1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
FORM 10-Q
(Mark One)
[ X ] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the period ended September 30, 1998
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR
15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from ______________ to ______________
Commission file number 1-12168
BOYD GAMING CORPORATION
(Exact name of registrant as specified in its charter)
Nevada 88-0242733
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
2950 South Industrial Road
Las Vegas, Nevada
89109
(Address of principal executive offices)
(Zip Code)
(702) 792-7200
(Registrant's telephone number, including area code)
Indicate by check mark whether the 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 (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to filing requirements
for the past 90 days.
Yes [X] No [ ]
Shares outstanding of each of the Registrant's classes of common stock as of
October 31, 1998:
Class Outstanding
----- -----------
Common stock, $.01 par value 61,825,666
2
BOYD GAMING CORPORATION
QUARTERLY REPORT ON FORM 10-Q
FOR THE PERIOD ENDED SEPTEMBER 30, 1998
TABLE OF CONTENTS
PART I. FINANCIAL INFORMATION
Page No.
--------
Item 1. Unaudited Condensed Consolidated Financial Statements
Condensed Consolidated Balance Sheets at September 30, 1998
and December 31, 1997 3
Condensed Consolidated Statements of Operations for the
three and nine month periods ended September 30, 1998
and 1997 4
Condensed Consolidated Statement of Changes in
Stockholders' Equity for the nine month period ended
September 30, 1998 5
Condensed Consolidated Statements of Cash Flows for the
nine month periods ended September 30, 1998 and 1997 6
Notes to Condensed Consolidated Financial Statements 7
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 14
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K 25
Signature e 26
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Part I. Financial Information
Item 1. Financial Statements
BOYD GAMING CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited) September 30, December 31,
(In thousands, except share data) 1998 1997
- -----------------------------------------------------------------------------------------------------------
ASSETS
Current assets
Cash and cash equivalents $ 68,051 $ 78,277
Accounts receivable, net 20,342 19,372
Inventories 8,408 9,906
Prepaid expenses 16,933 14,357
Income taxes receivable 12,083 2,787
Deferred income taxes 9,188 --
---------- ----------
Total current assets 135,005 124,699
Property and equipment, net 753,274 771,235
Other assets and deferred charges 42,357 41,912
Deferred income taxes -- 6,558
Goodwill and other intangible assets, net 203,965 208,011
---------- ----------
Total assets $1,134,601 $1,152,415
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities
Current maturities of long-term debt $ 1,890 $ 1,828
Accounts payable 24,091 28,535
Accrued liabilities
Payroll and related 27,091 26,100
Interest and other 59,121 55,879
---------- ----------
Total current liabilities 112,193 112,342
Long-term debt, net of current maturities 781,171 842,932
Deferred income taxes and other 23,904 --
Commitments and contingencies
Stockholders' equity
Preferred stock, $.01 par value; 5,000,000 shares authorized -- --
Common stock, $.01 par value; 200,000,000 shares authorized;
61,825,666 and 61,669,628 shares outstanding 618 617
Additional paid-in capital 139,950 139,054
Retained earnings 76,765 57,470
---------- ----------
Total stockholders' equity 217,333 197,141
---------- ----------
Total liabilities and stockholders' equity $1,134,601 $1,152,415
========== ==========
The accompanying notes are an integral part of
these condensed consolidated financial statements.
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BOYD GAMING CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
Three Months Ended Nine Months Ended
(Unaudited) September 30, September 30,
-------------------------- ----------------------------
(In thousands, except per share data) 1998 1997 1998 1997
- ------------------------------------------------------------------------------------- ----------------------------
Revenues
Casino $ 173,466 $ 153,442 $ 541,003 $ 459,016
Food and beverage 38,589 38,063 121,097 115,937
Room 18,232 18,940 55,110 57,700
Other 16,410 17,235 52,151 48,663
Management fees and joint venture 10,247 11,089 30,606 33,430
--------- --------- --------- ---------
Gross revenues 256,944 238,769 799,967 714,746
Less promotional allowances 22,351 21,021 69,847 61,897
--------- --------- --------- ---------
Net revenues 234,593 217,748 730,120 652,849
--------- --------- --------- ---------
Costs and expenses
Casino 89,174 78,471 276,149 230,624
Food and beverage 26,105 26,397 79,514 82,241
Room 6,161 6,618 18,643 19,784
Other 16,671 15,212 48,947 44,333
Selling, general and administrative 35,645 31,640 111,440 93,318
Maintenance and utilities 10,956 9,534 31,069 27,244
Depreciation and amortization 17,940 16,829 54,938 53,237
Corporate expense 3,169 5,036 13,755 18,625
Impairment and restructuring charges -- -- 5,925 131,339
--------- --------- --------- ---------
Total 205,821 189,737 640,380 700,745
--------- --------- --------- ---------
Operating income (loss) 28,772 28,011 89,740 (47,896)
--------- --------- --------- ---------
Other income (expense)
Interest income 87 135 293 443
Interest expense, net of amounts capitalized (18,443) (18,268) (56,462) (52,871)
--------- --------- --------- ---------
Total (18,356) (18,133) (56,169) (52,428)
--------- --------- --------- ---------
Income (loss) before provision (benefit)
for income taxes 10,416 9,878 33,571 (100,324)
Provision (benefit) for income taxes 4,479 4,002 14,276 (31,925)
--------- --------- --------- ---------
Net income (loss) $ 5,937 $ 5,876 $ 19,295 $ (68,399)
========= ========= ========= =========
Basic and diluted net income (loss) per common share $ 0.10 $ 0.10 $ 0.31 $ (1.11)
========= ========= ========= =========
Average basic shares outstanding 61,826 61,524 61,723 61,418
Average diluted shares outstanding 61,831 61,731 61,857 61,418
========= ========= ========= =========
The accompanying notes are an integral part of
these condensed consolidated financial statements.
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BOYD GAMING CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY For the nine
month period ended September 30, 1998 (Unaudited)
(In thousands, except share data)
- --------------------------------------------------------------------------------
Common Stock Additional Total
---------------------- Paid-In Retained Stockholders'
Shares Amount Capital Earnings Equity
-----------------------------------------------------------------
Balances, January 1, 1998 61,669,628 $ 617 $139,054 $57,470 $197,141
Net income -- -- -- 19,295 19,295
Stock issued in connection with
employee stock purchase plan 156,038 1 896 -- 897
---------- ----- -------- ------- --------
Balances, September 30, 1998 61,825,666 $ 618 $139,950 $76,765 $217,333
========== ===== ======== ======= ========
The accompanying notes are an integral part of
these condensed consolidated financial statements.
