --------------------------------------------------------------------------------------------------------------- - --------------------------------------------------------------------------------------------------------------- - --------------------------------------------------------------------------------------------------------------- - --------------------------------------------------------------------------------------------------------------- - --------------------------------------------------------------------------------------------------------------- - --------------------------------------------------------------------------------------------------------------- - --------------------------------------------------------------------------------------------------------------- - --------------------------------------------------------------------------------------------------------------- - --------------------------------------------------------------------------------------------------------------- - --------------------------------------------------------------------------------------------------------------- - --------------------------------------------------------------------------------------------------------------- - --------------------------------------------------------------------------------------------------------------- - --------------------------------------------------------------------------------------------------------------- - ---------------------------------------------------------------------------------------------------------------
3 EXHIBIT "C" SECURITY AGREEMENT THIS SECURITY AGREEMENT is made as of the ____ day of ________, 2001, by and between the undersigned (collectively "Borrower") and PINNACLE ENTERTAINMENT, INC., a Delaware limited liability company ("Secured Party"). 1. GRANT OF SECURITY INTEREST. -------------------------- Borrower hereby grants, transfers and conveys to Secured Party a security interest in and lien upon all, right, title and interest of Borrower in the following property and interests in property, whether now owned and existing or hereafter acquired and arising, and wherever located (such property and interests in property being, collectively, the "Collateral"): a. all of the stock of the Secured Party owned by Borrower; and b. any cash or other proceeds or products of the foregoing, including any cash, securities, instruments and other property from time to time paid, payable or otherwise distributed in respect of or in exchange for any or all of the foregoing, whether or not any of the foregoing shall constitute accounts or general intangibles under the Uniform Commercial Code; for the purpose of securing any and all present and future obligations and liabilities of Borrower under that certain promissory note to Secured Party dated of even date herewith (the "Note"). 2. COVENANTS AND CONTINUING AGREEMENTS. ----------------------------------- a. Transfer of Collateral. Without the prior written consent of ---------------------- Secured Party, Borrower will not, nor will it attempt to, Transfer any interest in the Collateral or any part thereof so long as any obligation of Borrower to Secured Party under Borrower's Note, this Security Agreement, or any related documents (the "Loan Documents") is outstanding. Upon a Transfer by Borrower of any interest in the Collateral, Borrower shall be obligated to apply any cash proceeds of a Transfer of an interest in the Collateral first toward paying the amount of any accrued but unpaid interest on the Note, and, thereafter, toward paying the outstanding principal balance due under the Note. b. Cooperation of Borrower. Borrower shall execute and deliver, ----------------------- upon request by Secured Party, any notice, statement, instrument, document, agreement or other paper and shall perform upon request by Secured Party, any act which Secured Party deems necessary to create, perfect, preserve, validate or otherwise protect any security interest 1 granted pursuant hereto, or to enable Secured Party to exercise and enforce his rights hereunder with respect to his security interest. c. Prohibited Transactions. Borrower shall not enter into any ----------------------- transaction that materially and adversely affects the Collateral or Borrower's ability to repay the amount due under the Note. d. Duty of Care with Respect to Collateral. Secured Party shall --------------------------------------- have no duty of care with respect to the Collateral, except that Secured Party shall exercise reasonable care with respect to any Collateral in its custody. Secured Party shall be deemed to have exercised reasonable care if Collateral in his custody is accorded treatment substantially equal to that which Secured Party accords his own property, or if Secured Party takes any action requested by Borrower with respect to the Collateral; provided, however, that no failure to comply with any such request of Borrower or omission to do any such act requested by Borrower shall be deemed a failure to exercise reasonable care, nor shall Secured Party's failure to take steps to preserve rights against any third parties or property be deemed a failure to exercise reasonable care with respect to Collateral in his custody. e. Voting Rights. Secured Party hereby acknowledges that, so ------------- long as no Event of Default (as defined below) shall have occurred and be continuing, Borrower shall retain the right to exercise all voting, consensual and other powers of ownership pertaining to the Membership Interest held by Borrower and pledged hereunder for all purposes not inconsistent with the terms of this Agreement or any other instruments, agreements or documents referred to herein. 3. EVENTS OF DEFAULT. The occurrence of any one or more of the following ----------------- shall constitute an event of default hereunder (an "Event of Default"): a. if default shall be made in the payment of any principal, interest or other sums due in respect of the Note when and as the same shall become due and payable and after the expiration of applicable grace periods, whether at maturity or by acceleration or as part of any payment or prepayment or otherwise, in each case, as provided in the Note; b. if default shall be made in the due observance or performance of any covenant or agreement on the part of Borrower contained herein; c. if by order of a court of competent jurisdiction, a trustee, receiver or liquidator of the Collateral or any part thereof, or of any other collateral security hereunder, or of Borrower or the Company shall be appointed; d. if Borrower or the Company shall file a petition in bankruptcy or for an arrangement or for reorganization pursuant to the Federal Bankruptcy Code or any similar law, federal or state, or if, by decree of a court of competent jurisdiction, Borrower or the Company shall be adjudicated a bankrupt, or be declared insolvent, or shall make an assignment for the benefit of creditors, or shall admit in writing its inability to pay its debts 2 generally as they become due, or shall consent to the appointment of a receiver or receivers of all or any part of its property; e. if any of the creditors of Borrower or the Company shall file a petition in bankruptcy against Borrower or the Company or for reorganization of Borrower or the Company pursuant to the Federal Bankruptcy Code or any similar law, federal or state, and if such petition shall not be discharged or dismissed within sixty (60) days after the date on which such petition was filed; or f. if final judgment for the payment of money shall be rendered against Borrower or the Company and Borrower or the Company shall not discharge the same or cause it to be discharged within sixty (60) days from the entry thereof, or shall not appeal therefrom or from the order, decree or process upon which or pursuant to which said judgment was granted, based or entered, and secure a stay of execution pending such appeal. 