Storied gaming firm in license battle.

Dogged by allegations that some of its executives secured prostitutes for high rollers, a hearing later this month could determine the fate of Pinnacle Entertainment Inc. as a gaming business.

Pinnacle, the Glendale company that has its roots in Jack Warner's Hollywood Park, is attempting to stave off the loss of its Indiana gaming license by negotiating a settlement with the Indiana Gaming Commission on the future of its Ohio River casino, Belterra.

Gaming officials said it's likely the commission will settle with the company in the interest of preserving local jobs and tax revenues, but that a decision has not yet been made.

"Whether nothing will happen to their license, whether it will be suspended or revoked, has not been decided yet," said Jack Thar, the commission's executive director.

The consequences of a rejection could affect Pinnacle's ability to continue as a gaming company, since most states prefer not do business with companies whose licenses have been rejected elsewhere.

"All other regulatory bodies would be forced to look at the issue," Thar said.

Daniel Lee, Pinnacle's recently named chairman and chief executive, said that even if Indiana revokes the company's license, such a judgment is not necessarily a death sentence.

"I'm sure other states would look at it--they already are," he said. "But if they remove the license, it does not automatically mean you lose a license in other states. But as a practical matter that is not where we'd like to go."

Pinnacle, which until February 2000 was known as Hollywood Park Inc., owns casinos in Indiana, Louisiana, Mississippi, Nevada and Argentina.

The company has its roots in Inglewood's Hollywood Park, formed as the Hollywood Turf Club in 1938 by Warner and some 600 shareholders, including Walt Disney, A1 Jolson and Bing Crosby.

Following a lengthy proxy battle, R.D. Hubbard gained control of the company in February 1991. In September 1999, Churchill Downs Inc. purchased the track and the Hollywood Park Casino, which was leased back to Pinnacle at an annual rate of $3 million for 10 years.

Cutting ties

After the Indiana allegations were levied, Pinnacle and Hubbard wasted no time severing their relationship.

Hubbard and Chief Executive Paul Alanis resigned on April 11, weeks after charges of sexual misconduct by company officials were detailed in a Feb. 26 complaint filed in U.S. District Court in Indiana.

According to the suit, filed of by two former Belterra employees, casino executives arranged for female escorts to join 48 wealthy male guests invited to a golf outing hosted by Belterra in June 2001.

A draft report by the gaming commission, citing the same series of events, said "according to numerous witnesses these women were brought to Belterra for the entertainment of the guests of the golf tournament. On several occasions several of the women were referred to as 'hookers."'

In addition to the prostitutes, who were alleged to have been flown in from California, the commission report cited concerns about claims that Hubbard directed Belterra casino employees to give money to casino guests without filling out the necessary paperwork.

With their resignations, Hubbard left a $500,000-a-year post, and Alanis a $600,000-a-year position that also paid him $800,000 in bonuses over the last three years, according to the company's most recent proxy statement.

Pinnacle's board named Lee, formerly chief financial officer of failed Internet grocer HomeGrocer.com and of Mirage Resorts, as chairman and chief executive.

Shortly after his resignation, Hubbard, who controlled 2.5 million Pinnacle shares, a 9.6 percent stake, began cashing out. Since April 25, Hubbard has sold or registered to sell 700,000 shares of Pinnacle stock for an estimated $8 million, according to Thomson Financial and Bloomberg News.

A woman who answered the phone at Hubbard's Palm Desert office said he was traveling and unable to be reached for comment.

Since mid-February Pinnacle stock has nearly doubled, hitting a 52-week high of $12.68 on May 3. It has since backed off, closing at $9.29 on June 11. (Many gaming stocks were battered last week over concerns about a new Indiana gaming tax.)

Analysts attribute the recent jump in Pinnacle's stock price to the management shake-up, as well as improved results at Belterra.

Hearing due

Thar said the commission would likely take up the Pinnacle license before the month is out at its next, as yet unscheduled, hearing.

The company does expect to be punished by the gaming commission, but industry observers do not see its ability to remain a going concern as an issue.

"I think the commission is satisfied, the thing is going to be resolved with a not unsubstantial but manageable fine," said Michael Crawford, an equity analyst with B. Riley & Co. "I'm anticipating around $3 million."

While he stressed a final decision had not yet been made, Thar said he believes the final settlement would reflect an earlier offer that would have had Hubbard give up his Indiana gaming license, pay at least $750,000 in fines and sell his 9.6 percent stake in Pinnacle.

"I would suspect the terms will be somewhat different, but not in a major way' he said.

"It's in the company's best interest that Hubbard sell his shares," said William Schmitt, an equity analyst with CIBC World Markets.

The troubles in Indiana obscure generally good news for the company, including the addition of Lee, who is expected to take a more controlled approach to growing the business.

"We believe the addition of Lee is positive... as we view him as more conservative and, thus, not likely to take on more debt leverage via large balance sheet developments," said analysts from Deutsche Bank in a quarterly report to bondholders.

Pinnacle Entertainment Inc. reported a net loss of $59 million for the first quarter ended March 31, compared with a loss of $2.1 million in the like year-earlier quarter. The bulk of the loss was attributed to an accounting change. First-quarter revenues were $127.3 million, vs. $134 million in the first quarter of 2001.

Despite the large first quarter loss, operating income at Pinnacle jumped 14 percent, to $8.4 million. Much of the increase was due to Belterra, where earnings before interest, taxes, depreciation, amortization and non-recurring items were $2.4 million, more than five times what they were in the first quarter of 2001.

"That's a property that last year operated at a loss, but is now operating at about a $1 million a month positive cash flow," said Crawford. "Once people go there, they've going back."

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Pinnacle Entertainment

Stock has increased amid the shakeup that claimed Hubbard's job.

Stock Prices.

June 12, 2001  $9.75
June 12, 2002  $9.29

Note: Table made from line graph