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BOYD GAMING CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
Nine Months Ended
(Unaudited) September 30,
--------------------------
(In thousands) 1998 1997
- ------------------------------------------------------------------------- --------------------------
CASH FLOWS FROM OPERATING ACTIVITIES
Net income (loss) $ 19,295 $ (68,399)
Adjustments to reconcile net income (loss) to net cash
provided by operating activities:
Depreciation and amortization 54,938 53,237
Deferred income taxes 19,124 (41,159)
Impairment and restructuring charges 5,925 131,339
Changes in assets and liabilities:
Accounts receivable, net 1,030 5,994
Inventories 1,498 105
Prepaid expenses (2,576) 2,969
Income taxes receivable (9,296) 7,144
Other assets (3,550) 4,022
Other current liabilities (1,726) (17,295)
Income taxes payable -- 2,705
--------- ---------
Net cash provided by operating activities 84,662 80,662
--------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES
Acquisition of property, equipment and other assets (44,451) (28,493)
Proceeds from sale of Sam's Town Kansas City's assets 10,500 --
--------- ---------
Net cash used in investing activities (33,951) (28,493)
--------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from issuance of common stock 762 669
Proceeds from issuance of debt 8,000 244,525
Net payments under bank credit facility (67,250) (305,850)
Payments on long-term debt (2,449) (1,273)
--------- ---------
Net cash used in financing activities (60,937) (61,929)
--------- ---------
Net decrease in cash and cash equivalents (10,226) (9,760)
Cash and cash equivalents, beginning of period 78,277 70,426
--------- ---------
Cash and cash equivalents, end of period $ 68,051 $ 60,666
========= =========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
Cash paid for interest, net of amounts capitalized $ 56,617 $ 35,781
========= =========
Cash paid for income taxes $ 5,066 $ 4,345
========= =========
SUPPLEMENTAL DISCLOSURE OF NON-CASH INVESTING AND FINANCING ACTIVITIES
Receivable from sale of Sam's Town Kansas City's assets $ 2,000 $ --
========= =========
The accompanying notes are an integral part of these
condensed consolidated financial statements.
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BOYD GAMING CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
- --------------------------------------------------------------------------------
NOTE 1. - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Principles of Consolidation
The accompanying condensed consolidated financial statements include the
accounts of Boyd Gaming Corporation and its wholly-owned subsidiaries,
collectively referred to herein as the "Company". At September 30, 1998, the
Company owned and operated ten casino entertainment facilities located in Las
Vegas, Nevada, Tunica, Mississippi, East Peoria, Illinois, and Kenner, Louisiana
as well as a travel agency located in Honolulu, Hawaii. In addition, the Company
manages a casino entertainment facility in Philadelphia, Mississippi, for which
it has a seven year management contract that expires in 2001. All material
intercompany accounts and transactions have been eliminated.
Basis of Presentation
In the opinion of management, the accompanying unaudited condensed consolidated
financial statements contain all adjustments, consisting only of normal
recurring adjustments, necessary to present fairly the results of its operations
and cash flows for the three and nine month periods ended September 30, 1998 and
1997. It is suggested that this report be read in conjunction with the Company's
audited consolidated financial statements included in the Annual Report on Form
10-K for the transition period ended December 31, 1997. The operating results
for the three and nine month periods ended September 30, 1998 and 1997 and cash
flows for the nine month periods ended September 30, 1998 and 1997 are not
necessarily indicative of the results that will be achieved for the full year or
for future periods.
Use of Estimates
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities at the date of the
financial statements and the reported amounts of revenues and expenses during
the reporting period. Significant estimates used by the Company include the
estimated useful lives for depreciable and amortizable assets, the estimated
allowance for doubtful accounts receivable, the estimated valuation allowance
for deferred tax assets, and estimated cash flows used in assessing the
recoverability of long-lived assets. Actual results could differ from those
estimates.
Reclassifications
Certain amounts in the 1997 condensed consolidated financial statements have
been reclassified to conform to the 1998 presentation. These reclassifications
had no net effect on the Company's net income.
NOTE 2. - IMPAIRMENT AND RESTRUCTURING CHARGES
During the quarter ended March 31, 1997, the Company wrote-down the carrying
value of its fixed and intangible assets in the Missouri gaming market to fair
value, which resulted in a $126 million impairment loss. The impairment loss was
recorded due to a significant change in the competitive environment with the
January 1997 addition of a significantly larger competitor in the Kansas City
gaming market and a history of operating losses at the Company's Sam's Town
Kansas City gaming establishment. The fair value of the impaired assets
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was primarily determined through a discounted cash flow analysis of the
operations of Sam's Town Kansas City.
On June 30, 1998, the Company recorded a $5.9 million restructuring charge in
connection with its announcement to cease operations at Sam's Town Kansas City.
Termination benefits of approximately $2.6 million for substantially all of the
Company's 646 employees were paid and included as part of the restructuring
charge. Other costs to exit the Kansas City gaming market of $3.3 million were
included in the restructuring charge and principally represent the recognition
of liabilities for various long-term commitments which the Company intends to
honor. At September 30, 1998, the $0.8 million current portion and the $2.2
million non-current portion of the restructuring charge liabilities are included
in "Interest and other" and "Deferred income taxes and other", respectively, on
the accompanying condensed consolidated balance sheet.
During July 1998, the Company closed Sam's Town Kansas City and sold
substantially all of its tangible assets for $12.5 million, which approximated
net book value for those assets. In connection with the sale, the Company
generated a tax loss of approximately $100 million which will be carried back
two years. Any tax loss not utilized against prior year income will be carried
forward for up to twenty years. The tax loss carry back created an income tax
receivable of $10.9 million and a current deferred income tax asset of $9.2
million. The remaining tax loss carry forward is netted in the non-current
deferred income tax liability on the accompanying condensed consolidated
balance sheet at September 30, 1998.
The Company also recorded a $5.3 million impairment loss related to its 17.4%
ownership interest in the Fremont Street Experience, Limited Liability Company
("FSE") during the quarter ended June 30, 1997. This impairment loss is
principally due to the significant levels of operating loss and operating cash
deficiency reported in May 1997 by FSE relating to its first full year of
operation. Management expects this trend to continue and, therefore, does not
expect to recover its investment in this entity.
NOTE 3. - ACQUISITION
On October 27, 1997, the Company acquired the remaining 85% equity interest in
Treasure Chest Casino, L.L.C. ("Treasure Chest") that was not owned by the
Company for approximately $103 million, plus the assumption of debt. Intangible
license rights, representing the excess of the purchase price over the fair
value of the net assets acquired, amounted to approximately $85 million.
Treasure Chest owns the Treasure Chest Casino, a riverboat casino operation on
Lake Pontchartrain in Kenner, Louisiana. The Company has managed the Treasure
Chest since its opening in September 1994. The Company funded the acquisition
and the repayment of Treasure Chest's debt with borrowings under its bank credit
facility. The Company's pro forma condensed consolidated results of operations,
as if the acquisition had occurred on January 1, 1997, are as follows:
NINE MONTHS ENDED
SEPTEMBER 30, 1997
------------------
Pro forma (in thousands, except per share data):
Net revenues $733,039
Net loss (65,286)
--------
Basic and diluted net loss per common share:
Net loss $ (1.06)
--------
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NOTE 4. - NET INCOME (LOSS) PER COMMON SHARE
During the quarter ended December 31, 1997, the Company adopted Statement of
Financial Accounting Standards ("SFAS") No. 128, "Earnings per Share". SFAS No.