4. REMEDIES. Upon the occurrence of any Event of Default, Secured Party -------- may at once proceed to foreclose its interest in the Collateral according to law, or he may, at his option, remove and sell and dispose of the Collateral at public or private sale, without any previous demand of performance or notice to Borrower of any such sale, notice of sale or demand of performance or any other notice or demand whatsoever (except as required by law), and from the proceeds of sale retain all costs and charges incurred by Secured Party in said taking or sale, including reasonable attorneys' fees incurred and principal, interest and all other amounts due under the Note or this Agreement, together with interest thereon. Any surplus shall be paid to Borrower or whoever may be lawfully entitled to receive the same. If there shall be a deficit, the amount thereof shall be immediately due to Secured Party. Secured Party may bid and purchase at any sale under this Security Agreement. Borrower further agrees that in the event that notice is necessary under applicable law, written notice mailed to Borrower at the address specified below five (5) days prior to the date of public sale of any of the Collateral subject to the security interest created herein or prior to the date after which private sale or any other disposition of the Collateral will be made shall constitute reasonable notice, but notice given in any other reasonable manner or at any other time shall also be sufficient. Borrower recognizes that, by reason of certain prohibitions contained in the Securities Act of 1933, as amended, and applicable state securities laws, Secured Party may be compelled, with respect to any sale of all or any part of the Collateral, to limit purchasers to those who will agree, among other things, to acquire the Collateral for their own account, for investment and not with a view to the distribution or resale thereof. Borrower also recognizes that certain Authorities may impose restrictions on the transfer of interests in the Collateral, which restrictions could also impair the value of the Collateral. Borrower acknowledges that any such private sales therefore may be at prices and on terms less favorable to Secured Party than those obtainable through a public sale without such restrictions, and, notwithstanding such circumstances, agrees that any such private sale shall be deemed to have been made in a commercially reasonable manner and that Secured Party shall have no obligation to engage in public sales and no obligation to delay the sale of any 3 Collateral for the period of time necessary to permit the respective issuer thereof to register it for public sale. 5. MISCELLANEOUS ------------- a. Successors and Assigns; Gender and Number; Assignment. This ----------------------------------------------------- Security Agreement shall bind and inure to the benefit of the parties hereto and their executors, administrators, heirs, transferees, successors and assigns. Secured Party may assign or otherwise transfer this Security Agreement, or any instruments evidencing all or any part of the Note, and any agreement relating thereto, and may deliver all or any of the Collateral to the transferee, who shall thereupon become vested with all the powers and rights with respect thereto given to Secured Party herein or in any instrument so transferred, and Secured Party shall thereafter be forever relieved and fully discharged from any liability of responsibility with respect thereto, all without prejudice to the retention by Secured Party of all rights and powers hereby or thereby given with respect to any and all instruments, rights or property not so transferred. Borrower may not assign, delegate or otherwise transfer any of its rights or obligations hereunder or under the Note without the prior written consent of Secured Party. b. No Waiver. Secured Party's failure, at any time or times --------- hereafter, to require strict performance by Borrower of any provision of this Security Agreement or the Note shall not waive, affect or diminish any right of Secured Party thereafter to demand strict compliance with and performance of any such provision; nor shall any such failure constitute a suspension or waiver by Secured Party of any other provision hereof or thereof. Any suspension or waiver by Secured Party of any event of default under the Note or hereunder shall not suspend, waive or affect any other event of default by Borrower whether the same is prior or subsequent and whether of the same or a different type. c. Remedies Cumulative. All rights, privileges, options and ------------------- remedies granted to Secured Party hereunder or under the Note shall be cumulative and not alternative. Upon default, Secured Party may exercise any of its rights, privileges, options and remedies, including the right to proceed in one form of action, and may proceed the against Collateral hereunder or any party liable hereunder or under the Note, all in any order determined by Secured Party, and Borrower hereby waives any right to require Secured Party to exhaust the Collateral prior to enforcing its rights against any party personally liable for repayment of the amount due under the Note. d. Governing Law. This Agreement shall be governed by the laws ------------- of the State of Nevada. Borrower hereby consents to the jurisdiction of the State of Nevada for purposes of enforcement of this Security Agreement or any obligations secured hereby. e. Time. Time is declared to be of the essence hereof with ---- respect to the performance of the covenants and obligations set forth herein. 4 f. Severability. Wherever possible, each term and provision of ------------ this Agreement shall be interpreted in a manner consistent with and shall be deemed to be effective and valid under applicable law. If any term or provision of this Agreement shall be held to be prohibited by or invalid under applicable law, such term or provision shall be ineffective only to the extent so determined and the remaining terms and provisions of this Agreement shall remain unaffected and in full force and effect. Secured Party: Borrower: ____________________________ PINNACLE ENTERTAINMENT, INC. WADE HUNDLEY a Delaware limited liability company By: __________________________________ ____________________________ MARGO HUNDLEY Its: __________________________________ 5 EX-10.55 10 dex1055.txt 1ST AMEND. TO EXECUTIVE DEFERRED COMPENSATION PLAN Exhibit 10.55 FIRST AMENDMENT TO THE PINNACLE ENTERTAINMENT, INC. (FORMERLY HOLLYWOOD PARK, INC) EXECUTIVE DEFERRED COMPENSATION PLAN Pinnacle Entertainment, Inc., a Delaware corporation formerly known as Hollywood Park, Inc. (the "Company"), hereby amends the Hollywood Park, Inc. Executive Deferred Compensation Plan (the "Plan"), with reference to the following facts: A. The Company maintains the Plan to provide benefits to a select group of management or highly compensated employees who contribute materially to the continued growth, development and future business success of the Company. B. By Section 12.2 of the Plan, the Company has reserved the right to amend the Plan. C. It is possible that, if a Change in Control (as defined in the Plan) occurs, certain individuals who are Participants in the Plan will become entitled to receive, under the terms of the agreements pursuant to which such Change in Control is consummated, cash payments in consideration of the cancellation of stock options which they hold in the Company (the "Option Cancellation Payments"). D. The Company wishes to amend the Plan to give Participants the opportunity to defer the Option Cancellation Payments in the event a Change in Control occurs, and to make certain other changes in the Plan. E. As of the date of this First Amendment, neither the Company nor its shareholders have entered into any commitment to consummate a Change in Control. NOW, THEREFORE, the Plan is hereby amended, effective as of March 15, 2000, as follows: 1. The name of the Plan is hereby changed to the "Pinnacle Entertainment, Inc. Executive Deferred Compensation Plan." All references in the Plan to "Hollywood Park, Inc." are hereby amended to references to "Pinnacle Entertainment, Inc." 2. Section 1.13 of the Plan is hereby amended to provide in its entirety as follows: "1.13 Deferral Contribution" shall mean the aggregate amount of Base Annual Salary, Bonus or Option Cancellation Payments deferred by a Participant during a given Plan Year in accordance with the terms of the Plan and the Participant's Election Form and "credited" to the Participant's Deferral Contribution Account. Deferral Contributions shall be deemed to be made to the Plan by the Participant on the date the Participant would have received such compensation had it not been deferred pursuant to the Plan. 3. Section 1.17 of the Plan is hereby amended by the addition of the following sentence to the end thereof: "Notwithstanding the foregoing, an Election Form shall be effective with respect to an Option Cancellation Payment upon a Change in Control if it is delivered to the Committee, in accordance with its rules and procedures and with the provisions of Section 3.6, before the satisfaction of the conditions to the closing of the Change in Control, and is accepted by the Committee." 4. Section 1.39 is hereby added to the end of Article 1 of the Plan, to provide as follows: "1.39 'Option Cancellation Payment' means the cash payment which certain Participants will become entitled to receive on the closing of a Change in Control, under the terms of the agreements pursuant to which such Change in Control is consummated, in consideration of the cancellation of certain stock options they hold in the Company." 5. Section 3.1(d) of the Plan is hereby amended to provide that the maximum percentage of Bonuses that may be deferred is 100%. 6. The following sentence is hereby added to the end of Section 3.4(a) of the Plan: "If any taxes, including but not limited to, FICA and other employment taxes with respect to the Deferral Contribution Account, are required to be withheld before the time of payment, the Company may withhold such amounts for other compensation paid to the Participant." 7. Section 3.6 is hereby added to the end of Article 3 of the Plan, to provide as follows: "3.6 Deferral of Option Cancellation Payments. A Participant who would ---------------------------------------- otherwise receive an Option Cancellation Payment may elect to defer any portion of such Option Cancellation Payment by delivering to the Committee a completed and signed Election Form, which Election Form (a) may be separate from any Election Form completed, signed, and delivered to the Committee by such Participant with respect to the Plan Year in which Option Cancellation Payment would otherwise be paid to the Participant, (b) must be delivered to the Committee, in accordance with its rules and procedures, before the satisfaction of the conditions to the closing of the Change in Control that gives rise to the Option Cancellation Payment, and (c) must be accepted by the Committee for a valid election to exist. If a Participant completes, signs, and timely delivers an Election Form to the Committee with -2- respect to all or a portion of such Participant's Option Cancellation Payment, and such Election Form is accepted by the Committee, the portion (or all) of the Option Cancellation Payment shall be withheld at the time the Option Cancellation Payment is or otherwise would be paid to the Participant. Option Cancellation Payments so withheld shall be credited to the Participant's Deferral Contribution Account." 8. Section 6.2 of the Plan is hereby amended by the addition of the following sentence to the end thereof: "Notwithstanding the foregoing, if a Participant's Termination of Employment occurs within eighteen (18) months after the occurrence of a Change in Control, the Participant's Termination Benefit shall be paid in the form of one lump sum not later than thirty (30) days after the Participant's Benefit Distribution Date." 9. Section 7.2 of the Plan is hereby amended by the addition of the following sentence to the end thereof: "Notwithstanding the foregoing, if a Participant's Retirement occurs within eighteen (18) months after the occurrence of a Change in Control, the Participant's Retirement Benefit shall be paid in the form of one lump sum not later than thirty (30) days after the Participant's Benefit Distribution Date." 10. Section 8.2 of the Plan is hereby amended by the addition of the following sentence to the end thereof: "Notwithstanding the foregoing, if a Participant's death during employment occurs within eighteen (18) months after the occurrence of a Change in Control, the Participant's pre-retirement death benefit shall be paid in the form of one lump sum not later than thirty (30) days after the Participant's Benefit Distribution Date." 11. Section 9.2 of the Plan is hereby amended by the addition of the following sentence to the end thereof: "Notwithstanding the foregoing, if a Participant's Disability occurs within eighteen (18) months after the occurrence of a Change in Control, the Participant's Disability Benefit shall be paid in the form of one lump sum not later than thirty (30) days after the Participant's Benefit Distribution Date." 12. Section 10.2 of the Plan is hereby deleted. 13. In all other respects, the terms and provisions of the Plan are hereby ratified and declared to be in full force and effect. -3- IN WITNESS WHEREOF, the Company has executed this First Amendment to be effective as of March 15, 2000. PINNACLE ENTERTAINMENT, INC. By: /s/ Loren S. Ostrow -------------------------------- -4- EX-10.56 11 dex1056.txt 2ND AMEND. TO EXECUTIVE COMPENSATION PLAN Exhibit 10.56 SECOND AMENDMENT TO THE PINNACLE ENTERTAINMENT, INC. EXECUTIVE DEFERRED COMPENSATION PLAN Pinnacle Entertainment, Inc., a Delaware corporation (the "Company"), hereby amends the Pinnacle Entertainment, Inc. Executive Deferred Compensation Plan (the "Plan"), with reference to the following facts: A. The Company maintains the Plan to provide benefits to a select group of management or highly compensated employees who contribute materially to the continued growth, development and future business success of the Company. B. By Section 12.2 of the Plan, the Company has reserved the right to amend the Plan. C. The Company wishes to amend the Plan to provide that benefits will automatically be paid in lump sums, rather than in installments, if a Participant's Account Balance is less than $50,000, rather than less than $10,000. NOW, THEREFORE, the Plan is hereby amended, effective for deaths, Retirements, Disabilities, and Terminations of Employment which occur on or after January 1, 2001, as follows: 1. All references in the Plan to "$10,000" are hereby amended to be references to "$50,000." 