128 requires the presentation of basic and diluted net income (loss) per share.
Basic per share amounts are computed by dividing net income (loss) by the
average shares outstanding during the period. Diluted per share amounts are
computed by dividing net income (loss) by average shares outstanding plus the
dilutive effect of common share equivalents. Since the Company incurred a net
loss during the nine month period ended September 30, 1997, both basic and
diluted per share calculations are based upon average shares outstanding of
61,418,000 during the period. The effect of options outstanding to purchase
approximately 2,720,000 shares was not included in the diluted calculation
during the period. Diluted net income per share during the three and nine month
periods ended September 30, 1998 and during the three month period ended
September 30, 1997 is determined considering the dilutive effect of outstanding
stock options. The effect of stock options outstanding to purchase approximately
4,623,000 and 2,673,000 shares, respectively was not included in the diluted
calculation during the three and nine month periods ended September 30, 1998 and
the effect of stock options outstanding to purchase approximately 2,720,000
shares was not included in the diluted calculation during the three month period
ended September 30, 1997 since the exercise price of such options was greater
than the average price of the Company's common shares during the applicable
periods.
NOTE 5. - GUARANTOR INFORMATION
The Company's $200 million of 9.25% Senior Notes (the "9.25% Notes") are
guaranteed by a majority of the Company's wholly-owned significant subsidiaries.
These guaranties are full, unconditional, and joint and several. In connection
with the October 1997 acquisition of Treasure Chest discussed in Note 3, the
Company created significant subsidiaries that do not guarantee the 9.25% Notes.
Prior to October 1997, the assets, equity, income and cash flows of the
non-guarantor subsidiaries represented less than 3% of the respective
consolidated amounts and were inconsequential, individually and in the
aggregate, to the Company. As such, the following consolidating schedules
present separate condensed financial statement information on a combined basis
for the parent only, as well as the Company's guarantor subsidiaries and
non-guarantor subsidiaries, as of September 30, 1998 and for the three and nine
month periods then ended. Comparative financial information is not presented
since management believes such information is not material to investors.
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CONDENSED CONSOLIDATING BALANCE SHEET INFORMATION AS OF SEPTEMBER 30, 1998
COMBINED
COMBINED NON- ELIMINATION
(IN THOUSANDS) PARENT GUARANTORS GUARANTORS ENTRIES CONSOLIDATED
- -------------------------------------------------------------------------------------------------------------------------
ASSETS
Current assets $ 25,442 $ 89,729 $ 22,121 $ (2,287)(1) $ 135,005
Property and equipment, net 27,034 685,860 40,380 -- 753,274
Other assets and deferred charges 931,845 (523,385) 149,954 (516,057)(1)(2) 42,357
Goodwill and other intangible assets, net -- 120,179 83,786 -- 203,965
---------- ---------- ---------- ---------- ----------
Total assets $ 984,321 $ 372,383 $ 296,241 $ (518,344) $1,134,601
========== ========== ========== ========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities $ 33,212 $ 64,738 $ 16,996 $ (2,753)(1) $ 112,193
Long-term debt, net of current maturities 712,514 68,624 33 -- 781,171
Deferred income taxes and other 20,079 3,825 -- -- 23,904
Stockholders' equity 218,516 235,196 279,212 (515,591)(2) 217,333
---------- ---------- ---------- ---------- ----------
Total liabilities and stockholders'
equity $ 984,321 $ 372,383 $ 296,241 $ (518,344) $1,134,601
========== ========== ========== ========== ==========
Elimination Entries
- -------------------
(1) - To eliminate intercompany payables and receivables.
(2) - To eliminate investment in subsidiaries and subsidiaries' equity.
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CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS INFORMATION FOR THE THREE MONTH
PERIOD ENDED SEPTEMBER 30, 1998
COMBINED
COMBINED NON- ELIMINATION
(IN THOUSANDS) PARENT GUARANTORS GUARANTORS ENTRIES CONSOLIDATED
- ----------------------------------------- ------------- -------------- ------------- ------------- -------------
Revenues
Casino $ -- $ 144,924 $ 28,542 $ -- $ 173,466
Food and beverage -- 36,123 2,466 -- 38,589
Room -- 18,232 -- -- 18,232
Other 2,411 7,597 9,308 (2,906)(1) 16,410
Management fees and joint venture 26,681 11,895 4,364 (32,693)(1) 10,247
--------- --------- --------- --------- ---------
Gross revenues 29,092 218,771 44,680 (35,599) 256,944
Less promotional allowances -- 20,600 1,751 -- 22,351
--------- --------- --------- --------- ---------
Net revenues 29,092 198,171 42,929 (35,599) 234,593
--------- --------- --------- --------- ---------
Costs and expenses
Casino -- 78,456 10,718 -- 89,174
Food and beverage -- 23,486 2,619 -- 26,105
Room -- 6,161 -- -- 6,161
Other -- 19,534 9,804 (12,667)(1) 16,671
Selling, general and administrative -- 29,578 6,067 -- 35,645
Maintenance and utilities -- 9,802 1,154 -- 10,956
Depreciation and amortization 184 15,478 2,278 -- 17,940
Corporate expense 5,435 262 378 (2,906)(1) 3,169
--------- --------- --------- --------- ---------
Total 5,619 182,757 33,018 (15,573) 205,821
--------- --------- --------- --------- ---------
Operating income 23,473 15,414 9,911 (20,026) 28,772
Other income (expense), net (17,023) (1,661) 328 -- (18,356)
--------- --------- --------- --------- ---------
Income before provision for income taxes 6,450 13,753 10,239 (20,026) 10,416
Provision for income taxes 3,023 1,456 -- -- 4,479
--------- --------- --------- --------- ---------
Net income $ 3,427 $ 12,297 $ 10,239 $ (20,026) $ 5,937
========= ========= ========= ========= =========
Elimination Entries
- -------------------
(1) - To eliminate intercompany revenue and expense.