2. In all other respects, the terms and provisions of the Plan are hereby ratified and declared to be in full force and effect. IN WITNESS WHEREOF, the Company has executed this Second Amendment to be effective as of January 1, 2001. PINNACLE ENTERTAINMENT, INC. By: /s/ Loren S. Ostrow ----------------------------- EX-10.57 12 dex1057.txt STATEMENT OF CONDITIONS DATED 11/20/01 Exhibit 10.57 STATEMENT OF CONDITIONS TO RIVERBOAT GAMING LICENSE OF PNK (LAKE CHARLES), L.L.C. ******************************************************************************** PNK (LAKE CHARLES), L.L.C. and PINNACLE ENTERTAINMENT, INC. hereby expressly accept, agree and stipulate to the following conditions to the license of PNK (LAKE CHARLES), L.L.C. to conduct riverboat gaming, to be issued by the Louisiana Gaming Control Board ("Board") pursuant to the provisions of La. R.S. 27:1, et seq. and administrative rules promulgated pursuant thereto. PNK (LAKE CHARLES), L.L.C. and Pinnacle Entertainment, Inc. hereby agree as follows: 1. Approval by a majority of those voting in the referendum election required by Article XII, Section 6(C)(2) of the Louisiana Constitution. (Referred to herein as "Local Referendum"). 2. To at all times comply with all provisions of federal and state law, including, but not limited to, the Louisiana Gaming Control Law ("LGCL"), La. R.S. 27:1, et seq, and all administrative rules and regulations in effect or later promulgated by the Board. 3. To indemnify and hold harmless the State of Louisiana, the Board, the Louisiana Department of Justice, the Louisiana Department of Public Safety and Corrections, their members, agents, and employees against any and all claims for personal injury or property damage arising out of or in connection with negligence and/or errors and omissions in the following: a. The approval of an application; b. The approval of the plans, designs and specifications of the Approved Project as defined in Condition 7, including the riverboat, shore or support facilities and all other amenities including hotel; c. The granting of a license, including all conditions placed thereon; d. The issuance of all orders, directives, and policy decisions of the Board or the Louisiana State Police Casino Gaming Division ("Division"); and e. The denial, suspension or revocation of a license. 1 PNK (LAKE CHARLES), L.L.C. and Pinnacle Entertainment, Inc. agree to sign a separate indemnification agreement implementing this condition. The indemnification agreement shall be signed no later that ten (10) working days following acceptance of the conditions by the Board, PNK (LAKE CHARLES), L.L.C. and Pinnacle Entertainment, Inc. 4. To assume responsibility for all acts or omissions of any person that result in a violation of La. R. S. 27:1, et seq, or any rule or regulation promulgated pursuant thereto, any order of the Board or the Division, and any portion of the internal controls of PNK (LAKE CHARLES), L.L.C. 5. To maintain copies of the License and Conditions at the helm or pilot house of the riverboat and the Louisiana offices of the licensee. The License and Conditions shall be produced for examination and inspection upon demand of any agent or representative of the Board or the Division. 6. To dock the riverboat on the designated waterway at a berth approved by the Board. The legal description of the berth shall be submitted to the Board for approval no later than one hundred twenty (120) days from certification of the results of the Local Referendum. In addition to Board approval, such berth shall be subject to any other necessary governmental approvals. 7. To offer the kind, amount and scope of non-gaming activities on the riverboat, shore or support facilities, and all other amenities, including hotel, as approved by the Board and described in the application of PNK (LAKE CHARLES), L.L.C. as well as the presentations made to the Board on July 26, 2000 and on October 10, 2001 (hereinafter collectively referred to as the "Approved Project"). 8. To construct and operate the Approved Project. It is expressly agreed and understood by PNK (LAKE CHARLES), L.L.C. and Pinnacle Entertainment, Inc. that no gaming operations shall commence until the entire Approved Project has been substantially completed and ready for occupancy or use in the opinion of the Board. The golf course need not be ready for use, provided it is constructed as well as seeded or sodded. 2 9. The Board, in its sole discretion, shall determine when the Approved Project is substantially completed and ready for occupancy or use for purposes of Condition 8 upon petition and presentation to the Board by PNK (LAKE CHARLES), L.L.C. together with a submission of certification of substantial completion and readiness for occupancy or use by PNK (LAKE CHARLES), L.L.C. 10. To obtain all Coast Guard certifications prior to conducting the preoperative inspection and submit these certifications to the Board for review. 11. To submit a complete set of internal controls to the Board for approval at least one hundred twenty (120) days prior to the commencement of gaming operations, and to continually operate under a Board approved system of internal controls. 12. To submit to and successfully complete a preoperative inspection by the Division prior to commencing gaming operations at the approved facility in Lake Charles, Louisiana. 13. To submit, after commencement of gaming operations, the following reports as part of the quarterly report submissions required by Board rules by the 20th day of January, April, July and October: a. A report of all consultants, contractors, agents and junket representatives: 1) Of PNK (LAKE CHARLES), L.L.C.; 2) Of Pinnacle Entertainment, Inc. or Pinnacle Entertainment subsidiaries related to Louisiana operations to the extent not reported in similar monthly reports submitted by Casino Magic of Louisiana, Corp., or Louisiana 1 Gaming, A Louisiana Partnership in Commendam; or 3) Who are Louisiana persons or entities contracted with Pinnacle or Pinnacle subsidiaries to the extent not reported in similar monthly reports submitted by Casino Magic of Louisiana, Corp., or Louisiana 1 Gaming, A Louisiana Partnership in Commendam. 3 b. A report of the number of minorities, females and Louisiana residents employed by PNK (LAKE CHARLES), L. L. C., their general job classification and salaries. 14. To permanently establish a position entitled Compliance Manager whose sole responsibility shall be to advise PNK (LAKE CHARLES), L.L.C. management and employees as to gaming regulations, ensure that PNK (LAKE CHARLES), L.L.C. remains in compliance with all gaming laws and regulations, and to administer remedial action in appropriate cases should PNK (LAKE CHARLES), L.L.C. fail to comply with applicable gaming laws. The Compliance Manager shall not occupy any other position or title with the licensee and shall serve as a liaison between the licensee and the Board, the Division, and the Attorney General's Gaming Division. This position shall be created and filled prior to the commencement of gaming activities. The person who fills this position shall reside in the state of Louisiana. 15. To abide by the following standards for construction of the Approved Project: a. No later than one hundred twenty (120) calendar days after certification of the results of the Local Referendum, to submit architectural blueprints and a detailed plan of design and construction of the Approved Project, including, but not limited to, the riverboat gaming vessel, shore, support, terminal, hotel, golf course and related facilities to the Board for review and approval. The plans and specifications shall satisfy the minimum requirements of riverboat size and design as provided in the Louisiana Gaming Control Law. The plans and specifications shall also comply with all applicable laws and regulations, including, but not limited to, environmental, fire and safety codes, Coast Guard regulations or such other applicable requirements as are imposed on vessels of similar design and size by federal, state and local laws. b. To contract with a shipyard to construct the riverboat gaming vessel and to enter into all other necessary contracts for construction of the Approved Project and to submit copies of the contracts for Board review and approval no later than one hundred twenty (120) days after Board approval of the plans and specifications referenced in Condition 15a. Additional time may be granted by the Board in its sole discretion upon timely request for good cause shown. Failure to meet this deadline or to timely 4 receive a waiver or extension of time from the Board may result in forfeiture of all privileges to the riverboat license. c. To Commence Construction of the Approved Project, including, but not limited to, the riverboat gaming vessel, shore, support, terminal, hotel, golf course and related facilities on or before thirty (30) days after Board approval of the contracts referenced in Condition 15b with construction to be completed within eighteen (18) months of commencement of construction (subject to force majeure). "Commence Construction" or "Commencement of Construction" shall be that time following Board approval of the contracts referenced in Condition 15b when excavating and grading work begins for purposes of preparing any foundation(s) related to the Approved Project. Neither PNK (LAKE CHARLES), L.L.C. nor Pinnacle Entertainment, Inc. may lease a riverboat vessel. Additional time may be granted by the Board in its sole discretion upon timely request for good cause shown. Failure to meet this deadline or to timely receive a waiver or extension of time from the Board may result in forfeiture of all privileges to the riverboat license. d. All contracts related to the Approved Project shall be let only by PNK (LAKE CHARLES), L.L.C. or Pinnacle Entertainment, Inc. unless otherwise approved by the Board. 16. To establish an Escrow Account and enter into an Escrow Agreement for purposes of administering the funds to finance the Approved Project which Escrow Agreement shall be approved by the Board. The Escrow Agreement shall state that funds drawn from the Escrow Account shall only be used to construct, complete and operate the Approved Project. 17. To escrow according to a Board-approved Escrow Agreement in an interest bearing account at a Board-approved financial institution an initial sum of Twenty-Two Million Five Hundred Thousand Dollars ($22,500,000.00) (the "Initial Escrow Amount"). The Initial Escrow Amount shall be deposited into the Escrow Account within ten (10) business days following certification of the results of the Local Referendum. Evidence of this deposit shall be submitted to the Board when made. Such Escrow Account shall be under the control of PNK (Lake Charles), L. L. C. and Pinnacle Entertainment, Inc. with the stipulation that prior to any disbursement, the funds therein may be invested in accordance with the Board-approved Escrow Agreement. The Initial Escrow Amount shall not be used to fund any development 5 or pre-development expenses of PNK (LAKE CHARLES), L.L.C. or Pinnacle Entertainment, Inc. prior to the Commencement of Construction. If, at any time prior to Commencement of Construction, the Board, in its sole discretion, determines that PNK (LAKE CHARLES), L.L.C. and Pinnacle Entertainment, Inc. are not making satisfactory progress on the Approved Project, the Board may issue a Notice of Unsatisfactory Progress to PNK (LAKE CHARLES), L.L.C. and Pinnacle Entertainment, Inc. and afford PNK (LAKE CHARLES), L.L.C. and Pinnacle Entertainment, Inc. a thirty (30) calendar day opportunity to cure the unsatisfactory progress. Following the thirty (30) calendar day cure period, if the Board determines, in its sole discretion, that the unsatisfactory progress has not been cured, then, ipso facto, and without any further action by the Board, any and all privileges to the license to conduct riverboat gaming shall be deemed to be and will be surrendered. PNK (LAKE CHARLES), L.L.C. and Pinnacle Entertainment, Inc. further agree to execute any documents the Board deems appropriate to reflect such surrender. In connection with such surrender and notwithstanding the provisions of Condition 30 herein, PNK (LAKE CHARLES), L.L.C. and Pinnacle Entertainment, Inc. expressly waive any rights to seek any relief from any state or United States court, including the Nineteenth Judicial District Court, pursuant to such court's original jurisdiction. Following the surrender of any and all privileges to the license to conduct riverboat gaming and execution of any documents to reflect such surrender the Board deems necessary, the Initial Escrow Amount, along with any accumulated interest thereon, shall be returned to PNK (LAKE CHARLES), L.L.C. or Pinnacle Entertainment, Inc. 18. To fund, no later than ten (10) days after Board approval of the contracts referenced in Condition 15b, and at all times maintain, until a determination of substantial completion and readiness for occupancy or use by the Board of the Approved Project in accordance with Conditions 8 and 9, a total balance of Two Hundred Twenty-Five Million Dollars ($225,000,000.00) dedicated to the Approved Project such that funds in the Escrow Account, unencumbered funds available through line(s) of credit or other Board approved sources of funding, and funds expended on the Approved Project total Two Hundred Twenty-Five Million Dollars ($225,000,000.00) at all times. In conjunction with the Escrow Agreement submitted to the Board for approval in Condition 16, the initial sources of funding the Two Hundred Twenty-Five Million Dollars ($225,000,000.00) balance shall be submitted to the Board for approval. Initial Bankroll, Capitalized Interest, Pre-Opening Expenses, Contingencies and Corporate Overhead related to the Approved Project may be included as funds expended on the Approved Project. 6 19. To submit the name(s) of any person or persons authorized to withdraw and disburse funds from the Escrow Account described in these conditions on behalf of the licensee. If any of the names submitted have not previously been found suitable, then such person is prohibited from withdrawing and disbursing funds from the escrow account until the person is found suitable. No person shall be permitted to withdraw funds from the Escrow Account who has not been found suitable. 