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CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS INFORMATION FOR THE NINE MONTH
PERIOD ENDED SEPTEMBER 30, 1998
COMBINED
COMBINED NON- ELIMINATION
(IN THOUSANDS) PARENT GUARANTORS GUARANTORS ENTRIES CONSOLIDATED
- ------------------------------------- --------- ---------- ---------- ----------- ------------
Revenues
Casino $ -- $ 451,436 $ 89,567 $ -- $ 541,003
Food and beverage -- 113,849 7,248 -- 121,097
Room -- 55,110 -- -- 55,110
Other 7,236 27,267 26,158 (8,510)(1) 52,151
Management fees and joint venture 85,553 35,985 15,020 (105,952)(1) 30,606
--------- --------- --------- --------- ---------
Gross revenues 92,789 683,647 137,993 (114,462) 799,967
Less promotional allowances -- 64,683 5,164 -- 69,847
--------- --------- --------- --------- ---------
Net revenues 92,789 618,964 132,829 (114,462) 730,120
--------- --------- --------- --------- ---------
Costs and expenses
Casino -- 242,936 33,213 -- 276,149
Food and beverage -- 71,873 7,641 -- 79,514
Room -- 18,643 -- -- 18,643
Other -- 58,193 28,757 (38,003)(1) 48,947
Selling, general and administrative -- 92,414 19,026 -- 111,440
Maintenance and utilities -- 27,620 3,449 -- 31,069
Depreciation and amortization 381 47,807 6,750 -- 54,938
Corporate expense 19,779 1,336 1,150 (8,510)(1) 13,755
Restructuring charge -- 5,925 -- -- 5,925
--------- --------- --------- --------- ---------
Total 20,160 566,747 99,986 (46,513) 640,380
--------- --------- --------- --------- ---------
Operating income 72,629 52,217 32,843 (67,949) 89,740
Other income (expense), net (51,960) (4,886) 677 -- (56,169)
--------- --------- --------- --------- ---------
Income before provision for income taxes 20,669 47,331 33,520 (67,949) 33,571
Provision for income taxes 3,583 10,693 -- -- 14,276
--------- --------- --------- --------- ---------
Net income $ 17,086 $ 36,638 $ 33,520 $ (67,949) $ 19,295
========= ========= ========= ========= =========
Elimination Entries
- -------------------
(1) - To eliminate intercompany revenue and expense.
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CONDENSED CONSOLIDATING STATEMENT OF CASH FLOW INFORMATION FOR THE NINE MONTH
PERIOD ENDED SEPTEMBER 30, 1998
COMBINED
COMBINED NON-
(IN THOUSANDS) PARENT GUARANTORS GUARANTORS CONSOLIDATED
- ---------------------------------------------------------- -------- ---------- ---------- ------------
Cash flows provided by (used in) operating activities $ 53,278 $ (1,605) $ 32,989 $ 84,662
-------- -------- -------- --------
Cash flows from investing activities
Acquisition of property, equipment and other assets (588) (42,191) (1,672) (44,451)
Proceeds from sale of Sam's Town Kansas City's assets -- 10,500 -- 10,500
-------- -------- -------- --------
Net cash used in investing activities (588) (31,691) (1,672) (33,951)
-------- -------- -------- --------
Cash flows from financing activities
Proceeds from issuance of long-term debt -- 8,000 -- 8,000
Net payments under bank credit facility (67,250) -- -- (67,250)
Receipt (payment) of dividends 13,752 14,820 (28,572) --
Other (1,095) (463) (129) (1,687)
-------- -------- -------- --------
Net cash provided by (used in) in financing activities (54,593) 22,357 (28,701) (60,937)
-------- -------- -------- --------
Net increase (decrease) in cash and cash equivalents (1,903) (10,939) 2,616 (10,226)
Cash and cash equivalents, beginning of period 2,832 58,317 17,128 78,277
-------- -------- -------- --------
Cash and cash equivalents, end of period $ 929 $ 47,378 $ 19,744 $ 68,051
======== ======== ======== ========
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
RESULTS OF OPERATIONS
The following table sets forth, for the periods indicated, certain operating
data for the Company's properties. As used herein, "Boulder Strip Properties"
consist of Sam's Town Las Vegas, the Eldorado and Jokers Wild; "Downtown
Properties" consist of the California, the Fremont, Main Street Station and
Vacations Hawaii, the Company's wholly-owned travel agency which operates for
the benefit of the Downtown casino properties; and "Central Region Properties"
consist of Sam's Town Tunica, Sam's Town Kansas City (through July 15, 1998),
Par-A-Dice, management fee income from Silver Star Resort and Casino, and
management fee and joint venture income from Treasure Chest Casino through
October 27, 1997, at which time the Company acquired the remaining 85% equity
interest in Treasure Chest that it did not already own to make it a wholly-owned
subsidiary. Net revenues displayed in this table and discussed in this section
are net of promotional allowances; as such, references to room revenue and food
and beverage revenue do not agree to the amounts on the Condensed Consolidated
Statements of Operations. Operating income (loss) from properties for the
purposes of this table exclude corporate expense, including related depreciation
and amortization, and impairment and restructuring charges.
Three Months Ended Nine Months Ended
September 30, September 30,
------------------------ -----------------------
1998 1997 1998 1997
--------- --------- --------- ---------
(In thousands)
- --------------
Net revenues
Stardust $ 38,024 $ 41,640 $ 120,459 $ 130,737
Boulder Strip Properties 45,746 43,951 140,050 140,198
Downtown Properties (a) 49,893 46,969 153,413 137,620
Central Region 100,930 85,188 316,198 244,294
--------- --------- --------- ---------
Total properties $ 234,593 $ 217,748 $ 730,120 $ 652,849
========= ========= ========= =========
Operating income (loss)
Stardust $ (373) $ 3,432 $ 7,053 $ 14,176
Boulder Strip Properties 4,236 3,980 17,543 19,328
Downtown Properties 2,148 435 7,649 3,576
Central Region 26,385 25,948 78,358(b) 67,101(b)
--------- --------- --------- ---------
Total properties $ 32,396 $ 33,795 $ 110,603 $ 104,181
========= ========= ========= =========
(a) Includes revenues related to Vacations Hawaii, a Honolulu travel agency,
of $8,525 and $7,552, respectively, for the quarters ended September 30,
1998 and 1997, and revenues of $24,069 and $18,372, respectively, for the
nine month periods ended September 30, 1998 and 1997.
(b) Before impairment and restructuring charges.
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REVENUES
- --------
Consolidated net revenues increased 7.7% during the quarter ended September 30,
1998 compared to the quarter ended September 30, 1997. Company-wide casino
revenue increased 13.0%, food and beverage revenue decreased 3.6% and room
revenue decreased 9.3%. Net revenues from the Stardust, Boulder Strip Properties
and Downtown Properties (the "Nevada Region") slightly increased (0.8%) during
the quarter ended September 30, 1998 compared to the quarter ended September 30,
1997. Increases in net revenues at the Downtown Properties (6.2%) and Boulder
Strip Properties (4.1%) were substantially offset by a decline in net revenues
experienced at the Stardust (8.7%) due to the competitive environment on the Las
Vegas Strip. Net revenues in the Central Region increased 18.5% during the
quarter ended September 30, 1998 compared to the quarter ended September 30,
1997 primarily as a result of the acquisition of Treasure Chest in October 1997,
as well as a 2.9% increase in management fee income from Silver Star. These
increases were partially offset by declines in net revenues experienced at Sam's
Town Kansas City (92%) due to the closure of the property on July 15, 1998 and
at Sam's Town Tunica (6.7%) due to the competitive environment in that gaming
market. See further discussion of the closing of Sam's Town Kansas City under
Impairment and Restructuring Charges later in this section.