20. To draw from the Escrow Account for the sole purposes set forth in the Board approved Escrow Agreement. No disbursements shall be made from the Escrow Account prior to the Board's receipt and acceptance of verification that the Escrow Account is fully funded and construction has commenced as defined in Condition 15c. 21. To make no disbursements from the Escrow Account to PNK (LAKE CHARLES), L.L.C., Pinnacle Entertainment, Inc. or any affiliate of PNK (LAKE CHARLES), L.L.C. except in the following situations: a. With Board approval, expenses of Pinnacle Entertainment, Inc., PNK (LAKE CHARLES), L.L.C. or an affiliate company may be paid out of the Escrow Account for work directly related to the Approved Project; and b. With Board approval, a one-time reimbursement credit to Pinnacle Entertainment, Inc. or an affiliate of PNK (LAKE CHARLES), L.L.C. will be permitted to be deducted from the Escrow Account for expenses directly related to the Approved Project incurred prior to the Commencement of Construction. c. Funds remaining in the Escrow Account following a determination of substantial completion and readiness for occupancy or use by the Board of the Approved Project in accordance with Conditions 8 and 9 shall be released to PNK (LAKE CHARLES), L.L.C. or Pinnacle Entertainment, Inc. 22. To submit to the Board by the 20th day of each month the following reports for the prior month: a. A work-in-progress report on the construction of the Approved Project, including, but not limited to, the riverboat gaming vessel, 7 hotel, golf course, and other dockside development and infrastructure work committed to in the Approved Project as approved by the Board on October 16, 2001, and as supplemented by Board approval of the design and development documents submitted pursuant to Condition 15 and any subsequent Petitions For Modification. The work-in- progress report shall include a narrative on the status of all work up to the date of the report, a progress payment report listing all payments by or on behalf of PNK (LAKE CHARLES), L.L.C. or Pinnacle Entertainment, Inc. and payment amounts made to date on the project, to whom such payments were made and for what goods or services rendered. b. A listing of all persons and entities paid any sum of money to date by or on behalf of PNK (LAKE CHARLES), L.L.C. or Pinnacle Entertainment, Inc. in connection with the Approved Project and the application for the Approved Project. The list shall contain the names, addresses, social security numbers, and tax identification numbers (if applicable) of all such persons and entities and a description of the services rendered by the person or entity. Persons or entities reported in the work-in- progress report need not be included in this report. c. A listing of all persons and entities with whom agreements have been made, along with summaries of the agreements, by or on behalf of PNK (LAKE CHARLES), L.L.C. or Pinnacle Entertainment, Inc. to pay any sum in connection with this project. This list shall include the names, addresses, social security numbers, and tax identification numbers (if applicable) of all such persons and entities as well as a description of the work to be done pursuant to the agreement. Upon request of the Board, a copy of the entire agreement will be provided to the Board. d. A report that includes an itemized statement of expenditures, the balance of the Escrow Account, and the balance of unencumbered funds available through line(s) of credit on the last day of each month. e. A report of all persons having an ownership, economic, revenue or income interest in PNK (LAKE CHARLES), L.L.C. and Pinnacle Entertainment, Inc. Since Pinnacle Entertainment, Inc. is a publicly traded company, those holding less than five percent ownership, economic revenue or income interest in Pinnacle Entertainment, Inc. may be excluded from this reporting, unless the Board requires otherwise. 8 f. The first monthly report, due on the 20th day of December 2001, shall include all information required in Paragraphs a-e of Condition 22 starting from the date of PNK (LAKE CHARLES), L.L.C.'s application for license, November 15, 1999. 23. To post performance and payment bonds incorporating such terms and conditions as required by the Board, no later than ten (10) days after Board approval of the contracts referenced in Condition 15b, for construction of the Approved Project in accordance with the plans and specifications approved by the Board, with or by a company or companies approved by the Board. Additional time may be granted by the Board in its sole discretion upon timely request for good cause shown. Failure to meet this deadline or to timely receive a waiver or extension of time from the Board may result in forfeiture of all privileges to the riverboat license. 24. To maintain a policy or policies of general liability insurance insuring all non-employee passengers, guests, patrons, etc. against personal injury and damage to property which they may sustain in connection with or arising out of their presence on the riverboat, the golf course, the hotel, and all other related and support facilities operated by PNK (LAKE CHARLES), L.L.C. The policy of liability insurance shall be in an amount of not less than Fifty Million Dollars ($50,000,000.00). PNK (LAKE CHARLES), L.L.C. and Pinnacle Entertainment, Inc. shall maintain all other commercially reasonable insurance coverages, including, but not limited to, worker's compensation, business automobile liability, and commercial marine hull insurance. The Board may require additional types of insurance coverage or coverage limits if it determines that such additions are commercially reasonable based on a review of the types and limits of coverages maintained by other riverboat gaming licensees or other similar projects. 25. To immediately notify the Board in writing and provide monthly updates of any lawsuit(s) concerning the Approved Project or PNK (LAKE CHARLES), L.L.C. Any lawsuits involving Pinnacle Entertainment, Inc. or any Pinnacle subsidiary, any disputes, or other matters that may substantially impact the Approved Project or be required to be reported to any governmental entity shall be reported to the Board. 26. To achieve and adhere to the following general economic and procurement goals in conducting riverboat operations related to the Approved Project: 9 a. To procure twelve and one-half percent (12.5%) of the total cost of goods and services from minority owned and majority minority owned companies; b. To procure twelve and one-half percent (12.5%) of the total costs of goods and services from female and majority female owned companies; c. To procure eighty percent (80%) of the total cost of goods and services from Louisiana based companies; d. To hire minorities ten percent (10%) greater than in proportion to the population of Calcasieu Parish. e. To hire females ten percent (10%) greater than in proportion to the population of Calcasieu Parish; and f. To hire at least eighty percent (80%) Louisiana residents. 27. In the event that either PNK (LAKE CHARLES), L.L.C. or Pinnacle Entertainment, Inc., or both, file a voluntary petition under any chapter of the Bankruptcy Code or an involuntary petition is filed against either PNK (LAKE CHARLES), L.L.C. or Pinnacle Entertainment, Inc., or both, which petition is not dismissed within sixty (60) days after filing, then each of the following conditions shall apply. a. All references herein to the "Bankruptcy Code" shall mean Title 11 of the United States Code as it exists or may hereafter be amended. b. All time periods provided for in this document shall be considered to run continuously and without interruption or suspension; that is, it is intended and agreed by PNK (LAKE CHARLES), L.L.C. and Pinnacle Entertainment, Inc. that no time period shall be considered to be interrupted or suspended by the automatic stay or by the occurrence of any event such as the conversion of a pending bankruptcy case, appointment of a trustee, entry of an order for relief in an involuntary case, or similar event. c. PNK (LAKE CHARLES), L.L.C. and Pinnacle Entertainment, Inc. acknowledge and agree that for purposes of the Bankruptcy Code, the enforcement of Louisiana Gaming Control Law, the rules and regulations, and these conditions is an exercise by a governmental 10 unit of its police and regulatory powers not subject to the automatic stay imposed by Section 362 of the Bankruptcy Code. d. PNK (LAKE CHARLES), L.L.C. and Pinnacle Entertainment, Inc. acknowledge and agree that PNK (LAKE CHARLES), L.L.C. and Pinnacle Entertainment, Inc. have no interest in or claim to the fees or taxes due the state as a result of riverboat gaming operations. PNK (LAKE CHARLES), L.L.C. and Pinnacle Entertainment, Inc. acknowledge and agree that these fees and taxes are to be held in trust on behalf of the state of Louisiana from the moment the funds are received as part of the gaming operations of PNK (LAKE CHARLES), L.L.C. e. PNK (LAKE CHARLES), L.L.C. and Pinnacle Entertainment, Inc. agree that "Applicable Law" as that term is defined in Section 365 of the Bankruptcy Code in all cases excuses the Board from accepting performance from any entity other that PNK (LAKE CHARLES), L.L.C. and Pinnacle Entertainment, Inc. to whom PNK (LAKE CHARLES), L.L.C. and Pinnacle Entertainment, Inc. may propose to "assign" or transfer all or any part of its "assets." f. PNK (LAKE CHARLES), L.L.C. and Pinnacle Entertainment, Inc. agree that the Board has no duty to consent or consider whether it may consent to any proposed assumption and assignment pursuant to Section 365 of the Bankruptcy Code. g. Whether PNK (LAKE CHARLES), L.L.C. and Pinnacle Entertainment, Inc. are in default of these conditions at the time of commencement of a voluntary or involuntary bankruptcy filing, PNK (LAKE CHARLES), L.L.C. and Pinnacle Entertainment, Inc. shall not be excused from full and timely performance under these conditions. h. PNK (LAKE CHARLES), L.L.C. and Pinnacle Entertainment, Inc. agree to give the Board seven calendar days prior notice of the intent to file a voluntary bankruptcy petition. Within twenty-four (24) hours of the receipt of notice, formal or informal, of the commencement of an involuntary case against PNK (LAKE CHARLES), L.L.C. and/or Pinnacle Entertainment, Inc., both verbal and written notice of the involuntary filing will be made to the Chairman of the Louisiana Gaming Control Board. i. PNK (LAKE CHARLES), L.L.C. and Pinnacle Entertainment, Inc. agree to entry of an immediate order from the Bankruptcy Court, without any waiver of sovereign immunity, on the Board's ex parte motion: 11 1) Granting to the Board a modification of the automatic stay and/or recognition that the automatic stay is not applicable allowing the Board to fully enforce each of these conditions and all other regulatory laws of the state of Louisiana. PNK (LAKE CHARLES), L.L.C. and Pinnacle Entertainment, Inc. hereby agree that in such a case, "cause" as defined by the Bankruptcy Code would exist for the immediate entry by the Bankruptcy Court of such an order modifying the automatic stay; and 2) If deemed necessary or advisable by the Board, compelling PNK (LAKE CHARLES), L.L.C. and/or Pinnacle Entertainment, Inc. to appear immediately and show cause why the privileges related to the license of PNK (LAKE CHARLES), L.L.C. should not be immediately surrendered by PNK (LAKE CHARLES), L.L.C. j. PNK (LAKE CHARLES), L.L.C. and Pinnacle Entertainment, Inc. agree that neither the commencement of a bankruptcy case nor the automatic stay shall interrupt or suspend the tolling of any applicable cure period. PNK (LAKE CHARLES), L.L.C. and Pinnacle Entertainment, Inc. agree that the filing of a bankruptcy petition, voluntary or involuntary, shall not suspend, interrupt or stay the running of the five (5) year term of the riverboat license which term shall commence on the first calendar day following certification of the results of the Local Referendum. 28. To report immediately in writing to the Board any failure to comply with these conditions or any provision of the LGCL, or rules of the Board along with an explanation of the reasons therefore. 29. To comply with any and all orders, directives and policy decisions of the Board or the Division. 30. To have any request for relief, extension of time or modification of condition presented to the LGCB for resolution by the LGCB in its sole and absolute discretion. Except as provided in Condition 17, any decision of the LGCB regarding a condition, or a modification of or dispute regarding a condition, is not subject to judicial review by means of the appeals process set forth in the Louisiana Gaming Control Law, provided however that nothing herein shall be construed to preclude PNK (LAKE CHARLES), L.L.C. or Pinnacle Entertainment, Inc. from seeking declaratory or injunctive relief from the Nineteenth Judicial 12 District Court pursuant to such court's original jurisdiction in accordance with Louisiana Constitution Article V, (S)16(A). 31. That the term of the license of PNK (LAKE CHARLES), L.L.C. shall commence to run from the date of certification of the results of the Local Referendum. 32. PNK (LAKE CHARLES), L.L.C. and Pinnacle Entertainment, Inc. acknowledge and agree that any request for approval of a transfer of ownership interest of PNK (LAKE CHARLES), L.L.C. will not be approved by the Board unless the proposed purchaser agrees to all conditions set forth in this document, and demonstrates to the satisfaction of the Board the ability to satisfy all conditions. 33. PNK (LAKE CHARLES), L.L.C. and Pinnacle Entertainment, Inc. acknowledge and agree that the privileges they receive hereunder are not assignable or transferable in any manner. 34. All reports required by LGCL, rules and regulations, or these conditions shall be signed and certified by an officer of PNK (LAKE CHARLES), L.L.C. or Pinnacle Entertainment, Inc. and delivered to the: a. Louisiana Gaming Control Board, c/o Louisiana State Police Audit Division, Post Office Box 66614, #41, Baton Rouge, LA 70896, and, b. Office of the Attorney General, Gaming Division, 339 Florida Street, Suite 500, Baton Rouge, LA 70801. 35. That upon determination of a need therefore, the Board may, in its sole discretion, appoint a monitor who shall report directly to the Board on any and all aspects of the Approved Project until completion of the Approved Project. PNK (LAKE CHARLES), L.L.C. and Pinnacle Entertainment, Inc. agree to make all records of any nature whatsoever available to the monitor at any time upon request. The costs of such monitor shall be paid by PNK (LAKE CHARLES), L.L.C. and Pinnacle Entertainment, Inc. to be determined by the Board. 36. PNK (LAKE CHARLES), L.L.C. and Pinnacle Entertainment, Inc. acknowledge and agree that the conditions set forth herein are not a 13 limitation upon the authority or the rights of the Board under any provisions of state or federal law. THUS DONE AND SIGNED by Appearers in the presence of the undersigned witnesses on this 20/th/ day of November, 2001. WITNESSES PINNACLE ENTERTAINMENT, INC. PNK (LAKE CHARLES), L. L. C. /s/ Witness By: /s/ Paul Alanis - -------------------- ------------------------------- Paul Alanis, President and CEO /s/ Witness - -------------------- /s/ Notary Public ------------------------------------------ NOTARY PUBLIC Approved By: The Louisiana Gaming Control Board /s/ Hillary J. Crain - --------------------------------------- Hillary J. Crain, Chairman By Authority and on Behalf of the Board 14 EX-11.1 13 dex111.txt STATEMENT RE: COMPUTATION OF PER SHARE EARNINGS Exhibit 11 - ---------- Pinnacle Entertainment, Inc. Computation of Per Share Earnings