Consolidated net revenues increased 11.8% during the nine month period ended
September 30, 1998 compared to the same period in the prior year. Company-wide
casino revenue increased 17.9%, food and beverage revenue declined 1.6% and room
revenue declined 9.8%. Net revenues from the Nevada Region increased 1.3% during
the nine month period ended September 30, 1998 compared to the nine month period
ended September 30, 1997 due to an 11.5% increase in revenues from the Downtown
Properties, partially offset by a decline of 7.9% at the Stardust that is
attributable to the competitive environment on the Las Vegas Strip. Net revenues
on the Boulder Strip for the nine month period ended September 30, 1998 remained
virtually unchanged compared to the same period in the prior year. Net revenues
in the Central Region increased 29% during the nine month period ended September
30, 1998 compared to the same period in the prior year. This increase in net
revenues is primarily attributable to the acquisition of Treasure Chest in
October 1997 and is partially offset by a 41% decline in net revenues at Sam's
Town Kansas City due primarily to the closure of the property on July 15, 1998.
See further discussion under Impairment and Restructuring Charges later in this
section.
OPERATING INCOME (LOSS)
- -----------------------
Consolidated operating income increased by 2.7% to $29 million during the
quarter ended September 30, 1998 from $28 million during the quarter ended
September 30, 1997. Operating income in the Nevada Region declined 23% due to
declines experienced at the Stardust, partially offset by gains experienced at
the Downtown and Boulder Strip Properties. In the Central Region, operating
income increased 1.7% due primarily to the acquisition of Treasure Chest in
October 1997, partially offset by the decline experienced at Sam's Town Tunica.
For the nine month period ended September 30, 1998, consolidated operating
income before impairment and restructuring charges increased by 14.6% to $96
million compared to $83 million in the same period from the prior year.
Operating income in the Nevada Region declined 13.0% as the competitive Las
Vegas environment caused reductions in operating income at the Stardust and
Boulder Strip Properties which were partially offset by gains experienced at the
Downtown Properties. In the Central Region, operating income
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increased 16.8% due primarily to the October 1997 acquisition of Treasure Chest,
partially offset by the decline experienced at Sam's Town Tunica.
STARDUST
- --------
Net revenues at the Stardust declined by 8.7% during the quarter ended September
30, 1998 compared to the quarter ended September 30, 1997. The decline is
attributable in part to a 5.8% reduction in gaming revenues due to decreased
table game wagering volumes and a decline in table game win. Slot win in the
quarter was essentially flat with prior year levels. The decline in net revenues
is also due, in part, to a 14.1% reduction in non-gaming revenues as the number
of available rooms declined 10.9% during the quarter due to a $9 million suite
remodel project. In addition, showroom revenue declined 34.2% due to a temporary
reformatting of the show for the summer months. Operating income declined by
111% or $3.8 million during the quarter ended September 30, 1998 compared to the
quarter ended September 30, 1997, and operating income margin declined to (1.0)%
during the quarter ended September 30, 1998 from 8.2% during the quarter ended
September 30, 1997. These declines in operating income and operating income
margin are primarily the result of the reduction in net revenues, a $1.5 million
reduction in show earnings due to a temporary reformatting of the show, and an
increase in marketing expenses due to the competitive environment on the Las
Vegas Strip.
For the nine month period ended September 30, 1998, net revenues at the Stardust
declined by 7.9% versus the comparable period in the prior year. Casino revenue
declined by 4.5% due primarily to a decline in slot and table game wagering.
Non-gaming revenues declined 13.6% due to an 11.4% decline in the number of
occupied rooms. As discussed above, the decline in the number of occupied rooms
is attributable in part to a $9 million suite remodel project which reduced the
number of available rooms by 6.8% during the nine month period and in part to
competitive factors. Operating income declined by 50% or $7.1 million during the
nine month period ended September 30, 1998 compared to the same period in the
prior year. Operating income margin declined to 5.9% during the nine month
period ended September 30, 1998 from 10.8% during the nine month period ended
September 30, 1997. These declines in operating income and operating income
margin are attributable to the reduction in net revenues, coupled with an
increase in marketing expenses due to the competitive environment on the Las
Vegas Strip.
BOULDER STRIP PROPERTIES
- ------------------------
Net revenues at the Boulder Strip Properties increased 4.1% during the quarter
ended September 30, 1998 compared to the quarter ended September 30, 1997.
Casino revenue increased 8.3% due to an increase in wagering volume and
increases in both slot and table game win percentages. Food and beverage revenue
and room revenue decreased 6.9% and 16.6%, respectively, from the quarter ended
September 30, 1997. Operating income at the Boulder Strip Properties increased
by 6.4% or $.3 million during the quarter ended September 30, 1998 compared to
the quarter ended September 30, 1997, and operating income margin increased to
9.3% during the quarter ended September 30, 1998 from 9.1% during the quarter
ended September 30, 1997. These increases are primarily attributable to the
increase in net revenues.
Net revenues at the Boulder Strip Properties remained relatively flat during the
nine month period ended September 30, 1998 compared to the same period in the
prior year. Casino revenue increased 2.4% due primarily to an increase in slot
win percentage. Food and beverage revenue and room revenue declined by 9.0% and
7.8%, respectively, from the nine month period ended September 30, 1997. During
the nine month period ended September 30, 1998, operating income at the Boulder
Strip Properties declined 9.2% or $1.8 million versus the comparable period in
1997. Operating income margin declined to 12.5% for the nine month period ended
September 30, 1998 compared to 13.8% for the same period in 1997. The decline in
operating income and margin is primarily
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attributable to an increase in marketing expense for the nine month period ended
September 30, 1998 as compared to the same period in 1997.
DOWNTOWN PROPERTIES
- -------------------
Net revenues at the Downtown Properties increased 6.2% during the quarter ended
September 30, 1998 compared to the quarter ended September 30, 1997 due
primarily to casino revenue, which increased 7.1% as a result of increased slot
wagering volume at Main Street Station and the Fremont. Non-gaming revenues at
the Downtown Properties remained relatively flat during the quarter ended
September 30, 1998 versus the comparable quarter in 1997 as an increase in room
revenue was offset by declines in food and beverage and other revenues.
Operating income at the Downtown Properties increased 394% to $2.1 million
during the quarter ended September 30, 1998 compared to the quarter ended
September 30, 1997 as improvements in operating results at the Fremont,
Vacations Hawaii and a decline in operating loss at Main Street were partially
offset by a decline in operating income at the California. Operating income
margin increased to 4.3% during the quarter ended September 30, 1998 versus 0.9%
during the comparable quarter in the prior year. The increase in operating
income is primarily attributable to the increase in net revenues.