For the three months ended December 31, ----------------------------------------------------------------------- Basic Diluted(a) ----------------------------------------------------------------------- 2001 2000 1999 2001 2000 1999 -------- ------- -------- ------- ------- ------- (in thousands, except per share data unaudited) Average number of common shares outstanding 25,444 26,421 26,145 25,444 26,421 26,145 Average common shares due to assumed conversion of stock options 0 0 0 79 1,085 854 -------- ------- ------- -------- ------- ------- Total shares 25,444 26,421 26,145 25,523 27,506 26,999 ======== ======= ======= ======== ======= ======= Net income before extraordinary item ($22,244) ($6,141) $ 3,971 ($22,244) ($6,141) $ 3,971 Extraordinary item, net of income taxes 0 0 0 0 0 0 -------- ------- ------- -------- ------- ------- Net (loss) Income ($22,244) ($6,141) $ 3,971 ($22,244) ($6,141) $ 3,971 ======== ======= ======= ======== ======= ======= Net income before extraordinary item per share ($0.87) ($0.23) $ 0.15 ($0.87) ($0.22) $ 0.15 Extraordinary item per share, net of income taxes 0.00 0.00 0.00 0.00 0.00 0.00 -------- ------- ------- -------- ------- ------- Net (loss) Income per share ($0.87) ($0.23) $ 0.15 ($0.87) ($0.22) $ 0.15 ======== ======= ======== ======== ======= ======= For the year ended December 31, ----------------------------------------------------------------------- Basic Diluted(a) ----------------------------------------------------------------------- 2001 2000 1999 2001 2000 1999 -------- ------- -------- ------- ------- ------- (in thousands, except per share data unaudited) Average number of common shares outstanding 25,814 26,335 25,966 25,814 26,335 25,966 Average common shares due to assumed conversion of stock options 0 0 0 104 1,121 363 -------- ------- ------- -------- ------- ------- Total shares 25,814 26,335 25,966 25,918 27,456 26,329 ======== ======= ======= ======== ======= ======= Net (loss) Income before extraordinary item ($28,649) $79,492 $44,047 ($28,649) $79,492 $44,047 Extraordinary item, net of income taxes 0 2,653 0 0 2,653 0 -------- ------- ------- -------- ------- ------- Net (loss) income after extraordinary item ($28,649) $76,839 $44,047 ($28,649) $76,839 $44,047 ======== ======= ======= ======== ======= ======= Net (loss) Income before extraordinary item per share ($1.11) $ 3.02 $ 1.70 ($1.11) $ 2.90 $ 1.67 Extraordinary item per share, net of income taxes 0.00 (0.10) 0.00 0.00 (0.10) 0.00 -------- ------- ------- -------- ------- ------- Net (loss) Income after extraordinary item per share ($1.11) $ 2.92 $ 1.70 ($1.11) $ 2.80 $ 1.67 ======== ======= ======= ======== ======= =======
_______ (a) When the computed diluted values are anti-dilutive, the basic per share values are presented on the face of the consolidated statements of operations. EX-21.1 14 dex211.txt SUBSIDIARIES EXHIBIT 21.1 List Of Subsidiaries Subsidiary State Of Organization - ---------- --------------------- Belterra Resort Indiana, LLC Nevada Biloxi Casino Corp. Mississippi Boomtown Hotel & Casino, Inc. Nevada Boomtown, Inc. Delaware Casino Magic Bueros Aires, SA Argentina Casino Magic Corp. Minnesota Casino Magic Europe, BV (Netherlands) Europe Casino Magic Helles, SA (Greece) Europe Casino Magic Management Services Corp. Minnesota Casino Magic Neuquen SA Argentina Casino Magic of Louisiana, Corp. Louisiana Casino Magic Support Services SA Argentina Casino One Corporation Mississippi Casino Parking, Inc. Mississippi Crystal Park Hotel and Casino Development Company, LLC California HP/Compton, Inc. California Louisiana Gaming Enterprises, Inc. Louisiana Louisiana - I Gaming Louisiana Ogle Haus, LLC Indiana PNK (Lake Charles), LLC Louisiana Realty Investment Group, Inc. Delaware St. Louis Casino Corp. Missouri EX-23.1 15 dex231.txt CONSENT OF ARTHUR ANDERSEN LLP Exhibit 23.1 ------------ CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS As independent public accountants, we hereby consent to the incorporation by reference in the registration statements on Form S-8 with respect to (A) the registration of shares issued (i) upon exercise of options granted pursuant to the 1996 Stock Option Plan of Hollywood Park, Inc., and (ii) upon exercise of options to purchase an aggregate of 20,000 shares of Common Stock granted to certain directors of Hollywood Park, Inc.; (B) the registration of shares issued upon exercise of options granted pursuant to the 1990 Stock Option Plan and the 1992 Director Option Plan of Boomtown, Inc.; (C) the registration of shares issued (i) upon exercise of options granted pursuant to the 1992 Incentive Stock Option Plan of Casino Magic Corp. and (ii) upon exercise of options granted to certain employees and directors of Casino Magic Corp.; (D) the registration of (i) options and stock appreciation rights granted under the 1993 Stock Option Plan of Hollywood Park, Inc. and (ii) shares issued upon exercise of such options and/or stock appreciation rights; (E) the registration of shares issued (i) pursuant to the Amended and Restated Directors Deferred Compensation Plan and (ii) upon exercise of options to purchase an aggregate of 822,500 shares of Common Stock granted to certain directors and officers of Hollywood Park, Inc.; (F) the registration of Deferred Compensation Obligations issued pursuant to the Executive Deferred Compensation Plan of Hollywood Park, Inc.; and (G) the registration of shares issued upon exercise of options granted pursuant to the 2001 Stock Option Plan of Pinnacle Entertainment, Inc, of our report dated February 4, 2002 on the financial statements of Pinnacle Entertainment, Inc., which report appears in the Annual Report on Form 10-K of Pinnacle Entertainment, Inc., for the fiscal year ended December 31, 2001. ARTHUR ANDERSEN LLP Los Angeles, California April 1, 2002 EX-99.1 16 dex991.txt LETTER RESPONSIVE TO TEMPORARY NOTE 3T Exhibit 99.1 April 1, 2002 Securities and Exchange Commission 450 Fifth Street N.W. Washington, D.C. 20549 Ladies and Gentlemen, Pursuant to Temporary Note 3T to Article 3 of Regulations S-X, we have obtained a letter of representation from Arthur Andersen LLP (Andersen), our independent public accountant, that its audit of our consolidated financial statements as of December 31, 2001 was subject to Andersen's quality control system for the U.S. accounting and auditing practice to provide reasonable assurance that the engagement was conducted in compliance with professional standards, and that there was appropriate continuity of Andersen personnel working on the audit, availability of national office consultation, and availability of personnel at foreign affiliates of Andersen to conduct relevant portions of the audit. PINNACLE ENTERTAINMENT, INC. /s/ Mr. Bruce C. Hinckley Senior Vice President, Chief Financial Officer and Treasurer -----END PRIVACY-ENHANCED MESSAGE-----