Net revenues at the Downtown Properties increased 11.5% during the nine month
period ended September 30, 1998 compared to the same period in the prior year.
Casino revenue increased 10.6% due primarily to increased slot wagering volumes
at each of the Downtown casino properties. Non-gaming revenues at the Downtown
Properties increased 3.1% during the nine month period ended September 30, 1998
versus the comparable prior year period due to increases in food and beverage
revenue and room revenue. Operating income at the Downtown Properties increased
$4.1 million or 114% during the nine month period ended September 30, 1998
compared to the same period in the prior year. Operating income margin increased
to 5.0% during the nine month period ended September 30, 1998 versus 2.6% in the
comparable prior year period. These increases are primarily attributable to the
implementation of various marketing programs to enhance operating volumes at the
Downtown Properties.
CENTRAL REGION
- --------------
Net revenues from the Central Region increased 18.5% during the quarter ended
September 30, 1998 compared to the quarter ended September 30, 1997. The
majority of the increase is attributable to the acquisition of the remaining
interest in Treasure Chest on October 27, 1997, as well as a 2.9% increase in
management fees from Silver Star. Treasure Chest produced net revenues for the
Company of $30 million during the quarter ended September 30, 1998 compared to
$1.1 million during the quarter ended September 30, 1997. Prior to the
acquisition of Treasure Chest, the Company accounted for its 15% minority
interest under the equity method. However, since the acquisition of the
remaining 85% equity interest in Treasure Chest, the revenues and expenses
generated by that property are now included in the Company's condensed
consolidated statements of operations. These increases in net revenues during
the September 30, 1998 quarter were partially offset by a $9.6 million decline
in net revenues at Sam's Town Kansas City due to the closure of the property on
July 15, 1998. See further discussion under Impairment and Restructuring Charges
later in this section. In addition, net revenues at Sam's Town Tunica declined
by 6.7% due to increased competition in the Tunica gaming market and net
revenues at Par-A-Dice declined 3.6% due primarily to a decrease in casino
revenue as gaming volumes and slot win percentages declined. Operating income
for the Central Region increased slightly to $26 million during the quarter
ended September 30, 1998 due primarily to the acquisition of Treasure Chest,
partially offset by declines in operating results experienced primarily at Sam's
Town Tunica and Par-A-Dice.
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Net revenues from the Central Region increased 29% during the nine month period
ended September 30, 1998 compared to the same period in the prior year. The
majority of the increase is attributable to the acquisition of the remaining
interest in Treasure Chest on October 27, 1997, as well as a 4.7% increase in
management fees from Silver Star. Treasure Chest produced net revenues for the
Company of $93 million during the nine month period ended September 30, 1998
versus $4.2 million during the comparable prior year period. Prior to the
acquisition of Treasure Chest, the Company accounted for its 15% minority
interest under the equity method. However, since the acquisition of the
remaining 85% equity interest in Treasure Chest, the revenues and expenses
generated by that property are now included in the Company's condensed
consolidated statements of operations. The increases in net revenues were
partially offset by a 41% decline in net revenues at Sam's Town Kansas City due
to the closure of the property on July 15, 1998. See further discussion under
Impairment and Restructuring Charges later in this section. In addition, Sam's
Town Tunica experienced a 4.4% decline in net revenues due to increased
competition which came online in the Tunica gaming market toward the end of the
quarter ended March 31, 1998. Net revenues at Par-A-Dice remained flat for the
nine month period ended September 30, 1998 compared to the same period in the
prior year. Operating income for the Central Region increased to $78 million
during the nine month period ended September 30, 1998 from $67 million during
the comparable prior year period due primarily to the acquisition of Treasure
Chest, partially offset by a decline in operating results at Sam's Town Tunica.
IMPAIRMENT AND RESTRUCTURING CHARGES
- ------------------------------------
During the quarter ended March 31, 1997, the Company recorded an impairment loss
of $126 million to adjust the carrying value of its fixed and intangible assets
in the Missouri gaming market to fair value. The impairment loss was recorded
due to a significant change in the competitive environment with the January 1997
addition of a significantly larger facility in the Kansas City gaming market and
a history of operating losses at the Company's Sam's Town Kansas City gaming
establishment. On June 30, 1998, the Company recorded a $5.9 million
restructuring charge in connection with its announcement to cease operations at
Sam's Town Kansas City. During July 1998, the Company closed Sam's Town Kansas
City and sold substantially all of its tangible assets for $12.5 million, which
approximated net book value.
During the quarter ended June 30, 1997, the Company recorded a $5.3 million
impairment loss related to its 17.4% ownership interest in Fremont Street
Experience, Limited Liability Company ("FSE"), which is the entity that operates
the downtown Las Vegas tourist attraction known as the Fremont Street
Experience. This impairment loss is principally due to the significant levels of
operating loss and operating cash deficiency reported in May 1997 by FSE
relating to its first full year of operations. Management expects this trend to
continue and, therefore, does not expect to recover its investment in this
entity.
OTHER EXPENSES
- --------------
Depreciation and amortization expense increased by $1.1 million during the
quarter ended September 30, 1998 versus the comparable quarter in 1997, and
increased by $1.7 million during the nine month period ended September 30, 1998
compared to the corresponding 1997 period. The increases in depreciation and
amortization expense during the three and nine month periods ended September 30,
1998 are primarily due to the increase in intangible and fixed assets related to
the acquisition of Treasure Chest in October 1997, offset by the reduction in
fixed and intangible assets related to the impairment loss recorded during the
quarter ended March 31, 1997.
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OTHER INCOME (EXPENSE)
- ----------------------
Other income and expense is primarily comprised of interest expense. Interest
expense increased by $0.2 million and $3.6 million, respectively, during the
three and nine month periods ended September 30, 1998 compared to the
corresponding periods in 1997. These increases are primarily attributable to
higher levels of debt outstanding due to the October 1997 acquisition of
Treasure Chest, partially offset by a decline in interest rates on certain fixed
and floating rate debt.
PROVISION (BENEFIT) FOR INCOME TAXES
- ------------------------------------
The Company's effective tax rates were 43% and 41%, respectively, during the
quarters ended September 30, 1998 and 1997, and 43% and (32%), respectively,
during the nine month periods ended September 30, 1998 and 1997. The fluctuation
in the rates during the comparable quarters ended September 30, 1998 and 1997 is
primarily attributable to state taxes, which have increased due to the enhanced
earnings generated from the Company's Central Region properties. The Company's
Nevada properties are not subject to state income tax. The fluctuation in the
rates during the comparable nine month periods ended September 30, 1998 and 1997
is primarily attributable to the impairment loss recorded during the quarter
ended March 31, 1997.
NET INCOME (LOSS)
- -----------------
As a result of these factors, the Company reported net income of $5.9 million
and $19.3 million, respectively, during the quarter and nine month period ended
September 30, 1998 compared to net income of $5.9 million during the quarter
ended September 30, 1997 and a net loss of $68 million during the nine month
period ended September 30, 1997.
LIQUIDITY AND CAPITAL RESOURCES
CASH FLOW AND WORKING CAPITAL
- -----------------------------
During the nine month period ended September 30, 1998, the Company generated
operating cash flows of $85 million compared to $81 million during the
comparable period from the prior year. The increase in operating cash flows is
primarily attributable to the operations of Treasure Chest, which was acquired
in October 1997, offset by earnings declines experienced principally at the
Stardust and Sam's Town Tunica. As of September 30, 1998 and 1997, the Company
had balances of cash and cash equivalents of $68 million and $61 million,
respectively, and working capital of $23 million and a working capital deficit
of $15.5 million, respectively. The Company has historically operated with
minimal or negative levels of working capital in order to minimize borrowings
and related interest costs under its $500 million reducing revolving credit
facility (the "Bank Credit Facility"). The working capital deficits, if any, are
funded through cash generated from operations as well as borrowings under the
Bank Credit Facility.
In connection with the July 1998 sale of certain tangible assets of Sam's Town
Kansas City for $12.5 million, the Company will be able to realize the benefit
of approximately $35 million in deferred tax assets. The realization of these
deferred tax assets will benefit operating cash flows by generating tax refunds
and reducing the amount of future federal income tax payments beginning in the
quarter ended September 30, 1998.
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CAPITAL EXPENDITURES
- --------------------
The Company is committed to continually maintaining and enhancing its
facilities, most notably by upgrading and remodeling its casinos, hotel rooms,
restaurants, other public space and equipment and by providing the latest slot
machines for its customers. The Company's capital expenditures for these
purposes were approximately $44 million and $28 million, respectively, during
the nine month periods ended September 30, 1998 and 1997.
DEBT FACILITIES AND EQUITY FINANCING
- ------------------------------------
Much of the funding for the Company's renovation and expansion projects has come
from cash flows from operations as well as debt and equity financings. The
Company paid down outstanding debt with its free cash flow generated from
operations and the proceeds from the sale of Sam's Town Kansas City's assets
which resulted in cash flows used for financing activities of $61 million during
the nine month period ended September 30, 1998, compared to $62 million during
the corresponding period in 1997. At September 30, 1998, outstanding borrowings
and unused availability under the Bank Credit Facility were $323 million and
$177 million, respectively. Interest on the Bank Credit Facility is based upon
the agent bank's quoted reference rate or the London Interbank Offered Rate, at
the discretion of the Company. The blended rate under the Bank Credit Facility
at September 30, 1998 was 7.8%.
The Bank Credit Facility contains certain financial and other covenants,
including, without limitation, various covenants (i) requiring the maintenance
of a minimum tangible net worth, (ii) requiring the maintenance of a minimum
fixed charge coverage ratio, (iii) establishing a maximum permitted funded debt
to EBITDA ratio, (iv) imposing limitations on the incurrence of additional
indebtedness and the creation of liens, (v) imposing limitations on the maximum
permitted expansion capital expenditures during the term of the Bank Credit
Facility, (vi) imposing limits on the maximum permitted annual maintenance
capital expenditures during the term of the Bank Credit Facility, and (vii)
imposing restrictions in investments, the purchase or redemption of subordinated
debt prior to its stated maturity, dividends and other distributions, and the
redemption or purchase of capital stock of the Company. Management believes the
Company and its subsidiaries are in compliance with the Bank Credit Facility
covenants at September 30, 1998.
As of September 30, 1998, the Company had outstanding $200 million principal
amount of 9.25% Senior Notes (the "9.25% Notes") due October 2003 and $250
million principal amount of 9.50% Senior Subordinated Notes (the "9.50% Notes")
due July 2007. The 9.25% and 9.50% Notes contain limitations on, among other
things, (a) the ability of the Company and its Restricted Subsidiaries (as
defined in the Indenture Agreements) to incur additional indebtedness, (b) the
payment of dividends and other distributions with respect to the capital stock
of the Company and its Restricted Subsidiaries and the purchase, redemption or
retirement of capital stock of the Company and its Restricted Subsidiaries, (c)
the making of certain investments, (d) asset sales, (e) the incurrence of liens,
(f) transactions with affiliates, (g) payment restrictions affecting restricted
subsidiaries and (h) certain consolidations, mergers and transfers of assets.
Management believes the Company and its subsidiaries are in compliance with the
covenants related to the 9.25% and 9.50% Notes at September 30, 1998.
The Company's ability to service its debt will be dependent on its future
performance, which will be affected by, among other things, prevailing economic
conditions and financial, business and other factors, certain of which are
beyond the Company's control.
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EXPANSION PROJECTS
- ------------------
The Company, as part of its ongoing strategic planning process, is currently
establishing its priorities for the future. In Nevada, the Company is exploring
opportunities for both the expansion of its Sam's Town Las Vegas property and
the development of new properties on other sites in the Las Vegas locals market.
The Company has postponed plans to develop a new property on the Stardust's
61-acre site until the impact of the opening of several new resorts on the Las
Vegas Strip has been determined. Instead, the Company intends to refurbish the
Stardust to better compete with the newer Strip properties.
On July 14, 1998, the Company, through a wholly-owned subsidiary, entered into
an amended and restated joint venture agreement (the "Amended Agreement") with
Mirage Resorts, Incorporated ("Mirage") to jointly develop and own a casino
hotel entertainment facility in Atlantic City, New Jersey (the "Atlantic City
Project"). Among other things, the Amended Agreement provides for the settlement
of litigation between the Company and Mirage relating to the joint venture
agreement that the Company and Mirage entered into in May 1996. The Atlantic
City Project is expected to cost approximately $750 million and contemplates a
hotel of at least 1,200 rooms and a casino and related amenities adjacent and
connected to Mirage's planned wholly-owned resort. The Amended Agreement
provides for at least $150 million in capital contributions by the Company, $90
million of which is expected to be contributed in 1999 and the remainder
thereafter. Funding of the Company's Atlantic City Project capital contributions
are expected to be derived from cash flow from operations and availability under
the Company's Bank Credit Facility. The Company has begun work on the planning
stages of this development. In addition, outside of Nevada and New Jersey, the
Company continues to monitor acquisition opportunities in many of the newer
gaming markets as the industry continues to consolidate.
Substantial funds are required for the Atlantic City Project discussed above and
would also be required for other future expansion projects. There are no
assurances that any of the above mentioned projects will go forward or
ultimately become operational. The source of funds required to meet the
Company's working capital needs (including maintenance capital expenditures) is
expected to be cash flow from operations and availability under the Company's
Bank Credit Facility. The source of funds for the Company's expansion projects
may come from cash flow from operations and availability under the Company's
Bank Credit Facility, additional debt or equity offerings, joint venture
partners or other sources. No assurance can be given that additional financing
will be available or that, if available, such financing will be obtainable on
terms favorable to the Company or its stockholders.
YEAR 2000 PROJECT
- -----------------
The Year 2000 issue is the result of computer programs being written using two
digits rather than four to define the applicable year. Any programs that have
time-sensitive software may recognize a date using "00" as the year 1900 rather
than the year 2000. This could result in a major system failure or
miscalculations.
The Company is currently engaged in a five-phase process of evaluating and
resolving the problems that might be associated with its internal operating
systems and the Year 2000 issue. The five phases are as follows:
1. Evaluation and development of remediation plans for traditional
information technology ("IT") systems;
2. Evaluation and development of remediation plans for non-IT
systems;
3. Implementation and testing of remediation plans;
4. Evaluation of vendor compliance with Year 2000 issues; and
5. Preparation of contingency plans.
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The first phase of the process is the evaluation and development of remediation
plans for IT systems and is expected to be completed by the fourth quarter of
fiscal 1998. In this phase, the Company will evaluate which IT systems are Year
2000 compliant and will select plans to bring identified non-compliant systems
into compliance. Currently, the Company has completed the majority of the
evaluation of IT systems and the development of remediation plans.
The second phase of the process, expected to be completed by the fourth quarter
of fiscal 1998, is the evaluation and development of remediation plans for
non-IT systems. Currently, non-IT systems are still under evaluation. The
Company does not expect the impact of the Year 2000 to be material for its
non-IT systems. There can be no assurance, however, that the Company will not
discover Year 2000 issues in the course of its evaluation processes in phases
one or two that would have a material adverse effect on the business, financial
condition, or results of operations of the Company.
Phase three of the process involves the implementation of remediation plans for
IT and non-IT systems that were identified in phase one and two as
non-compliant. This process is expected to be completed by the end of the third
quarter of fiscal 1999 and will involve either the replacement of the Company's
existing systems with systems that are Year 2000 compliant or the remedial
review and replacement of the software code that does not use the two digit year
code. As part of this phase, the Company intends to perform date sensitive
testing including testing on systems that vendors have certified to be Year 2000
compliant, to ensure that the modifications developed adequately resolve the
Year 2000 issue. While the Company believes the testing program should provide
additional evidence of its ability to operate in the Year 2000, there can be no
assurance that the Company will not discover Year 2000 issues in the course of
its testing process that would have a material adverse effect on the business,
financial condition or results of operations of the Company.
Phase four, expected to be completed by the end of the first quarter of 1999,
involves evaluating Year 2000 compliance for those vendors who provide the
Company with goods and services critical to the servicing of our guests, mainly
in the non-gaming portions of our business. While no individual vendor supplies
the Company with a significant portion of any goods or services used in the
non-gaming operations, there can be no assurance that the Company will not
discover Year 2000 issues in the course of evaluation of its vendors that would
have a material adverse effect on the business, financial condition or results
of operations of the Company.
The final phase of the process, expected to be completed during the third
quarter of fiscal 1999, will involve the development of a contingency plan in
the event any non-compliant critical systems remain by January 1, 2000. As part
of this phase, the Company will attempt to quantify the impact, if any, of the
failure to complete any necessary corrective action. The Company currently
believes that the majority of the equipment and processes used by the Company
have adequate manual backup procedures that would allow the Company to continue
to operate a significant portion of the business in the event the conversion
project is not completed on schedule (or the systems of other companies on which
the Company may rely are not timely converted). However, in most of the Central
Region gaming jurisdictions, electronic monitoring of operations is required.
Waivers for manual processes may be obtained from these gaming jurisdictions;
however, there can be no assurance that a material portion of the gaming
business at those properties would not be affected until the time at which a
waiver is granted or if a waiver is granted at all. If the Company is able to
obtain timely waivers for the Central Region properties, the remaining primary
risks associated with the Year 2000 may be an effect on the timing of the
reporting of certain operating results to management and may include an adverse
effect on business volumes if the
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Year 2000 problems could not be timely corrected. Although the Company cannot
currently estimate the magnitude of such impact, if systems material to the
Company's operations have not been made Year 2000 compliant upon completion of
this phase, the Year 2000 issue could have a material adverse impact on the
Company's business, financial condition and results of operation.
The Company recently reevaluated its estimates and assumptions of the costs
directly associated with the Year 2000 project and currently estimates
approximately $7.6 million in costs directly associated with the project that is
expected to be funded from cash flow from operations and availability under the
Company's Bank Credit Facility. This current estimate includes approximately
$3.0 million in operating expenses related to the remediation efforts, including
training. At September 30, 1998, the Company had incurred $1.7 million in costs
directly related to the Year 2000 project, substantially all of which were
capitalized as they related to replacement of systems that were not Year 2000
compliant.
Given the inherent risks for a project of this magnitude and the resources
required, the timing and costs involved could differ materially from those
anticipated by the Company. There can be no assurance that the Year 2000 project
will be completed on schedule or within budget.
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PRIVATE SECURITIES LITIGATION REFORM ACT
The Private Securities Litigation Reform Act of 1995 provides a "safe harbor"
for forward looking statements. Certain information included in this Form 10-Q
and other materials filed or to be filed by the Company with the Securities and
Exchange Commission (as well as information included in oral statements or other
written statements made or to be made by the Company) contains statements that
are forward looking, such as statements relating to the Company's Year 2000
project, plans for future expansion and other business development activities as
well as capital spending, financing sources, and the effects of regulation
(including gaming and tax regulation) and competition. Such forward looking
statements involve important risks and uncertainties that could significantly
affect anticipated results in the future, and accordingly, actual results may
differ materially from those expressed in any forward looking statements made by
or on behalf of the Company. These risks and uncertainties include, but are not
limited to, those related to construction, expansion and development activities,
economic conditions, changes in tax laws, changes in laws or regulations
affecting gaming licenses, changes in competition, and factors affecting
leverage and debt service including sensitivity to fluctuation in interest
rates, risks related to the Year 2000 project and other factors described from
time to time in the Company's reports filed with the Securities and Exchange
Commission, including the Company's Transition Report on Form 10-K for the
transition year ended December 31, 1997. Any forward looking statements are made
pursuant to the Private Securities Litigation Reform Act of 1995 and, as such,
speak only as of the date made.
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PART II. OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) Exhibits.
27. Financial Data Schedule
(b) Reports on Form 8-K.
(i) The Company filed a current report on Form 8-K dated
July 14, 1998 related to the Amended and Restated
Joint Venture Agreement of Stardust A.C.
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SIGNATURES
Pursuant to the requirements 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.
BOYD GAMING CORPORATION
(Registrant)
Date: November 13, 1998 By /s/ Ellis Landau
-----------------------------------
Ellis Landau,
Executive Vice President,
Chief Financial Officer, and
Treasurer (Principal Financial Officer)
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EXHIBIT INDEX
Exhibit
Number Description
- ------ -----------
27 Financial Data Schedule